The Federal Reserve has announced that the Fed Funds rate will remain low until at least 2023. Both gold and the equity markets rallied in response to Fed Chair Jerome Powell's dovishness, but can the turnaround in prices last? Gary Wagner, editor of TheGoldForecast.com analyzes the next key price levels.
It's fed day and we're dissecting chair, Jerome Powell statements at today's meeting Gary Wegner, editor of the gold forecast.com. Joining us today to talk about market action in response, Gary, welcome back to the show. Now it seems to me that Jerome Powell is dovish today. His statements have moved. The markets gold is up.
Stock markets are up. How do you think, how do you think he did? How do you think? I think in terms of soothing the market, he did exceptionally well. In essence, he really underscored the fact that interest rates aren't going up this year. They're not going up next year. And most likely they're not going up.
Even in 2023, they presented the dot plot and that showed that it's a unanimous vote, uh, currently that there will be no rate hike this year. There were only four dissenters that came in in terms of raising rates in 2022. Seventh is centers in 2023, but in all three years, the majority consensus was to leave interest rates between zero and a quarter percent in terms of the fed funds rate.
Okay. So why do you think markets reacted the way they did now? Gary is a, because of this statement that he wants to keep the fed funds rate low until 2023. I think what it was is it was a combination of his acknowledgement that he sees the economy getting better. He saw he's projecting GDP to go to 6.5 unemployment to tick down.
But yet he said that he is fully committed to continue the current track, the monetary policy that is currently in place of low interest rates and expenditures of 120 billion, uh, per month in terms of their assets sheet. And he says that will continue and continue the way he put it was for a long time.
So, what he's saying is they're going to let the economy really ramp up and he's not going to change your thing. Even though there's signs of improvement, he will not change the rates until we're at a post pandemic period. Now he didn't say that I believe it moved the market. Okay. He did say that we will continue to be a common data until the job is done.
I think there's a few ways to interpret that statement. One, the job is currently not done. The economy has not yet improved. And number two, once it does. Rates are going to go up. How are you interpreting it? Well, at some point, rates will go up, but he did mention that, although there are certain sectors that are doing well, he sees some weakness in other sectors.
And the whole idea with the fed was we always had that dual mandate interest that I, excuse me, inflation at 2% maximum employment, he realized to get to maximum employment after the devastating effect we've had because of the pandemic that he's willing to let inflation run hot. He's projecting it to go to 2.5.
I think it might even go a little hotter than that, but the fact is in the past, that would trigger a rate hike. That's how you control that inflation. If he doesn't do that, that means that there's basically going to be an elongated period of time of cheap money in terms of borrowing free money. In terms of us fiscal aid packages realize we spent 4 trillion last year.
They pass a 1.9 trillion this year and talk is that they're not done. That's what Nancy Pelosi said the other day. She said that the pandemic will dictate when we have another round of fiscal stimulus. His main point was that the pandemic is what has affected the economy. And until the MP, the pandemic has run its course, he's not going to change his monetary policy.
And that is what sooth people, knowing that in other words, He was saying, listen to America, I've got your back. We're going to make sure that we can have a recovery and I'm going to use every tool available to help facilitate that. And that is what really sparked the rally in gold as well as equities.
To me, what struck out is that he acknowledged that there will be inflation. I think that's significant, right? He said, we want to get inflation above 2% now. Why? Why is he saying that? Is he just changing the fed mandate? Basically, he's saying if I'm interpreting this correctly, he's saying he wants inflation to run harder, so he doesn't have to raise rates.
So he's forgoing the controlling, the inflation part of the mandate in, in favor of full employment. Is that what's going on? Well, well, I look at the way I look at it is he has kind of tweaked dual mandate to put maximum employment at. The number one thing he wants to focus on in lieu of where inflation goes.
In other words, he believes it's more important to get everybody back to work than it is for inflation to tick up. And that is a adjustment in the monetary policy. Hasn't changed. They still don't want inflation to run while four or 5%. But he is projecting by the end of the year that inflation will run to 2.5%.
So he's already acknowledging that it's going to go pass their former mandate of 2% and he's willing to do that and keep rates where they are, even if that what's going to happen. If inflation does run above two and a half percent, what's going to happen to consumer, to consumer spending. Um, Real wages what's going to happen to people's living standards.
Are we going to go back into a recession? Could that happen? I don't believe so. The idea behind his philosophy is if you get maximum employment, if we get the numbers down to where they were pre pandemic, you're going to have a huge GDP. There's going to be more people working. And those people working will get wages that allow them to live now, obviously at, at certain levels in terms of income that will affect the day-to-day, uh, living style.
But I believe that his mandate is to get as many people to work as quickly as he can. And that is the one what he wants to do to return to normal. And then also you've got the fiscal stimulus checks getting banks now, uh, the 1.9. Uh, rescue act that Biden passed last week, those checks are already going into bank accounts.
