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Gold, Silver and 2024 Fed Rate Cut Forecasts

Rate cuts coming says everyone. But how deep...?
NOT even December yet, but a cold Christmas has already hit Britain's TV ads and half-empty shopping malls, writes Adrian Ash at BullionVault.
Finance analysts are rushing even further ahead...
...issuing their 2024 predictions while the old year still has 5 weeks to go.
The 'big call' consensus?
Everyone says next year will bring lower interest rates, starting with rate cuts from US central bank the Federal Reserve.
Cheap money would of course prove wonderful for bonds, stocks, real estate speculators, no doubt crypto bros and (most likely) precious metals led by gold and silver.
So how much lower will US rates go? That's where opinion splits.
Bank analysts' forecasts for end-2024 US Fed interest rates. Source: MKS Pamp
US investment bank Goldman Sachs is the least excited about Fed rate cuts for 2024, predicting only 1 small cut before the end of next year.
That's because Goldman believes that, while "the hard part of the inflation fight now looks over", the US central bank has "made substantial progress toward a soft landing..."
...and so it sees little chance of an economic recession, caused by the Fed's rate hikes, needing a steep cut to rates next year.
At the other end of the range, Swiss-based bank UBS says that Fed rates will end 2024 way down at 2.75%, pretty much halving from where they stand today.
Their logic?
"The starting conditions are much worse now than 12 months ago," UBS is quoted by CNBC, pointing to the "historically large amount of credit that is being withdrawn from the US economy" as lenders stop lending so much and the Fed itself continues to wind down its massive QE bond purchases from the Covid pandemic and, before that, the global financial crisis.
On an annual basis, the Fed has now shrunk its balance-sheet by almost 10% from November 2022, very nearly matching the record pace of sucking money out of banks it hit in summer 2019, back when it last lost its bottle and stopped reducing its QE bond holdings as the financial markets decided that a US recession was looming.
The markets proved right of course, but more out of luck than foresight. I mean, no-one said in 2019 that a global pandemic would shut the world economy in 2020.
That recession then marked the deepest plunge in economic activity on modern records. And yet the US Fed, in response, slashed its key interest rate by only 2.3 percentage points, less than UBS is now forecasting for 2024.
Chart of US Fed interest rate (blue) plus its year-on-year change (red). Source: St.Louis Fed
Does anyone really think next year will be worse than Covid?
No, at a guess (and a prayer). But it doesn't need to be.
The Fed could easily cut rates deeper and faster next year than it did from 2019 to 2020, because it's starting from a much higher point.
Check the chart above. It shows, in blue, how the Fed Funds rate is currently at its highest since early 2001, way up at 5.33% per annum. Whereas in 2019, and after trying to "normalize" interest rates following the global financial crisis, the Fed's baby-step rate rises only got up to 2.40% before it began cutting rates again.
The Fed then refused to go below zero (unlike the Bank of Japan or Swiss National Bank or European Central Bank). So the most it could cut by when the 2019 recession scare became the 2020 Covid catastrophe was also 2.40%.
This contrasts with the Tech Stock Crash of 2001, when Fed rates started at 6.50% and fell by 4.60% in 12 months...
...and it also contrasts with the panic phase of the global financial crisis in 2008, when Fed rates started at 5.26% and fell by 4.10% in 12 months.
Put another way, the recession forecast from UBS looks a lot more like the "soft landing" forecast from Goldman Sachs than the gap between their interest-rate forecasts would suggest at first glance.
Indeed, and putting the 2020 Covid recession aside (because the Fed's rate-cutting was limited by its low starting point and its very Anglo-Saxon commitment to the 'zero lower bound') only 1 of the previous 7 recessions in the US saw the Fed cut rates by less than UBS' forecast for 2024.
That shallow cut to Fed rates came around the 1980 recession, brought about by the Fed yanking rates up above double-digits as it finally grasped the nettle of tackling double-digit inflation.
"Letting gold go to $850 per ounce was a mistake," said famously tall and infamously high-rate Fed chair Paul Volcker of that frantic time, when gold peaked 24 times above its price of a decade earlier.
"We had to deal with inflation. There was a kind of great speculative pressure...Everybody wanted to buy collectibles...Other markets of real things were booming."
Lots of things are now booming again as everyone bets that Jerome Powell, head of the Fed today, will start cutting rates next June if not May if not April or March.
Investors and speculators have already bid up the Nasdaq 100 index of US tech stocks by more than 12% since the eve of the Fed's "no change" decision at the start of November. They've sent silver prices over 12% higher against the falling US Dollar over the last 2 weeks alone.
Chart of Nasdaq 100 tech-stock index vs. silver (Comex front-month contract) vs. HUI Gold Bugs mining stock index. Source: Google Finance
For now, that jump in silver prices hasn't been followed by gold (now a mere 5.2% higher from a fortnight ago)...
...let alone by gold-mining stocks...
...and it's so far spurred a return to the kind of profit-taking by existing silver investors seen at the tail-end of 2022.
But Powell has, in the past, been called a "high rates guy"...
...albeit by Donald Trump, the deeply indebted real-estate mogul, who chose Powell to chair the Fed back in 2018 when he was in the White House and he wanted "a low rates guy" to keep juicing the economy and the stock market.
Most surely, Jerome Powell – at least compared to the rate of interest set by his more recent predecessors – really does seem to like keeping rates closer to inflation if not above it.
That resolve may well get tested next year if this month's gently weakening US data starts to tumble. So too might America's financial support for the wars being fought by both Ukraine and Israel, never mind Taiwan if Beijing decides to chance its luck... well as Washington's own record peace-time budget deficits and its startling ability to keep the stock-market soaring...
...even before we get to the possibility of Trump himself returning to the White House in next November's election.
Long-dated Treasury bonds, after all, are now deemed a "risky" asset (a little too late to help unwary savers!) while 40% of small-cap US companies are now loss-making.
All of this will matter to gold, silver and the other precious metals next year.
Bottom line for now? There ain't no crisis like a Dollar crisis. And the Dollar faces a whole raft of trouble ahead.
More on this to follow. Lots more no doubt in 2024.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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