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Fed Re-Commits to Dollar Devaluation as Gold & Silver Consolidate

First, the Economy Was Wreaked, Then the Cities, Next the Currency…


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

As the Federal Reserve embarks on a new campaign to raise inflation rates, markets may be in for a change in character. 

On Wednesday, Fed Chairman Jerome Powell announced that the central bank would be targeting an inflation “average” of 2%. By the Fed’s measures, inflation has been running below 2% in recent years. So, getting to a 2% average in the years ahead will require above 2% inflation for a significant period.

Here’s Powell attempting to explain himself from the central bankers’ virtual Jackson Hole conference:

Jerome Powell: Our statement emphasizes that our actions to achieve both sides of our dual mandate will be most effective if longer term inflation expectations remain well anchored at 2%. However, if inflation runs below 2% following economic downturns, but never moves above 2%, even when the economy is strong, then over time, inflation will average less than 2%.

Households and businesses will come to expect this result. Meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2% over time.

If Jerome Powell and company are successful in jacking up consumer price levels, the implications for holders of bonds and cash are dire. Anyone who holds savings in a money market account or a U.S. Treasury security of any maturity stands to suffer real losses year after year.

Not even the 30-year Treasury sports a yield as high as 2%. Bond yields did rise sharply on Thursday following Powell’s jawboning.

Earlier this month, Fed officials had disappointed the bond market by backing off on yield curve control. That signaled they would allow long-term yields to rise even as they hold short-term rates near zero.

The 30-year Treasury hit 1.5% yesterday. It still has a long way to go to get to a positive real rate in an environment where the Fed is likely to push inflation above 2% -- and to an overshoot of 3%, perhaps 4%, perhaps higher.

But Wall Street is cynically cheering on the Fed’s currency debasement campaign of impoverishing wage earners, savers, and retirees who are living on a fixed income. CNBC’s Jim Cramer heaped praise upon Powell for a job well done.

Jim Cramer: I think he's done a remarkable job. He's not listening to people who say, "You'd better start worrying about inflation now." He's looking about employment and realizing, "You know what? We got to be sure that we don't go back into a depression after we've had some nice comeback." David, I don't know. To me, he says, "Don't you have to worry about me anymore. We'll let it overshoot."

David Faber: Yeah, he is penalizing savers. He continues to do that though, right, who cannot find a return anywhere except perhaps the stock market.

Stock market bulls are anticipating another leg up in the Fed-fueled rally. But they may be in for a surprise as investors begin to position for a more inflationary road ahead. It may not be the high-flying Nasdaq names and the mega-cap growth stocks in the S&P 500 that continue to lead.

We could instead see a rotation into areas of the market that represent better value and have real pricing power in an inflationary environment.  Energy, materials, mining, and metals come to mind.

Of course, a core holding in physical gold and silver is an absolute must for investors who want to hedge against inflation risk, financial turmoil, and geo-political risks.

At Money Metals Exchange, we believe that holding less than 5 or 10% of your assets in precious metals is downright irresponsible at the current time.  Yet, despite the large inflow of new precious metals buyers witnessed over the past year, the vast majority of Americans still don’t have a single ounce of gold or silver.

Gold and silver markets are perking up here late in the week.  Gold prices are rallying strongly here today and now show a gain of 1.6% since last Friday’s close to come in at $1,980 per ounce.  Silver, meanwhile, is also having a nice day and currently comes in at $27.75 an ounce after gaining 3.2% on the week.

Turning to the PGMs, platinum prices are up 1.5% to trade at $946. And finally, palladium is managing a weekly gain of 0.9% to command $2,265 per ounce price.

As metals markets have consolidated over the past three weeks, we’ve also seen the bullion buying settle down.  Premiums on many minted precious metals products have also come down a bit. That’s good news for those looking for opportunities to accumulate more coins, rounds, or bars.

Whether spot prices have some room to fall in the weeks ahead remains to be seen. The Fed’s inflationary policies are obviously a long-term tailwind for the metals, but they aren’t necessarily a near-term catalyst for the next up leg. We may have to look toward the fall when market volatility is likely to pick up ahead of the election.

This week’s Republican National Convention targeted moderate and swing voters with non-traditional pitches to try to get Donald Trump re-elected.  GOP pundits think it was a success.  With Trump trailing to Biden in the polls over the summer, these polls appear to be tightening to within the margin of error in key battleground states. 

Though a lot can change between now and November, the election map is set to look much like it did in 2016 – with solid blue states remaining blue, solid red states remaining red, and the same set of so-called tossup states up for grabs. The end result will be a deeply and bitterly divided country regardless of who prevails in states like Florida and Wisconsin to ultimately claim the White House.

The imbalances and contradictions in the economy may also reach a tipping point.  Wall Street is enriching itself while Main Street suffers under the effects of lockdowns and violent anti-police riots supported by America’s largest corporations and even a few governors and big city mayors.  

First, the economy was wrecked. Then the cities were wrecked – looted, burned, and turned over to the forces of lawlessness and disorder.  Next, the purchasing power of the dollar will be wrecked.  Inflation could be the next big source of economic despair for millions.

Wall Street will be mightily disappointed if it turns out to be the sort of stagflation that predominated in the late 1970s.  It was not a good time to be invested in either bonds or stocks in general. Both major asset classes produced real losses after taking into account inflation.

Of course, gold and silver both shined during the late 1970s. Their bull markets culminated in super spikes that reached their apex in early 1980.

The Paul Volcker led Fed had to frantically raise interest rates into the double digits to finally tame inflation. The Powell Fed won’t be raising rates anytime soon – and given the overhang of government and private debt, it’s doubtful rates will be meaningfully higher at any point in the next few years. 

Central bankers fear deflation and debt defaults more than anything under the sun, and since there is no restraint on their power to expand the currency supply, they have the tools they need.  Instead, the default will simply be on the value of the currency.

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.

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