Okay. So that will help. If there is little inflation, the fiscal system, what was his GDP forecast again, Gary, he said that he's expecting the GDP, uh, to be forecast at 6.5%. By the end of the year, that's very high by American standards. Isn't it. It's well, it's, it's an, a robust number. Um, it's a kind of number we always want, and it is pretty aggressive in terms of his statement, but between the treasury and fiscal stimulus and government spending and the accommodative monetary policy, where they continue to add to their balance sheet, which means they're providing liquidity.
I think that it's possible. How do you think yields will respond to a 6.5% growth in the economy and rising inflation above two and a half percent? What we've seen if that continues, meaning market sentiment is optimistic ahead of what the numbers are showing. And they're, I think they're ahead of the curve because when you.
Anticipate where stock is and where it's going to go. You're looking down the road. And so I think the anticipation, excuse me, will continue to be robust. The question. I asked myself at some point, the fed going to step in and work with, they really can't control short-term notes, but they can do something similar to what they did.
I believe in 2013, they labeled it operation twist in which they bought certain yields, sold certain yields to kind of bring that into alignment. They haven't spoken about that. But he did say they would use every tool in their toolbox. And that is a tool. I think that if that gets really out of alignment, at some point, the fed might step in and start, you know, uh, selling the ten-year buying the 30 year.
That's what they did in 2013. What happened to the markets in response to operation, operation twist? Well, that was as quantitative easing was kind of leveling out. They had QE one, QE four Q E three was what was called operation twist. And rather than allocating more money to their asset sheet and, um, They kept interest where it was, but they bought and sold different lengths of government bond, securities.
And that way to control the differential between the rates of longterm and short term bonds and notes did after that was QE four QE four was really winding down. And the idea behind QE four was they were actually going to purchase back some of those assets, because if you recall at the end of a. As the recession in 2008, hit 2012 and 13, they accumulated $4.5 trillion of assets.
They really swelled the balance sheet. So they decided, okay, we're going to try and liquidate. They liquidated if I recall, and I might be wrong on this number, but about. 300 billion, 420. And they took it from 4.5 to about 4.3 and then they realized that if they kept doing that, that would dry up the liquidity.
So they stopped that completely. And that was the conclusion of Q E for back then. Yeah. And I remember in 2013 they withdrew. Sort of their quantitative easing, where at least ease back in a, in a, in what we saw with taper tantrum, the markets really didn't like that. There's, there's worried. Now they're going to have another taper tantrum.
Do you see that happening? What's the risk of that happening? My sense is that any mistakes that were made in the handling of the 2008, 2009 banking crisis, if it's known to have caused a severe or dramatic changes, they don't want to repeat it. And I think that they're, they're being overcautious because of that.
Whereas. In former days, they would. Absolutely. If they saw inflation tick up, they would just Rach the rate a quarter percent. They would always be constantly adjusting it. Now they're saying, listen, forget all of that. This is a global pandemic. This is the worst that we have seen really, since the great recession in terms of unemployment rates, we've never seen rates like this, where we had what 12 million plus unemployed.
The key right now is I don't believe they're willing. To do things that they would not have done say 10 years ago, because they believe that it is necessary to return the country to its post pandemic days and to a powerhouse in terms of the economy and still remain the number one economy in the world.
Right. So the other thing that I want to bring up is that I didn't see any indication of Powell wanting to implement yield curve control. Do you think, uh, yields will continue to rise it because of that? And look, we, we had, we had the tenure at about 2% prior to the pandemic where at 1.64 today, can it go up at 2% well pre pandemic?
It was at 2.2 and you're, that's an excellent point, David. He, he has shied away from any statements saying that they would attempt to mess with the yield curves. The truth of the matter is that the federal reserve can't control the, the, the actual inter interest rates of, of the notes. Um, they don't have that power.
What they can do is buy certain ones and sell certain ones and have an influence on it. He has been hesitant. What he has said is that it will be a short term move at best, and he's willing to let it run its course. In other words, I don't believe. He thinks that it will go to these high levels, like 2.2.
And there's not a reason to act right now. So let's put everything together. Then Gary, how do you see nominal yields changing relative to inflation? In other words, where do you see real yields going? I think that they, they might tick up a little bit or down a little bit. I don't see them moving up substantially higher.
As long as fed funds rates are extremely low, then the banks have the ability to get a lot of money, very cheaply, and they can still make a profit with a three point spread or whatever spread they, their, their mandate is at the banks. So they don't have. That the incentive to see it go higher because they can make a good profit here.
And when the money is cheap to lend out, they're going to lend out a lot more than it. If interest rates go higher. So it's not in the interest of the banks. I think they have higher interest rates. The fed doesn't want it. And most importantly, this debt that we have been accumulating. And right now let's say we're at 6 trillion so far.
We make interest payments. The us government makes interest payments monthly on those debts. And so it would be a devastating effect. If interest rates ran real high and government debt became unbearable. And so that's something that they're very aware of when you start putting on trillions in debt.
