Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Another pair of alarming inflation reports jolted markets this week.
On Wednesday, the Consumer Price Index came in at a 9.1% annual rate. The higher-than-expected reading puts the CPI at a new 41-year high.
The biggest contributors to rising consumer prices are the basic necessities of food, fuel, and shelter. As households struggle to make ends meet, they are trimming discretionary spending, burning through savings, and running up credit card balances.
Businesses are also getting squeezed. On Thursday, the Producer Price Index showed wholesale costs rising at a massive 11.3% year-over-year.
These are all major warning signs for the economy. As both businesses and consumers are forced to tighten their belts, a slowdown looms.
And if the Federal Reserve makes another major policy misstep, then a severe recession and financial crisis may also be coming. The Fed seems committed to hiking interest rates until something breaks and forces policymakers to pivot.
They are expected to deliver another 75 basis-point rate hike later this month. The latest inflation reports have some Fed watchers saying that a massive 100-point rate increase is now on the table.
Rising interest rates are causing the U.S. dollar to spike versus foreign currencies. A strengthening fiat dollar achieved parity with the euro for the first time in 20 years.
That, in turn, is putting downward pressure on metals markets.
Trading algorithms interpret a rising dollar index as cause to put in sell orders for gold and silver. Of course, the U.S. currency has been rapidly declining in real purchasing power terms. But for now, inflation hedges are being sold off along with stocks, bonds, and cryptocurrencies.
The yellow metal has been under significant pressure in recent days, dropping to as low as $1,700 per ounce on Thursday.
Gold prices closed on Thursday at $1,717 an ounce, down 1.9% for the week. Silver shows a weekly loss of 4.7% to trade at $18.64 per ounce. Platinum is off 5.4% to trade at $859. And palladium is off by 2.2% this week to bring spot prices to $1,968 per ounce, again all of these prices based on this Thursday evening recording.
Turning to copper, the industrial metal fell nearly 10% on the week to a 20-month low. The red metal is flashing a major red flag for the global economy. It suggests that manufacturing activity is plunging.
The broader plunge in commodity markets also suggests that inflation pressures are abating. While not yet reflected in headline CPI data, markets are clearly foretelling a deceleration.
Having created the inflation problem in the first place by flooding the financial system with excess stimulus, the Fed is now panicking to try to correct its mistakes.
Fed chairman Jerome Powell is acting like a bad driver who over-steers to try to avoid a road hazard. If the driver had kept his eyes on the road, he could have spotted the hazard early and gently put his foot on the brakes. But instead, he keeps his foot on the gas too long, then suddenly slams on the brakes while trying to swerve out of the way of danger, causing his car to spin out and crash.
The Fed’s reckless piloting of monetary policy is in the process of causing a major accident for the economy.
Should the central bank continue to raise interest rates rapidly, the dollar could have room for more upside on foreign exchange markets, and that upside could keep the gold bulls at bay.
However, the Fed may be forced to reverse course sooner than most analysts think.
A Fed-induced recession is becoming more likely with each passing week. Officials will surely hike rates again at their next policy meeting. The big question is whether the Fed can deliver more hikes in September and beyond before the equity markets freak out.
Markets may be pricing in more rate hikes than the Fed can actually deliver. If so, then the recent selling in gold and silver looks to be way overdone.
Many large market participants have shed their gold exposure in recent weeks. Gold ETF holdings have also declined, demonstrating a lack of interest by the investing public. Sentiment is at a negative extreme usually associated with bottoms.
Meanwhile, the shorts in the futures markets may be running out of gas. As there are few bullish speculators left to sell to, the bears will find pushing paper prices much lower from here challenging.
Current price levels for precious metals represent an excellent long-term value for patient investors. The long-term bullish narrative for gold and silver remains intact.
And despite seemingly everyone in the mainstream investing world hating the metals right now, bargain hunters are pouncing. Demand for physical bullion remains strong. It has even picked up during the recent spot price tumble.
Should market conditions become even more extreme like they were during the COVID panic in early 2020, product shortages and premium spikes could emerge. But for now, Money Metals has plenty of common bullion products available for delivery at prices that probably won’t stay this low for long.
Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.
“Many economists in 2022 are highly delusional – a very dangerous group indeed. When you hike rates aggressively with a strong dollar you multiply interest rate risk, which was already off the charts coming from such a low 2020 base in terms of yield – it’s a convexity nightmare. Interest rate hikes today – hand in hand with a strong U.S. Dollar – carry 100x the destructive power than the Carter – Reagan era.”
