Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? / Commodities / Gold and Silver 2021
Precious metals markets got absolutely slammed onThursday. The selling rout followedstatements put out by the Federal Reserve suggesting that tapering and ratehikes could come sooner than previously expected.
The U.S. Dollar Index spiked on the Fed’s latest talkingpoints, prompting short sellers in the commodity futures markets to pounce.
Copper and most other commodities also got hammered thisweek.
The interest rate markets, meanwhile, exhibited someunusual divergences. The 30-year Treasury yield fell sharply at the same timeas shorter-term bond yields and mortgage rates rose. The effect was a dramaticflattening of the yield curve.
Perhaps Federal Reserve chairman Jerome Powell succeededin convincing markets that the recent inflation spike is transitory. But Powellhimself admitted in rambling remarks to the media that he doesn’t really knowwhat the recent data implies about the future.
Jerome Powell: This is, uh, anextraordinarily unusual time. And we really don't have a template or, or, orah, or you know, ah, any experience of a situation like this. So, I think wehave to be humble about our ability to understand the data. It's not a time totry to reach hard conclusions about the labor market, about inflation, aboutthe path of policy. There, there is a possibility on the other side of thisthat, that uh, inflation could be, could actually be quite low going forward.But that's, that’s not really where our focus is right now. Where, where ourfocus right now is, umm, we need to... our, our expectation is that these, uh,high inflation readings that we're seeing now will start to abate.
Inflation could abate slightly from here or it couldaccelerate further. But it’s not going away, and the Fed sees it as its missionto make sure of that.
That means the prospects remain grim for cash savers andbond holders who are hoping to generate enough income to maintain purchasing power.Negative real interest rates are going to be in force for some time to come.
As the Fed’s balance sheet sits at a record $8 trillionand growing, policymakers are now projecting a gradual tapering and two ratehikes in 2023. Who knows if that will actually happen. And even if it does, theFed funds rate will still be pitifully low versus the Fed’s own 2% inflationbenchmark.
Investors who buy into the “transitory” inflation lineare being duped. Inflation when measured against nominal interest rates willremain high for the foreseeable future.
Yes, lumber prices and used car prices could come down inthe months ahead as supply and demand rebalance.
But there could also be tremendous wage pressureunleashed as businesses struggle to fill jobs amid millions of working-agepeople still sitting at home collecting government benefits. Inflation couldbegin showing up in a whole host of areas that aren’t even being talked aboutyet.
So, despite this week’s Fed-induced carnage in preciousmetals markets, nothing officials said diminishes the long-term case for owning gold and silver.
Certainly, some near-term technical damage was done.Further momentum selling in futures markets is possible before a final bottomis reached.
But as we’ve often seen in past episodes where spotprices got smashed, that tends to motivate bargain hunters in the bullionmarket. In fact, many physical precious metals investors are thankful for thisopportunity to accumulate more ounces while they are on sale.
A divergence between a declining paper market and ared-hot bullion market could unfortunately lead to potential shortages in someproducts and a rise in premiums across the board. That’s what happened to the silver market during last year’stumultuous gyrations.
Regardless of market condition, bullion buyers would bewise to inquire about premiums before buying a particular product. Often thesame quantity of metal can be obtained at a much less overall cost simply byswitching from government minted coins to privately issued rounds, for example.
Some dealers try to steer customers into higher-premiumproducts by touting their particular dates or “proof” finishes or purported collectiblevalue. But paying up for any of these features can be a big mistake if yourmain objective is to accumulate ounces of precious metal for long-terminflation protection.
A big part of any sound inflation protection strategy iskeeping transaction costs low. That means staying away from specialty marketswithin markets where bid/ask spreads are wide, market values are subjective,and scams can be pulled. Sticking with liquid, fungible assets such as widelyrecognized bullion products ensures the fullest, most direct participation inthe underlying bull markets for the metals.
Andno, nothing in this week’s market action changes the bullish big picturefundamentals for gold and silver. They remain far sounder stores of value thanU.S. fiat dollars which are destined to depreciate.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2021 Mike Gleason - All Rights Reserved
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