Another week, another record high for gold.
On Wednesday, the monetary metal surged above $2,300 per ounce. It took a bit of a breather Thursday ahead of today’s key employment report but it rallied again on Friday.
Turning to silver, it made a significant breakout of its own this week. The white metal shot up above the $27 level to a fresh 2-year high and rallied to over $27.50 on Friday
As gold prices continue to reach new heights, bulls are eying even higher highs. Detractors, meanwhile, are pushing the narrative that gold has gotten too expensive.
They could both turn out to be right, though for different reasons.
In terms of depreciating U.S. fiat dollars, there can be little doubt that gold prices will continue to gain over time. The official inflation rate may rise or fall from here, but inflation itself is here to stay.
Those in the deflation camp have for years, and in some cases decades, been calling for gold and most other assets to suffer massive price collapses. At this point, the deflationists have been totally discredited. But a few still stubbornly persist in their belief that a deflationary depression is coming.
For some reason, they just don’t get that inflation is built into the machinery of our monetary system. It’s not the 1930s anymore. Back then, politicians and central bankers were still constrained by the remnants of a gold standard. The U.S. Treasury still minted coins made of silver. The Federal Reserve had no access to a digital printing press.
Today’s Fed can create unbacked currency in unlimited quantities with the click of a few keystrokes on a computer. Moreover, today’s Fed has vowed that it will not tolerate deflation for any sustained period of time. Fed officials won’t even tolerate a positive inflation rate that they arbitrarily deem to be too low.
Gold’s surge to new records reflects the Fed’s ongoing campaign of currency debasement. Yet the gold naysayers may have a point about the precious metal being too pricey – not in terms of dollars, but in terms of other hard assets.
In recent years, gold has outperformed silver, platinum, palladium, and copper. In fact, despite rallying of late, all of those other non-gold metals still have a long way to go in order to post new all-time highs.
Metals analysts have noted that structural supply deficits exist in these markets, perhaps most glaringly so in silver. It may only be a matter of time before chronic supply and demand imbalances trigger some sort of reckoning in the price-setting mechanism on futures exchanges.
Given that silver in particular is a small market that attracts some highly leveraged players, a price squeeze could result in some major fireworks to the upside. Silver is certainly gathering some upside momentum, but the timing of when it might accelerate toward new highs may depend on how the Fed’s shifting stance toward inflation plays out.
Fed Chairman Jerome Powell seemed to confirm last month that central bankers are giving up on trying to get inflation down to their arbitrary 2% target. Powell indicated rate cuts would come later this year even if inflation stays elevated at current levels.
But this week, Federal Reserve Bank of Minneapolis President Neel Kashkari suggested that persistently high inflation may require policymakers to cancel rate cuts – and even consider rate hikes.
Neel Kashkari: Ultimately, we've been surprised in a good way that the economy has been very resilient, even though we've raised interest rates a lot. So, if we continue to see strong job growth, if we continue to see strong consumer spending, and strong GDP growth, then that raises a question in my mind, well, why would we cut rates? Maybe the dynamics that we have right now are actually sustainable.
Interviewer: Here's another question. Are rate hikes off the table?
Neel Kashkari: No, they're certainly not off the table. I don't know of anybody who's taken them officially off the table. I don't think they're very likely. Even me, I think I'm on the more hawkish side of the committee. Even for me, I don't think it's likely. I think if we continue to be surprised that inflation is more persistent. The first thing I think we would do is just hold rates here for an extended period of time to see if that ultimately does the trick. But ultimately, if we get convinced that that's not enough to bring inflation back down to our target in a reasonable period of time, that I think we would consider raising interest rates from here.
Kashkari is admittedly more hawkish on inflation than most of his central planning colleagues. He may be playing a sort of “good cop, bad cop” routine with markets to try to discourage exuberant investors from aggressively front-running the Fed’s likely rate cut.
In any event, central bankers have no actual intention of eliminating the inflation problem. They will never raise rates high enough or constrict the money supply tightly enough to deliver true price stability.
Given the inevitability of further currency depreciation, gold isn’t done going up in terms of fiat Federal Reserve notes. And the moves in other metals may just be getting started.
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