Metals Notes

How will higher rates from the Fed affect the economy?

As many of you are well aware the Federal Reserve did as many expected on December 16, 2015, raising its key rate by .25% and announcing it will slowly raise rates over the next few years. Here at Jack Hunt’s we observed a noteworthy uptick in bullion sales in the days immediately following this announcement. With that in mind I’ll offer a few thoughts on the implications of this and future rate hikes and the rationale behind the Feds decision. Although I won’t predict what these higher rates mean for the short or long term price of Gold, I hope you’ll conclude after reading this that precious metals deserve a more prominent place in your portfolio.

There were several premises for the recent rate hike:

1)    The Fed knows what interest rate is good for the economy.

2)    That the recovery is sufficiently established to permit an end to the ‘emergency’ micro rates of the last several years.

3)    Everything more or less is hunky-dory so to speak.

I personally disagree. Active buyers and sellers should set the price of credit, not the Fed. And if you think the recovery is firmly established and all is well, please consider a few facts:

  • Last month US industrial production fell more than at any time in over three years. This marks the eighth decline in the last ten months. This is another clear sign that our economy is transitioning from higher paying industrial jobs to lower paying service sector jobs.
  • According to the Fed, there are now 61 million people of working age in the US who don’t have jobs. That’s out of 204 million people between the ages of 18 and 66. My ‘old’ math suggests that’s a 30% unemployment rate, not the 5% rate the ‘feel good’ equities based financial media wants you to hear.
  • The ‘Labor Participation Rate’, the amount of people in the working age population either employed or looking for work, is at its lowest level since 1977. For men it’s never been lower. Do the math! Factoring in all ages less than half of this country’s population is legitimately employed, full time or part time.

Virtually everyone not paying income taxes, regardless of age, is dependent on family, pensions or the government for survival. If the economy is so great, as the Feds current and future outlook on interest rates suggests, why are 30% of the able bodied workers in this country jobless? To my way of thinking lower paying jobs and higher true unemployment levels don’t bode well for a country already drowning in debt. A new recession and a downturn in the stock markets seems inevitable in the not too distant future. As a result, many are turning some of their paper assets into tangible assets like gold and silver while the equity markets are still comparatively strong.