(Money Metals News Service) In the latest episode of the Money Metals Midweek Memo, host Mike Maharrey analyzes the economic forces shaping the gold market, the Federal Reserve’s precarious balancing act with interest rates, and the long-term implications of inflation on precious metals.
From Newton’s third law of motion to a potential breakout in gold prices, this episode unpacks crucial financial trends that investors need to watch.
The Economics of Action and Reaction
Maharrey opens the episode by drawing a parallel between Newton’s third law—where every action has an equal and opposite reaction—and the principles of economics. In monetary policy, every decision triggers consequences, often playing out over extended periods.
For example, artificially low interest rates have encouraged borrowing and inflated debt levels.
Now, with interest rates rising, the economy faces the inevitable reaction: financial strain.
Gold Market Recap: A Bull Run with Volatility
This past week saw a dramatic movement in gold prices. After reaching a new all-time high of $2,953 per ounce, the price dropped nearly 2 percent, testing the $2,900 support level before stabilizing around $2,925. Such volatility, according to Maharrey, is normal in a bull market and should not be mistaken for a collapse in gold’s upward trajectory.
Gold exchange-traded funds in North America saw a significant inflow of 48.8 tons last week—the highest since April 2020.
Historically, Western investors have been slow to jump on the gold bandwagon, with demand primarily coming from central banks and investors in Asia.
If this trend continues, some analysts predict it could push gold beyond $3,000 per ounce, with a potential breakout once that psychological resistance level is cleared.
Trade War Fears and the Gold Market
One driver of recent gold price fluctuations is the increasing talk of tariffs, particularly from President Donald Trump. A looming trade war could impact the Federal Reserve’s policy decisions, as tariffs are often associated with rising prices. While some view tariffs as inflationary, Maharrey clarifies that true inflation stems from an expansion in the money supply, not just price increases on specific goods.
Despite short-term fluctuations, trade wars tend to drive safe-haven demand for gold. If economic turmoil arises, gold could benefit from investor flight to security.
The Federal Reserve’s Catch-22 on Interest Rates
The core theme of the episode is the Federal Reserve’s difficult position. The central bank must balance:
- Keeping interest rates high to combat inflation.
- Cutting interest rates to ease economic strain caused by mounting debt.
Currently, the federal funds rate sits at 4.5 percent, with a 3 percent Consumer Price Index (CPI) inflation rate, making the real interest rate just 1.5 percent. If inflation continues rising, real interest rates will decline unless the Fed hikes rates further—an unlikely scenario given economic vulnerabilities.
The Housing Market as a Canary in the Coal Mine
The impact of higher interest rates is becoming evident in the housing market, a sector particularly sensitive to borrowing costs. Mortgage rates, which peaked at 7.8 percent in 2023, had temporarily dropped but are now hovering around 7 percent again. This has led to:
- A 4.9 percent month-over-month decline in existing home sales (January 2024).
- The worst year for existing home sales since 1995.
- A growing inventory glut, with 3.5 months of unsold homes—the highest since 2019.
Maharrey warns that the housing market’s struggles are a preview of broader economic consequences as businesses and consumers grapple with higher borrowing costs.
A Debt-Driven Economy on the Brink
Beyond real estate, rising debt levels across all sectors indicate financial distress. U.S. credit card debt has soared to a record $1.38 trillion, with many consumers relying on credit cards just to cover basic living expenses.
Unlike the pandemic era, when government stimulus allowed households to pay down balances, today’s consumers are accumulating debt at a rapid pace, with an $18 billion increase in December alone—a 20.2 percent year-over-year jump.
Meanwhile, the average credit card interest rate remains above 20 percent, offering little relief despite the Fed’s rate cuts.
This debt burden extends to corporations as well. Corporate bankruptcies hit a 14-year high in 2024, surpassing even the economic fallout of the pandemic lockdowns.
Many companies, particularly those accustomed to the artificially low interest rates of the past decade, are struggling to refinance their obligations. Delinquent corporate bank loans have spiked from $21 billion in Q4 2023 to nearly $29 billion today, as firms face sharply higher borrowing costs.
This widespread debt stress underscores the fragility of an economy propped up by easy credit and points to a looming financial squeeze that could trigger a broader economic downturn.
The Fed’s Inevitable Return to Easy Money
With mounting economic pressures, Maharrey argues that the Federal Reserve will eventually resort to rate cuts and quantitative easing, even at the risk of reigniting inflation. Historically, when faced with economic turmoil, the Fed prioritizes market stability over price control.
For long-term investors, this makes gold and silver essential hedges against the coming wave of inflation and currency devaluation.
Final Thoughts: Now Is the Time to Act
With gold in a strong uptrend and silver still undervalued relative to gold, Maharrey urges investors to take advantage of market dips rather than waiting for higher prices.
The potential for gold to surpass $3,000 per ounce could mark the beginning of a rapid price acceleration, making now a strategic buying opportunity.
For those interested in diversifying into precious metals, Money Metals offers expert guidance via 800-800-1865 or through their online platform at MoneyMetals.com.
