Why Has the Upcoming Fed Meeting Not Bumped Gold More?

The odds are set at 94% that the federal reserve will cut rates following the September 17th meeting. Trump has pressured Powell for this for months, and if the Wednesday meeting confirms these rate cuts, it will be a historic step for the Fed. Never before has Executive Branch’s control of money been seen so evidently. This period of uncertainty has the price of gold near historic highs, but the price still does not fully reflect the reality of the upcoming situation. Investors are flocking to gold like never before, but are still not buying enough to account for the huge potential for gold price increase. The first reason investors are still holding back on gold is uncertainty. The upcoming actions of the Fed are as predictable as political actions can be, but the human element of the decision still scares them away. Additionally, investors don’t understand the extent to which the dollar has been undermined from every direction. Finally, most investors are only weighing the short term effects of the rate cut rather than the long term irreversible consequences.

The price of gold has uncertainty just like any investment, but the specific type of uncertainty that is determining its price in this situation is more uncomfortable for investors to deal with. The likelihood of a rate cut is very high, but the fact that it is a human choice adds in a layer of unknown that is not as easily quantified. Jerome Powell could wake up on Wednesday morning and decide to raise rates. Many trends used to predict stock prices are swings or things far outside of the control of any one human being, but the inherently human nature of Wednesday’s choice means that it’s hard for people to go all in. Many types of risk can be quantified, but even with oddsmakers setting probabilities on Wednesday’s decision, it is inherently more difficult to reduce Jerome Powell’s decision to a number. The deeply interpersonal dynamics between him and President Trump make this situation one that could be changed by a tweet. An uncomfortableness with this sort of risk is holding investors back from buying gold as aggressively as they could be.

Even without the rate cut, the decline of the dollar, and the associated increase in gold price has not been accounted for. The rate cut has potential to spike the price of gold, but the predictable continuation of the dollar’s decline is the engine behind a slow and steady gold price increase. Years of inflation and a recent string of central banks drastically dumping the dollar have diminished the dollar from numerous directions. Even as the worst of the dollar is diminished, its demand is rapidly dropping. In the past, the United States had the leeway to inflate because the whole world used dollars as an exchange currency and bastion of safety. The past few years of de-dollarization are going to amplify all inflation and lead to a harsh landing after so many years of avoiding consequences. If gold functions in any way similarly to how it has in similar times in the past, its price can only be pressured upwards by this development. Unearned trust in the dollar by investors prevents them from seeing this troubling reality and bolstering the price of gold.

While many financial analysts are worried about the short term inflationary effect of the upcoming rate cut, the loss of trust that it will cause will reverberate for decades. The principle of the Fed’s independence has been one of the only things slowing its spiral into hyperinflation. State controlled money cannot persist, but trying to make the Fed independent was a nod towards the problem with government control. Now, even that one saving grace is no longer intact. If people cannot trust the Fed to maintain its independence from the whims of the current president, the dollar will continue its trajectory. Even when seemingly being independent, the Fed had to fight to earn trust. Now that fight will be far harder. Inflation commitments over long periods of time and the pursuit of monetary stability will take an almost unrecoverable blow. The fundamental change in how the Fed operates will lead even more people to seek safety in gold. If more people understood the great shift that was happening, they would buy gold like their life depended upon it. Gold functions so well as protection against the mismanagement of the Fed because rather than having to create false independence, it is truly independent from government control.