You've got to pay the Piper and it's much easier to pay them back with low interest rates than moderate or high interest rates. Okay. Let's bring it back to gold now. Uh, as I stated earlier, the price of gold didn't move up higher in response to the statement when it came out, we're at around 1745 right now, as we speak, Gary, is this the end of the bear trend that we've saw in the last couple of weeks?
Well months actually. I actually, I think that we are right now in a rally mode. It's what I'm calling a counterweight. If you recall, last time I was out about three weeks ago, we had just really broken below the 200 day moving average was trading at around 1800, but it had come down from 2088. They have been a slow, methodical drop.
The fact of the matter is when it broke through the 200 day moving average that told me there's still downside that we're going to have to bear and we would see lower pricing. And in fact, we did, it went down about a hundred dollars to 1680. The interesting thing is I've got a chart up on the screen.
It is in what's called Henkin Archie format. And if you can see that really what I'm. Really focusing in on is this high that comes in right here. That's the all-time record high. And the length of the time that it took to hit these lows is a multi month length. And the key number to me has been the 61.8% Fibonacci retracement that's at 1690.
I believe the lowest 1680. That is when we looked at the possibility. That the market was extremely oversold, that there would be traders coming in to buy the dips. The problem was you had stronger dollars and you had a yield curve kicking up, but that kind of, we saw that pivot. And that's why I like this type of chart because on a Henken ashy chart, what it is is the open is really fixed as.
Um, the midpoint of the last candle. So for example, when you're looking at this type of chart, there's a couple of things you want to watch body sizes, first thing, because it gives you strength of trend and the absence of upper Wix when they're red, but you will get this pivot candle. And that is this candle I've just pointed to you.
Notice how tells start to appear. And then you get this kind of, it's called a doji in Japanese where the opening clothes are the same. And then we started to get these upticks. We did have this one day here. Now, if you convert this to a standard candlestick chart, what happens is you will get a lot more noise for example, but it will give you, uh, the true prices.
And I'll go ahead and change that right now. Yeah, when we do that, this is true price action. And so I, the day we, we recommended our subscribers get in were we were in at 1722 and it was based upon a couple of signals. The first signal really came in was this large green candle here. Is almost an engulfing bullish.
The reason it's almost as it would have needed to open below the close of the prior day in silver, you got a pure engulfing bullish, but you don't take that call until you get a confirming candle. Confirming candle is a higher, high, higher, low, higher, close. We got that the following day. That's what triggered our last bicycle.
And it's what signaled to me that the multi-month correction. Was over, at least for now. I think we might have one more downside leg and this was Elliot wave theory. But once that is concluded, it resets the clock to a motive phase and a motive phase will take us to a new high. No, I don't think that will happen this year, but I do think that we are in tuned for a pretty good rally here.
I can show you some of the numbers that I'm looking at in terms of a forecast. Let me just switch this here. Uh, if you can see that chart that came up, this is basically the same thing. What I am looking at rather than. The Fibonacci retracement that I use from 1450 to 2088. And this particular one, I'm simply looking at the retracement.
So I'm starting here, a labeling this a fifth wave, and then I'm labeling this in a way. So we get something like an, a, B, C correction. And when you do that, you get a counter wave and that would be our B wave. Typically on a counter wave. It will go anywhere between call it 50. And 75% of the price moved down, which is this area that I'm circling right here.
So our projection is that we could see gold go to 1880 and as high as 1980. And basically the way that I look at it is we just simply project onto what we're anticipating in this market might do. We've got a strong area of resistance in 1880. You can see that right throughout here. And I see really no major resistance points up until that point.
There you get a whole band of price action here. This is the upper end of the band, right at around 1990. And so I am extremely bullish now, interim term and short term. Okay, Gary, I have, I have one more follow up question on that. Now, if you take a look at the fed dot plot here, people are interpreting that as very, uh, sort of, uh, a very bullish outlook on the economy, because basically they're projecting to in a longer-term rates to go the fed fund waits to go higher.
Should the economy improve Gary? Let's say to the 6.5% GDP recovery rate, what's going to happen to equities in relation to gold, will just people go into equities and dump their safe Haven assets. There is the unique relationship between. Risk on in safe Haven that historically is they work counter to each other.
Uh, when it's risk on, they favor that over safe Haven. There is an exception to that rule. We've talked about this on a couple of occasions. The exception to the rule is that when you have huge, uh, fiscal spending and that concurrently is done, where you've got a monetary policy, that's extremely dovish.
It will cause both us equities and gold to rise in tandem at the same time. It's exactly what we saw in 2009 through the middle of 2011, what happened then was in 2011 gold topped off, but the equities markets continued to run. Okay, fantastic. I believe that if we see it play out in a similar way, we'll go to we'll pick up a rally.
That might be $150 higher in gold. You'll see all time new highs in us, equity, such as the S and P and the NASDAQ. At the point that gold gets a little bit overbought. You could see the stock market continue to run. And have some selling pressure in the precious metals or safe Haven assets. Gary, thank you so much.
Fantastic update. We needed that today. Thank you. My pleasure as always have a great day and thank you for watching Kitco news. Don't forget to subscribe. I'm David Lynn. . .