In the latest episode of Money Metals Midweek Memo, host Mike Maharrey discusses 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 possible break in gold prices, this episode looks at crucial financial trends that investors should be aware of.

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

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 a dramatic move in gold prices. After reaching a new all-time high of $2,953 an 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.

North American gold exchange-traded funds recorded a significant inflow of 48.8 tonnes 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 breached.

Trade war fears and the gold market

One factor driving recent gold price fluctuations is the 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 in specific goods.

Despite short-term fluctuations, trade wars tend to drive safe-haven demand for gold. 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:

Keep interest rates high to combat inflation.

Reduce interest rates to alleviate economic stress 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 , bringing the real interest rate to just 1.5 percent. If inflation continues to rise, real interest rates will decline unless the Fed 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% in 2023, had temporarily fallen, but are now back to around 7% . This has led to:

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

Worst year for existing home sales since 1995.

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

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

A debt-driven economy on the brink of the abyss

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

Unlike in 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 $18 billion increase 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 the Federal Reserve's rate cuts.

This debt burden extends to corporations as well. Corporate bankruptcies reached their highest level in 14 years in 2024 , surpassing even the economic consequences of pandemic confinements. 

Many companies, particularly those accustomed to artificially low interest rates over the past decade, are finding it difficult to refinance their obligations. Nonperforming corporate bank loans have soared from $21 billion in the fourth quarter of 2023 to nearly $29 billion today, as companies face much higher borrowing costs. 

This widespread stress on debt 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 Fed's inevitable return to easy money

In the face of mounting economic pressures, Maharrey argues that the Fed will eventually resort to rate cuts and quantitative easing, even at the risk of reigniting inflation. Historically, when faced with an economic crisis, the Fed prioritizes market stability over price control.

For long-term investors, this makes gold and silver essential hedges against the next 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 declines rather than wait for higher prices. 

The potential for gold to break above $3,000 per ounce could mark the beginning of a rapid price acceleration, making it a strategic buying opportunity.

Mike Maharrey, Money Metals