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No Fed hike boosts gold

At the conclusion of its March 16 meeting, the Federal Open Market Committee announced that it was leaving the federal funds interest rate unchanged. This followed the announcement six days earlier by the European Central Bank that the eurozone economy was so precarious that the ECB was ramping up its quantitative easing (inflation of the money supply) program.

Physical demand for gold was high throughout 2015 and will only grow in 2016.

The price of gold jumped two percent upon news the Federal Reserve would not touch interest rates.

Both meetings followed the G-20 meeting of central bank governors and finance ministers in Shanghai, China, in late February where participants were not able to agree on a coordinated plan of action for the weakening global economy.

At its December 2015 meeting, the FOMC has raised the federal funds interest rate for the first time in a decade and indicated that it was then anticipating four more interest rate hikes in 2016, beginning with the March meeting held last week.

The revised plan to leave the interest rate unchanged was expected.  Since the FOMC’s December 2015 meeting, there has been substantial negative economic news in the United States and worldwide.  An increase in the federal funds interest rate would only have been justified if the U.S. economy showed signs of overheating.

You can read the full FOMC announcement at https://www.federalreserve.gov/newsevents/press/monetary/20160316a.htm.

Despite flowery language that tried to mask as much negative economic news as possible, and also blaming international events as reason for the unchanged interest rate, there is much in this announcement that hints that the U.S. economy is not as strong as the FOMC is alleging.

For instance, at the beginning of the fourth paragraph, it refers to “future adjustments” rather than future increases in the federal funds interest rate. This could be an indicator that the U.S. economy could sink enough that the December 2015 rate increase could be partly or fully reversed. It also leaves open the possibility of going to negative interest rates sometime this year.

In the following paragraph it states that the Fed will continue to roll over and extend its past quantitative easing activity as it matures. If the U.S. economy were really improving, the normal step would be to reverse past expansion of the money supply by now letting it contract.

There was a swift reaction to the Fed’s announcement. The U.S. Dollar Index fell more than one percent almost immediately. Through March 18, this Index was down 3.6 percent year to date. Gold and silver each quickly jumped about two percent in price after the FOMC statement.  The price of silver even made it over $16 for a time.

The U.S. government still has significant financial clout to prop up the value of the U.S. dollar relative to other currencies and to slow down the increases in gold and silver prices. But, if anything, the FOMC announcement further confirms that the value of the U.S. dollar should decline in the coming months. It won’t move in a straight line, but look for a weaker dollar and higher gold and silver prices as the year progresses.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

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