Silver Eyes Key Breakout Levels as Inflation Heats Up / Commodities / Gold & Silver 2020
Gold and silver markets advanced early thisweek, with silver leading the way. OnThursday, the metals sold off a bit as the U.S. dollar gained.
The major trend for the dollar, however, isdown. The Dollar Index has been grinding lower since mid March, when it put ina spike high.
Silver finally broke through $19 level with astrong close above it on Monday. Therehasn’t yet been much follow-through. Although silver has continued to closeabove $19, we’re not seeing a big momentum push higher.
Precious metals analyst and Money Metalscontributor Steve St. Angelo sees$19.75 as a resistance line on the chart that may have capped thesilver market this week. Perhaps we’ll see another attempt at breaking throughit next week. We see another key levelat $21, and if that’s decisively broken, then silver could run all the way to$26.
With both precious metals and base metalsmaking strong moves in recent weeks, inflation pressures may be brewing. The Consumer Price Index rose 0.6% percent inJune after falling 0.1% in May. It was the biggest jump for the CPI since 2012.
Food and energy prices are surging, withgasoline in particular up 12.3%. Otherconsumer spending categories that have been weak may be set to rise in the nextCPI report.
It may seem counterintuitive for inflation tobe an issue while much of the U.S. economy remains stifled by lockdowns. Somestates including California are now even re-imposing some of the most severerestrictions that were put in place earlier this year.
Yet even with at least 14 million jobs lost,personal incomes have risen thanks to government stimulus measures. Governmenttransfer payments have exploded by $2 trillion. That’s equal to a 200% annualized increase.
It’s no mystery why inflation isreturning. Inflation is being generateddirectly by the government and its enablers at the Federal Reserve.
Additional virus-related stimulus measures arebeing debated by Congress and the Trump administration. It appears likely that despite someopposition from fiscal conservatives, another round of stimulus checks will becoming.
Meanwhile, the Fed will keep interest ratesartificially depressed for the foreseeable future. Philadelphia Fed PresidentPatrick Harker said this week that the central bank should hold interest ratesnear zero until inflation not only reaches but exceeds the 2% target.
That echoes previous comments by Fed ChairmanJerome Powell on so-called “symmetrical” inflation targeting. It means centralbankers will welcome a period when inflation runs above target.
Higher inflation combined with ultra-lowinterest rates will create an environment of deeply negative real rates. When the rate of return on bank savingsaccounts and Treasury bills is negative after adjusting for inflation, saversand investors will need to look elsewhere to preserve and grow their wealth.
Some of that wealth will end up in the preciousmetals markets. Negative real rates tend to be bullish for gold and silverprices. Since there are nosigns of any rate hikes on the horizon this year or next, the only threat tothis bullish scenario is that the economy collapses into deflation.
We can’t rule out another deflationary scare inthe economy and crash in equity markets. But under our monetary system, thesetypes of events are always followed by a big inflationary push. We suspectthere is more to come in the current inflationary push and that precious metalsstill have a lot more upside potential than downside risk.
To be sure, the inflation risk is greatest if thiscoronavirus-depressed global economy recovers.
The Producer Price Index has yet to show any broad rises inwholesale prices. But disrupted supplychains for a host of commodities and manufactured products are showing signs ofstress and instability.
Consumers are feeling the pain of rising food (especially meatand dairy) costs. Pent up demand for discretionary consumer goods could soontrigger price spikes in other categories as well.
Asia and Europe appear to be faring better than the U.S. interms of limiting the spread of the virus.
Their economies may thus be positioned to recover more strongly.
As U.S. COVID-19 cases continue to rise (even as the casefatality rate falls), even more state-by-state economic (re)lockdowns mayoccur. That means more calls for economic bailouts and stimulus measures –which, if enacted, would further exacerbate upward pressures on deficits andmoney printing.
The Federal Reserve Note dollar is especially vulnerable tobeing debased – and possibly even ditched by large foreign holders includingChina. A bearish outlook for the U.S. dollar implies a bullish case for hardmoney – gold and silver.
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.
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