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Fed Continues Tough Talk, but Gold & Silver Show Resilience

New sound money advocates may get elected next week


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

Precious metals investors remain cautious following the Federal Reserve’s latest jumbo rate hike.

On Wednesday, the Fed announced another three-quarter point bump up on interest rates. It’s the sixth straight hike by central bankers and brings the Fed funds rate up to 4%. That’s the highest it has been since 2008.

Investors fully anticipated the Fed’s latest move but hoped it would be accompanied by a dovish statement from Chairman Jerome Powell. Instead, Powell threw cold water on the idea of a pause or pivot at the FOMC’s next meeting. In his remarks, he sounded less like a dove and more like a grinch who was preparing to severely punish Americans for the Fed’s past mismanagement and impose more pain to financial markets as the holiday season approaches.

Of course, thanks to the Fed’s reckless actions over the past three years, Thanksgiving celebrations will be a lot more expensive this year than last as a result of dramatic food price increases. Powell admitted that the Fed has so far failed to contain inflation and warned that more tightening than previously forecast is coming… but, as you would expect, he didn’t acknowledge the Fed’s central role in creating the problem in the first place.

Jerome Powell: My colleagues and I are strongly committed to bringing inflation back down to our 2% goal. If we don't get inflation under control because we don't tighten enough, now we're in a situation where inflation will become entrenched. We have both the tools that we need and the resolve it will take to restore price stability on behalf of American families. It is very premature to be thinking about pausing. So, people, when they hear lags, they think about a pausing. We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.

In the face of increasingly tough talk from Fed policymakers, gold and silver markets have been showing some resilience. Instead of breaking down sharply to new lows this fall, they have settled into trading ranges. Today we’re seeing big advances in the money metals, and they’re both in now green territory for the week.

This week gold prices are up 1.6% to trade at $1,678 per ounce. While gold has spent a lot of time recently trading near the bottom of its range, silver is showing some relative strength and remains well off its lows for the year. As of this Friday recording, and in big part due to today’s rally, the white metal is putting in a weekly gain of a robust 6.4% or over a $1.50 to bring spot prices to $20.75 an ounce.

Turning to the PGMs they’re both underperforming. Platinum is off a slight 0.4% since last Friday’s close to trade at $956. And finally, palladium is looking at a loss of 3.7% this week to come in at $1,900 per ounce.

Many metals investors are understandably skittish in this difficult environment. They want to hear the Fed finally give indications that it is ready to back off on rate hikes. And they want to see the U.S. Dollar Index finally take a decisive turn to the downside.

Those things will happen sooner or later. But there’s a good chance metals markets will begin rallying ahead of any Fed pivot or renewed dollar decline. It’s quite possible that silver and other metals have already seen their lows for the year.

It’s also possible that next week’s election results could change market dynamics. Hopes are high among Republicans for a red wave that gives the GOP control of the House and Senate.

One of the races that could determine which party controls the Senate is in Arizona. There, Republican Blake Masters is trying to unseat incumbent Democrat Mark Kelly. Polls suggest the race is now a toss-up.

Sound money advocates are paying attention to this race in particular because Masters has advocated bringing some soundness to the nation’s fiscal and monetary systems. Masters has even said he would remove income taxation from gold and silver… something that Congressman Alex Mooney’s bill would do.

Masters has been endorsed by former Congressman Ron Paul, who spearheaded the original Audit the Fed bill and was a leading advocate for gold during his own tenure on Capitol Hill.

If elected, Masters would assume the Senate seat previously held by John McCain for more than three decades. Senator McCain was never known as a strong ally of the sound money movement. And frankly, few Senators in recent history have been.

The coming election is unlikely to deliver a meaningful shift in Washington’s orientation toward spending, borrowing, and currency printing. If Republicans take the Senate and reinstall Mitch McConnel as Majority Leader, investors will likely perceive it for what it is – a continuation of the same old, same old routine.

No matter how many times power switches back and forth between Chuck Schumer and Mitch McConnel, nothing will fundamentally change in terms of the government’s dire fiscal trajectory. The only thing that’s changing now is that the costs of servicing the government’s massive debt load are on track to explode.

The era of low interest rates appears to have ended, and politicians in Washington, D.C. have yet to fully grapple with the consequences. The Federal Reserve is trying to deter individuals, businesses, and politicians from borrowing new money into existence by making it more expensive for them to do so.

But some politicians including Elizabeth Warren and Bernie Sanders are openly rebelling against the Fed’s bout of seeming hawkishness. Others in Congress and in the Biden administration are quietly devising ways to keep spending and borrowing levels elevated. Very few politicians in either party are talking about making the sorts of budget cuts that families and businesses are now being forced to make thanks to rising interest rates and persistently high inflation.

The end result may be that the government borrows even more money, not less, in order to be able to finance higher debt servicing costs. And as a consequence, the existing inflation problem could become even more entrenched.

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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