U.S. Markets Levitate as Investors Nervously Eye Fed

Welcome to this week's Market Wrap Podcast, I'm Mike Gleason.

Well, reports of Ukrainian military jets being shot down by Russian artilleries along with ramped up military action by Israel in Gaza weren't enough to give a boost to gold and silver prices this week. The precious metals markets pulled back as superficially upbeat economic data helped lift the U.S. dollar versus foreign currencies.

Some investors are now looking for the Federal Reserve to begin raising rates sooner rather than later. But such calls are a bit premature, and as we will explain in a moment, such a move could be irrelevant. With official measures of inflation still tame and commodity prices down over the past couple months -- now well below their 2011 highs -- the Fed is under no particular pressure to drain the liquidity that is supporting the housing and stock markets.

But don't make the mistake in thinking that future interest rate hikes will necessarily hurt precious metals prices either.

During the great gold and silver bull run of the late 1970s, the Fed wasn't slashing rates. It was doing the opposite. The Fed kept raising rates, but it didn't get out ahead of inflation until Paul Volcker stepped in and jacked rates up to punishing double-digit levels.

What matters to precious metals markets is not so much whether the Federal Reserve Board is raising or lowering rates in nominal terms, but whether interest rates are running above or below inflation. As inflation rises, and especially as investors come to fear higher rates of inflation, precious metals stand to benefit so long as the Fed remains behind the curve.

Meanwhile, Fed chairperson Janet Yellen has repeatedly indicated that the Fed will tolerate higher rates of inflation before it will stop trying to stimulate a sluggish economy and job market with accommodative monetary policy. That's why stagflation could be an emerging mega-trend going forward – one that could be incredibly bullish for gold and silver.

Getting back to the markets, the S&P 500 crawled to a slight new all-time high this week in quiet summer trading. Volatility in U.S. equity and bond markets is gone as fear has seemingly been vanquished. Social media stocks, junk bonds, foreign bonds, Treasury bonds – you name the financial asset and investors have bid it up to fully valued levels and beyond. Everywhere you look, risk premiums have all but vanished.

So have we entered a new normal where financial assets rise in perpetuity thanks to the safety net of Fed liquidity? Well, every bull market has a story, and at bull market tops almost everyone expects the bullish storylines to continue playing out. The current Fed-fueled bull market will be no different.

Eventually, fear will return to the markets, and the fear trade will come back with a vengeance. For now, though, precious metals remain mired in a long consolidation. This week both gold and silver were plunged back into trading ranges after being unable to hold breakouts from June.

For the week, gold is down 1.2% and to trade at $1,295 per ounce as of this Friday morning recording. Meanwhile, silver looks lower by 2.1% and currently trades at $20.45 an ounce.

Gold and silver futures markets were hit by selling Thursday on news of softening demand for physical gold out of China. Chinese gold buying in the first six months of 2014 fell by 19% compared to last year's record gold intake, according to the China Gold Association.

Yet as gold prices dipped below $1,300 an ounce, physical buyers came back into the market. Premiums on the Shanghai Gold Exchange rose slightly from the global benchmark, indicating Chinese buyers are interested in owning physical metal at these levels. Stronger buying would undoubtedly be seen if prices dip further in the days ahead.

Lower prices near term are certainly a possibility on a technical basis. But the metals markets will soon be entering seasonally strong periods on the calendar. Over the past 30 years, August through September has been the strongest two-month period for gold price advances. Whether that seasonal tendency holds true this year remains to be seen, but there are plenty of other compelling reasons to accumulate physical precious metals on this late July pullback.

In spite of some fleeting strength in the U.S. dollar versus other fiat currencies, the reality is that the Fed remains committed to depreciating the dollars you hold. Most investors know this, which is why they have been throwing their dollars into financial markets to try to get positive real rates of return. The problem is that the herd has now squeezed just about all remaining drops of value from stock and bond markets. There's scarcely any fruit left to pick from in these markets. Quite frankly, they've already been harvested.

By contrast, the herd hasn't discovered the fertile grounds of precious metals. Yet. For now, physical gold and silver remain among the few investable assets that you can buy at depressed valuations and obtain long-term protection from the Fed's campaign against the dollar.

Before we sign off for this week, I want to remind you that you have less than one week left now to take advantage of Money Metals's July special on all fractional gold and silver products. Buy $1,000 or more of any gold or silver item which is less than one ounce in size, and we'll throw in a free roll of 20 pure copper rounds. Order $5,000 or more, and your order also ships for free!

And just to highlight a couple of the qualifying items in our extensive product lineup, we still have a limited supply of the $10 Liberty coins containing just less than half an ounce of gold. These 100 year old coins can be had at bullion like premiums of only 8 to 8.5% over the melt value.

Also in gold -- don't forget there are now two Valcambi CombiBar options to choose from. We have both the 50-gram bar that breaks into individual 1-gram sections, plus the new 1-ounce CombiBar that separates into ten 1/10-oz gold pieces.

In terms of the poor man's gold, the ultimate fractional silver product is our Walking Liberty 1/10 oz silver rounds. A tenth of an ounce of silver is nearly 1/20th the value of a single gram of gold, and hundreds of Money Metals customers have snatched up these little beauties since we introduced them earlier this year. Packaged in tubes of 50, or five ounces, these tenth-ounce Walking Liberty silver rounds are stamped with their weight and purity and are available for as low as $2.50 each at present.

For more information, or to place an order for these or any other products we carry just visit our website at www.MoneyMetals.com -- or give us a call and talk to one of the most knowledgeable precious metals specialists in the entire industry by dialing 1-800-800-1865 during normal business hours. Our team is simply here to guide you and you will never experience pressure of any kind.

Well, that will wrap it up for this week, thanks for listening. This has been Mike Gleason with Money Metals reminding you that we remain fully committed to getting you the most value for your depreciating dollar… with speed, with accuracy and with top notch service. Have a great weekend everybody.