Alix Steel of Bloomberg spoke with Jim Rickards, author of Currency Wars, about the Federal Reserve’s conundrum over raising rates. Rickards says that despite what the Fed says now, it’s not going to raise rates in June. Meanwhile, gold has shown strength even in the face of supposed deflation. Rickards is confident that the yellow metal will climb when the Fed realizes the economy isn’t nearly as strong as its data suggests.

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Highlights from the interview:

Jim Rickards: It’s just a continuation of a trend. I think you actually have to go all the way back to December 2013 when Bernanke started to taper. Remember Yellen didn’t start to taper, Bernanke did. Now she finished it, but the whole sequence of first we’ll taper the asset purchases, then we’ll raise interest rates, then gradually we’ll reduce the balance sheet. It was all based on the idea that the US economy was getting stronger and could bear the stronger dollar. What’s happened in fact is the data is coming in weak. The Fed has given the markets no reason to believe they’re not going to raise rates, but of course a strong dollar is deflationary. So you have this conundrum. The Fed wants inflation; they told us they have this two percent target. They say they want to raise rates, but raising rates makes the dollar stronger which is deflationary because you import deflation from abroad in the form of low import prices… None of it makes sense. Something has to happen….

You’re going to raise rates in this weak environment? It’s going to sink the stock market. So the question is, when is the Fed going to wake up? Their models are wrong, so their forecast is always wrong. They are data dependent. But the problem with data is that it’s real-time. You got to see a couple more months. And my guess is that by June they’ll see how weak the economy is and they’ll blink. They won’t raise rates. But the problem then is that markets could rally because if they market expects a rate increase, but they don’t, that’s like a rate cut. So if they raise them, there’s no bottom, and if they don’t raise them and make that clear, maybe even going to QE4, they could rally. So it’s very difficult for investors because you certainly don’t want to short stocks if you don’t raise rates, but you don’t want to own them if they do raise rates. I think cash is a good component right now.

Alix Steel: Jim, why aren’t we seeing this reflected in the gold market at all, this sort of danger, this sort of rush to safety like the dollar and the treasury market?

JR: Well I think we are Alix and here’s why. Think about what we just said. This is a deflation trade, emerging market currencies are collapsing, bond markets are rallying so yields are collapsing. But gold has gone down a little bit lately but it’s sort of holding its own. In a highly deflationary environment with decreasing real rates, which is what we’re seeing, I would have expected to see gold go down to $900. The fact that it’s hanging in their around the $1100 or $1200 level actually shows strength relative to other prices that are collapsing. So you haven’t seen the price soar, but why would it in a deflationary environment? Rising real rates are bad for gold, and we’re getting rising real rates. But gold’s kind of hanging in there, and that tells me that it’s poised to rally if the Fed blinks and doesn’t raise rates which is what I expect.