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The dollar price of gold continued in the doldrums last week. Gold is one of the best-performing asset classes of 2017, but it has gone down over the past three weeks based on market expectations that the Fed will raise rates in December.
This expectation has caused a set of market movements, including a stronger dollar and weaker prices for gold, bonds and the euro.
My view is that the economy is fundamentally weak and the Fed will not raise rates in December. I base that on nine months of disinflation data (using the Fed’s preferred measure, not alternate measures that market analysts flock to) and on a weakening employment picture, including job losses in September for the first time in seven years.
The rate hike crowd claim that the job losses were temporary because of the hurricanes and that the jobs report also showed higher wages.
Perhaps the economy won’t lose jobs in October, but the jobs that were lost won’t come back right away either because it can take months to rebuild the shops, restaurants and hotels that suffered the worst damage, especially in Florida.
As for the higher incomes, that requires a look behind the data. Incomes went up “on average,” but that was not because of across-the-board gains that were evenly distributed. It was because those who lost jobs in the hurricane were among the lowest-paid workers, including waiters, bartenders and maids.
If the lower-paid workers drop out and the higher-paid professionals keep working even without a raise, then the “average” wage goes up even though nobody got a raise and many lost their income.
Another cause of the income increase was the overtime pay to utility workers who provided assistance in the wake of both hurricanes. That’s valuable work, but clearly not sustainable or likely to be repeated.
With disinflation strong and job creation weak, the Fed won’t raise rates. Janet Yellen will be a lame duck in a few weeks and gone in February. She does not want her legacy to be that of the chair who caused a recession on her way out the door. She’ll sit tight and leave policy to her successor, Kevin Warsh.
With disinflation strong and job creation weak, the Fed won’t raise rates. Janet Yellen will be a lame duck in a few weeks and gone in February.
The Warsh appointment is another signal the market has wrong. Warsh is reputed to be a “hawk” who is rule-based and will raise rates.
In fact, he’s a pragmatist who will do what makes sense under the circumstances. Warsh believes the Trump tax plan will stimulate real growth. As real growth substitutes for nominal growth, the threat of inflation goes down, not up.
That means less urgency about raising rates. We’ll see what happens at the Fed’s March 2018 FOMC meeting, but for now I see no rate hikes on the horizon, even with Warsh as chair.
That’s a great sign for gold. Below, I show you four major gold catalysts that could send prices much, much higher. The third in particular has great ramifications for the dollar. Read on.