In the latest episode of 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 analyzes crucial financial trends that investors need to be aware of.

Maharrey opens the episode by drawing a parallel between Newton's third law (which states that every action has an equal and opposite reaction) and the principles of economics. In monetary policy, every decision triggers consequences that often unfold 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 stress.

Gold Market Summary: A Bull Market with Volatility

Last week saw dramatic movement in gold prices. After reaching a new all-time high of $2,953 per ounce, the price fell 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 confused with 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 join the gold movement, with demand coming mainly from central banks and investors in Asia.

If this trend continues, some analysts predict that it could push gold beyond $3,000 an ounce, with a possible breakout once that psychological resistance level is exceeded.

Fears of a trade war and the gold market

One factor driving recent fluctuations in the price of gold is growing interest in tariffs, particularly from President Donald Trump. An impending trade war could affect the Federal Reserve's policy decisions, as tariffs are often associated with rising prices. While some consider tariffs to be inflationary, Maharrey clarifies that true inflation arises from an expansion of the money supply, not just price increases for specific goods.

Despite short-term fluctuations, trade wars tend to boost demand for gold as a safe haven. If an economic crisis arises, gold could benefit from investors' flight to safety.

The Federal Reserve's interest rate paradox

The central theme of the episode is the difficult position of the Federal Reserve. The central bank must balance:

Keeping interest rates high to combat inflation.

Lowering interest rates to ease the economic strain caused by rising debt.

Currently, the federal funds rate stands at 4.5 percent, with a consumer price index (CPI) inflation rate of 3 percent, making the real interest rate just 1.5 percent. If inflation continues to rise, real interest rates will decline unless the Federal Reserve raises them further, an unlikely scenario given economic vulnerabilities.

The real estate market as a canary in the coal mine

The impact of higher interest rates is becoming evident in the real estate market, a sector particularly sensitive to borrowing costs. Mortgage rates, which peaked at 7.8 percent in 2023, had temporarily declined but are now back around 7 percent. This has led to:

A month-over-month decline of 4.9 percent in existing home sales (January 2024).

The worst year for existing home sales since 1995.

A growing excess inventory, with 3.5 months of unsold homes, the highest level since 2019.

Maharrey warns that the housing market's problems are a harbinger of broader economic consequences as businesses and consumers face higher borrowing costs.

A debt-driven economy on the brink of collapse

Beyond real estate, rising debt levels across all sectors point to financial difficulties. Credit card debt in the United States has skyrocketed to a record $1.38 trillion, and many consumers rely on credit cards just to cover basic living expenses. 

Unlike during the pandemic era, when government stimulus allowed households to pay down their balances, today's consumers are accumulating debt at a rapid pace, with an increase of $18 billion in December alone, a year-over-year jump of 20.2 percent. 

Meanwhile, the average credit card interest rate remains above 20 percent, offering little relief despite Federal Reserve rate cuts.

This debt burden also extends to corporations. Corporate bankruptcies reached their highest level in 14 years in 2024, surpassing even the economic consequences of 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 skyrocketed from $21 billion in the fourth quarter of 2023 to nearly $29 billion today, as companies face much higher borrowing costs. 

This widespread debt stress highlights the fragility of an economy propped up by easy credit and points to an impending financial squeeze that could trigger a broader economic crisis.

The Federal Reserve's inevitable return to easy money

In view of mounting economic pressures, Maharrey argues that the Federal Reserve will ultimately resort to rate cuts and quantitative easing measures, even at the risk of reigniting inflation. Historically, when faced with an economic crisis, the Federal Reserve 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 wait for higher prices. 

The possibility of gold surpassing $3,000 per ounce could mark the beginning of a rapid acceleration in prices, making it a strategic buying opportunity.

Mike Maharrey, Money Metals