The Federal Reserve may soon raise interest rates and end quantitative easing this month. Many expect that this tightening cycle will be accompanied by a recession as the economy slows down.
So, what does the Central Bank’s tightening cycle mean for gold? The gold market will be positively influenced given that this precious metal performs even better during an economic crisis.
We have witnessed the yellow metal’s recent resilient performance to rising bond yields, which many explain as the demand for gold as a hedge against the Federal Reserve’s failure to pull off a soft landing. The Federal Reserve may also ease its stance after it has raised rates if the tightening cycle causes stock market turbulence or an economic slowdown, which will in turn positively influence gold’s performance.
Normally, rate hikes and tightening of the monetary policy usually causes bursts of asset bubbles, recessions and economic bursts. This usually happens because the amount of bad investments, debt and risk is too high. There may be some truth to this recession expectation, especially if one considers the relationship between the state of the U.S. economy and the Federal Reserve’s tightening cycle. When one analyzes this relationship, they will observe that all recessions recorded usually accompanied a rise in rates of interest.
For instance, in the 2004–2006 period, the United States Federal Reserve hiked interest rates by 425 basis points, causing the burst of the housing bubble and the Great Recession. Additionally, in the period between 1999 and 2000, the U.S. Central Bank raised interest rates by 175 points, which led to the burst of the dot-com bubble.
However, not every tightening cycle has resulted in recessions. For instance, interest rates were raised in the early ‘60s as well as in the 1983–1984 period and the 1994–1995 period, yet no economic slumps were recorded. This means that theoretically a soft landing is hard to achieve but still possible.
Currently, the U.S. Central Bank will have to fight inflation in order to stage a soft landing. This will require hikes that may slow down the economy or even trigger a recession. It doesn’t help that, if left unchecked, inflation may still cause a recession that would push the economy into stagflation.
It should be noted, however, that economic indicators do not signal a slump in the economy and even with the yield curve flattening, the economy is still above the negative territory. This means that if the Fed raises interest rates, a recession will not begin immediately after. But chances are high that the countdown will have started and the stocks of safe haven mineral miners such as StraightUp Resources Inc. (CSE: ST) (OTCQB: STUPF) could see growing interest from investors.
NOTE TO INVESTORS: The latest news and updates relating to StraightUp Resources Inc. (CSE: ST) (OTCQB: STUPF) are available in the company’s newsroom at https://ibn.fm/STUPF
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