GoldMinr: PIMCO’s Bold Move: Should the Fed Halt Mortgage Unwind to Boost Gold?

The U.S. housing market is facing a unique challenge: mortgage rates remain stubbornly high, hovering around 6.35%, making homeownership a distant dream for many Americans. This situation has prompted PIMCO, a leading global investment management firm, to suggest a rather unconventional solution: the Federal Reserve should halt its mortgage-backed securities (MBS) unwind. But what does this have to do with gold, often seen as a safe-haven asset in times of economic uncertainty? And could this bold move by the Fed actually boost gold prices?

Understanding the Fed’s Mortgage Unwind

Since 2022, the Federal Reserve has been actively reducing its holdings of mortgage-backed securities (MBS) as part of its quantitative tightening (QT) policy. This involves allowing the principal and interest payments from these securities to roll off its balance sheet without reinvesting the proceeds. The goal is to normalize the Fed’s balance sheet after years of expansionary monetary policy.

However, PIMCO argues that this MBS unwind is contributing to the elevated mortgage rates. According to their recent report, the spread between Treasury yields and mortgage rates remains unusually wide, around 230 basis points. This wide spread, they contend, is a direct consequence of the Fed’s continued shedding of mortgage bonds.

PIMCO’s Proposal: A Boost for Housing?

PIMCO proposes that the Fed should consider reinvesting the proceeds from its MBS holdings. They estimate that this could lower mortgage rates by 20 to 30 basis points, potentially providing as much stimulus to the housing market as a 100-basis-point cut in the federal funds rate.

Marc Seidner, chief investment officer of non-traditional strategies, and Pramol Dhawan, portfolio manager at PIMCO, argue that in a cycle where interest rate policy is politically fraught and inflation remains sticky, the Fed may find that the most effective easing tool is already hiding in plain sight.

The Gold Connection: How Does This Affect Precious Metals?

So, where does gold fit into this picture? Gold, often seen as a safe-haven asset, has historically shown distinct patterns of performance during economic shifts, particularly in response to changes in U.S. monetary policy.

Here’s how the Fed’s actions, particularly regarding mortgage-backed securities, can influence gold prices:

Interest Rate Expectations: The Fed’s monetary policy decisions significantly impact interest rate expectations. When the Fed signals a dovish stance, suggesting future rate cuts or a halt to tightening, it reduces the opportunity cost of holding non-yielding assets like gold. A dovish pivot reduces the opportunity cost of holding non-yielding assets like gold, which historically thrives in low-interest-rate environments.
Dollar Weakness: Easing monetary policy, including halting the MBS unwind, can lead to a weaker U.S. dollar. Since gold is often priced in dollars, a weaker dollar makes gold more attractive to international buyers, potentially driving up its price.
Inflationary Pressures: While inflation is projected to stabilize near 3% in 2025, the Fed’s acknowledgment of tariff-driven inflationary risks has kept market uncertainty alive, favoring gold’s safe-haven status. If the Fed’s actions are perceived as inflationary, investors may flock to gold as a hedge against rising prices.
Safe-Haven Demand: Economic uncertainty, whether stemming from housing market woes or broader economic concerns, typically boosts demand for safe-haven assets like gold. If PIMCO’s proposal is adopted and fails to revive the housing market, or if it sparks concerns about the Fed’s ability to control inflation, it could further fuel safe-haven demand for gold.

Historical Perspective: Fed Policy and Gold

Historically, gold prices have often risen significantly in the 24 months following U.S. Federal Reserve interest rate cuts, with notable gains of 31%, 39%, and 26% in 2000, 2007, and 2019, respectively. Economic Context Influences Gold’s Performance: Gold tends to perform well when rate cuts occur in response to economic slowdowns, financial crises, or inflation concerns, as investors seek safe-haven assets during periods of uncertainty. The 2007-2008 financial crisis saw central banks worldwide engage in aggressive monetary easing which further fueled Gold’s rally. The Fed’s interest rate cuts were a key catalyst for this growth, as Gold prices reached new heights in response to the unprecedented global economic turmoil which was unfolding at the time.

However, it’s important to note that the relationship between Fed policy and gold prices is not always straightforward. Other factors, such as the strength of the dollar, global economic growth, and geopolitical risks, can also play a significant role.

Potential Risks and Considerations

While PIMCO’s proposal could provide a much-needed boost to the housing market and potentially support gold prices, it’s not without risks:

Inflation: Reinvesting in MBS could be seen as inflationary, potentially undermining the Fed’s efforts to bring inflation under control.
Moral Hazard: Some may argue that intervening in the MBS market creates a moral hazard, encouraging excessive risk-taking by mortgage lenders.
Limited Impact: There’s no guarantee that halting the MBS unwind would significantly lower mortgage rates or revive the housing market. Other factors, such as credit availability and consumer confidence, also play a crucial role.

Gold Price Forecasts: What to Expect?

Predicting future gold prices is always a challenge, but several analysts have offered their forecasts for the coming years:

J.P. Morgan Research: Expects gold prices to average $3,675/oz by the final quarter of 2025, rising toward $4,000/oz by the second quarter of 2026.
CoinCodex: The gold price forecast for 2025 is currently between $ 3,645.68 on the lower end and $ 4,380.47 on the high end.
BullionByPost: Citi have upgraded their 2025 average to $2,900 per ounce, but given gold’s already high price, that would require a significant drop in the second half of the year. UBS have revised their forecast to $3,500, while Goldman Sachs have revised their forecasts several times, and their latest figure is $3,700 by the end of 2025.

These forecasts suggest a generally positive outlook for gold, driven by factors such as continued strong investor and central bank demand, geopolitical risks, and expectations of further Fed easing.

The Bottom Line: A Complex Interplay

PIMCO’s proposal to halt the Fed’s mortgage unwind highlights the complex interplay between monetary policy, the housing market, and gold prices. While there are potential benefits to this approach, there are also risks and uncertainties to consider.

For investors in the precious metals markets, it’s crucial to closely monitor the Fed’s policy decisions and their potential impact on interest rates, the dollar, and inflation expectations. Keeping an eye on the housing market and broader economic conditions will also be essential for making informed investment decisions.

Disclaimer: This blog post is for informational purposes only and does not constitute financial advice. Please consult with a qualified financial advisor before making any investment decisions.