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Powell uses the “R” word, and Putin “warns” that nuclear weapons could be used

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The Federal Reserve concluded the September FOMC meeting and as expected announced another rate hike of the “Fed funds rate”, the rate at which commercial banks borrow and lend their excess reserves to each other overnight by 75 basis points. Beginning in March the Federal Reserve has raised rates at the last five consecutive FOMC meetings. They raised rates by ¼% in March, and ½ a percent in May, followed by three consecutive ¾% rate hikes in June July, and September. This takes the target interest rate set by the Federal Open Market Committee to 3% - 3 ¼%.

In yesterday’s article, we said that market participants were primed for a 75-basis point rate hike and the most part have factored it into current pricing. We also stated that we believed that rather than rattling the precious metals markets it would have the opposite effect as traders who were positioned short in gold would cover their position and a relief rally would follow. That is precisely what market participants witnessed today.

As of 7:50 PM EDT gold futures basis, the most active December contract is fixed at $1674.70. Today it was extreme dollar strength that outshined any gains in gold that resulted from traders bidding the precious yellow metal higher. The dollar gained 1.183 points or 1.08% today the dollar to its highest level in over 20 years. Currently, the dollar index is fixed at 111.125 just off of today’s high of 111.36.

The Federal Reserve released its new projections vis-à-vis the Federal Reserve’s “dot plot”. Based on these new projections the Federal Reserve expects its fed funds rate to rise to 4.4% by the end of the year and 4.6% next year.

Chairman Powell’s former statements that the Federal Reserve could reduce inflation to their target level and concurrently do that with a “soft landing”. A soft landing refers to a moderate economic slowdown following a period of growth. The Fed has used this phrase to project confidence that the aggressive rate hikes will slow down the spiraling and persistent levels of inflation without leading America into a recession.

However, after five consecutive rate hikes at every FOMC meeting since March, he acknowledged what analysts and economists had been well aware of throughout the year; you cannot aggressively raise interest rates without the intended economic contraction from higher rates leading to a recession. Today during his press conference Chairman Powell said, “We don’t know ― no one knows whether this process will lead to a recession, or if so, how significant that recession would be.”

Over the last three press conferences that Powell holds immediately following the conclusion of an FOMC meeting, he has been subtly changing his script which began as we believe we can lower inflation and implement the soft landing to a much stronger statement over the last three press conferences acknowledging that the economy has to pay a price to bring inflation down. But today differed in that Powell made veiled statements confirming the obvious; “we don’t know - no one knows whether this process will lead to a recession, or if so, how significant that recession would be.”

But the hard truth is that he does know that this process will lead to a recession. He knows that it is impossible to intentionally create a major economic contraction which by definition is a recession. In his speech last month at the Jackson Hole economic symposium, he stated, “The Fed's drive to curb inflation by aggressively raising interest rates would bring some pain.” But Powell's statements today said what analysts and economists have been saying throughout the series of rate hikes, you cannot reduce inflation without the process leading to a recession. This was the first time that the Federal Reserve’s median forecast for the next year suggests a recession is coming.

Putin warns the West that he is not bluffing about the use of nuclear weapons

There was another major fundamental event that created extreme dollar strength and shifted market sentiment from bearish to bullish as it pertains to gold as a safe-haven asset. In a televised address Vladimir Putin warned the West that “he is not bluffing and willing to use “all instruments at [Russia’s] disposal” to protect Russia’s territory, in what appeared to be a veiled reference to Russia’s nuclear capability.

 Vladimir Putin mobilized 300,000 military reservists which is a significant escalation. But the most alarming part of his televised address is his threat to escalate the conflict by threatening the use of nuclear retaliation. Unquestionably, when leaders like Vladimir Putin or North Korea’s supreme leader Kim Jong-un threatens the use of nuclear weapons it is something that the world should take very seriously. These leaders have the means and willingness to carry out their threats.

When a narcissistic dictator threatens to use all the instruments at his disposal and says it is not a bluff it would be unwise to not take this madman at his word.

Wishing you as always good trading and good health,

Gary S. Wagner - Executive Producer