On Thursday, October 27, the government will release its most recent third quarter GDP figures and the most recent figures on our national debt. Economists and investors will seek to determine the extent of the economic contraction between the second and third quarters. The Federal Reserve aggressively raised interest rates with the ultimate goal of having an economic contraction. Their ultimate goal is to lower the current level of inflation. Therefore, the third quarter will almost certainly reveal a continuation of the economic contraction already underway.
By definition, the United States has already entered a recession. If it is revealed that there was another contraction in GDP in the third quarter, it would be the third consecutive quarter in which GDP in the United States has contracted.
The most recent figures according to the US Debt Clock.org indicate that our national debt is currently over $31 trillion and continues to grow. The most recent figures from the Federal Reserve revealed that its balance sheet has shrunk only slightly, from around $8.7 trillion at its peak to its current level of $8.3 trillion.
The Federal Reserve is expected to continue raising rates at the November and December FOMC meetings by a total of 150 basis points over the last two meetings of the year. This would take the Fed funds rate to between 450 and 475 basis points. However, interest rates at this level will have a profound and negative impact on the servicing of our national debt. Currently, our national debt is greater than our annual GDP and higher interest rates will make servicing this national debt much more costly for the government.
This means that interest rates of 4½% to 5½% are not sustainable for an extended period because they will increase the cost of servicing our federal debt. The question becomes: will the Federal Reserve adjust its current extremely hawkish monetary policy or at least halt interest rate hikes after December? More importantly, maintaining interest rates at this level for an extended period will have extremely adverse effects on our government’s ability to service the interest payments on the $30 trillion in debt on its own.
We have seen gold and silver prices under pressure since the Federal Reserve began raising rates in March of this year. Gold traded from a high of $2078 in March to its recent low just above $1620. In other words, gold is down just over 22% from the March highs to the late September lows.
Silver has taken a much larger decline from March highs of this year of $27.45 an ounce to the current price of around $18.68. This is a price drop or loss in value of more than 32% per ounce of silver. The short-term outlook for gold and silver prices continues to have a bearish bias based on upcoming interest rate hikes by the Federal Reserve in November and December.
The drop in gold and silver this year has been substantial and the question is whether or not next week’s government report on third quarter GDP and updated national debt will affect market sentiment for precious metals.
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Wishing you as always good exchanges and good health,
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