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Collapse of FTX Exchange Poses Warning of Much Broader Risks

A New 7.7% Inflation Rate Is Seen as Positive News


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

Investors finally got some good news this week on the inflation front. Thursday's Consumer Price Index report showing price level increases moderating somewhat sent stocks, bonds, and precious metals all soaring.

CPI inflation still came in elevated at an annual rate of 7.7% through October. But that was slightly lower than analyst expectations. The 7.7% reading also represents a possible deceleration trend from earlier in the year when the CPI was running well above 8%.

With the official inflation rate now heading down a little bit, the Federal Reserve will likely start scaling back its interest rate hikes. Expectations for Fed softening helped drive the U.S. Dollar Index down to a two-month low.

In response, gold and silver prices jumped. Since last Friday’s close, gold prices are up 4.6% to trade at $1,767 an ounce. Silver, meanwhile, is gaining 2.5% on the week to bring spot prices to $21.57 per ounce.

Turning to the PGMs, platinum continues to show some impressive relative strength. Platinum prices are pushing higher by 5.8% this week to come in at $1,035. And finally, the palladium market shows a weekly gain of 6.5% to trade at $2,068 per ounce.

Metals investors are hopeful that a dovish turn by the Fed will lead to bullish price action in the months ahead.

They are also trying to figure out how accommodating or threatening the political climate will be following the mid-term election. The results were certainly disappointing to Republicans who had hoped to win a large majority in the House of Representatives and retake control of the Senate.

While a few key races still are undecided, it appears unlikely that the GOP will end up with anything better than a razor-thin majority in the House and an evenly split Senate. Fiscal conservatives who seek major budgetary reforms and a fight with the Biden administration over big issues like raising the debt ceiling will likely be stymied.

Not much is likely to change in Washinton, D.C. during the next Congress. Looking ahead to 2024, speculation is growing that Florida Governor Ron Desantis could be the GOP nominee for President.

Desantis won re-election overwhelmingly by running on his record of freeing the state from COVID restrictions and banning Woke indoctrination in schools. We will probably learn more in the months ahead about where he stands on fiscal and monetary issues at the federal level.

In the meantime, one of the issues Congress is likely to take up soon is regulation of cryptocurrency markets.

This week crypto markets got rattled by the collapse of a major exchange known as FTX. FTX had faced a wave of customer requests for withdrawals and announced it was experiencing liquidity issues. A digital bank run ensued.

FTX had specifically touted itself as a safe and secure platform. That turned out not to be the case. FTX mismanaged its own finances and may have also misappropriated funds in client accounts.

Now the entire crypto industry is coming under closer scrutiny by politicians and regulators.

However, the FTX debacle is complicated by the fact that its owner, Sam Bankman-Fried, has been a huge financial contributor to Democrats. The crypto billionaire gave $40 million to Democrat candidates in 2022, making him the party’s second largest donor. In 2020, he pumped $10 million into Joe Biden’s campaign for President.

It’s also no secret that the big retail banks not only give lots of money to members of Congress but also push former executives to fill top positions at regulatory agencies. That creates conflicts of interest when it comes to cracking down on financial institutions that are involved in the manipulation of precious metals markets, for example.

There is a risk that amid the clamor for tighter regulations on crypto markets, politicians will move to limit the freedoms on investors to allocate capital wherever they wish instead of holding fraudsters accountable at both the individual and institutional level.

Investors cannot necessarily count on free and fair markets when they engage with crypto exchanges, futures exchanges, brokerages, or banks. Holding funds with any financial institution entails at least some measure of counterparty risk.

But precious metals held in physical form insulate investors from the counterparty risks associated with digital assets and financial assets.

The collapse of FTX could be the canary in the coal mine warning of broader risks on not only crypto exchanges, but futures exchanges, stock exchanges, and the banking system itself. The aggressive pace of interest rate hikes by the Federal Reserve and the resulting volatility in debt and equity markets could raise liquidity concerns at major financial institutions.

The best way for investors to protect themselves against such risks isn’t to hope for stronger regulations or a bailout from the government. Instead, investors can take matters into their own hands by owning tangible assets, including gold and silver, outside of the financial system.

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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