Gold and silver markets advanced early this week, with silver leading the way. On Thursday, the metals sold off a bit as the U.S. dollar gained.
The major trend for the dollar, however, is down. The Dollar Index has been grinding lower since mid March, when it put in a spike high.
Silver finally broke through $19 level with a strong close above it on Monday. There hasn’t yet been much follow-through. Although silver has continued to close above $19, we’re not seeing a big momentum push higher.
Precious metals analyst and Money Metals contributor Steve St. Angelo sees $19.75 as a resistance line on the chart that may have capped the silver market this week. Perhaps we’ll see another attempt at breaking through it next week. We see another key level at $21, and if that’s decisively broken, then silver could run all the way to $26.
With both precious metals and base metals making strong moves in recent weeks, inflation pressures may be brewing. The Consumer Price Index rose 0.6% percent in June after falling 0.1% in May. It was the biggest jump for the CPI since 2012.
Food and energy prices are surging, with gasoline in particular up 12.3%. Other consumer spending categories that have been weak may be set to rise in the next CPI report.
It may seem counterintuitive for inflation to be an issue while much of the U.S. economy remains stifled by lockdowns. Some states including California are now even re-imposing some of the most severe restrictions that were put in place earlier this year.
Yet even with at least 14 million jobs lost, personal incomes have risen thanks to government stimulus measures. Government transfer payments have exploded by $2 trillion. That’s equal to a 200% annualized increase.
It’s no mystery why inflation is returning. Inflation is being generated directly by the government and its enablers at the Federal Reserve.
Additional virus-related stimulus measures are being debated by Congress and the Trump administration. It appears likely that despite some opposition from fiscal conservatives, another round of stimulus checks will be coming.
Meanwhile, the Fed will keep interest rates artificially depressed for the foreseeable future. Philadelphia Fed President Patrick Harker said this week that the central bank should hold interest rates near zero until inflation not only reaches but exceeds the 2% target.
That echoes previous comments by Fed Chairman Jerome Powell on so-called “symmetrical” inflation targeting. It means central bankers will welcome a period when inflation runs above target.
Higher inflation combined with ultra-low interest rates will create an environment of deeply negative real rates. When the rate of return on bank savings accounts and Treasury bills is negative after adjusting for inflation, savers and investors will need to look elsewhere to preserve and grow their wealth.
Some of that wealth will end up in the precious metals markets. Negative real rates tend to be bullish for gold and silver prices. Since there are no signs of any rate hikes on the horizon this year or next, the only threat to this bullish scenario is that the economy collapses into deflation.
We can’t rule out another deflationary scare in the economy and crash in equity markets. But under our monetary system, these types of events are always followed by a big inflationary push. We suspect there is more to come in the current inflationary push and that precious metals still have a lot more upside potential than downside risk.
To be sure, the inflation risk is greatest if this coronavirus-depressed global economy recovers.
The Producer Price Index has yet to show any broad rises in wholesale prices. But disrupted supply chains for a host of commodities and manufactured products are showing signs of stress and instability.
Consumers are feeling the pain of rising food (especially meat and dairy) costs. Pent up demand for discretionary consumer goods could soon trigger price spikes in other categories as well.
Asia and Europe appear to be faring better than the U.S. in terms of limiting the spread of the virus.
Their economies may thus be positioned to recover more strongly.
As U.S. COVID-19 cases continue to rise (even as the case fatality rate falls), even more state-by-state economic (re)lockdowns may occur. That means more calls for economic bailouts and stimulus measures – which, if enacted, would further exacerbate upward pressures on deficits and money printing.
The Federal Reserve Note dollar is especially vulnerable to being debased – and possibly even ditched by large foreign holders including China. A bearish outlook for the U.S. dollar implies a bullish case for hard money – gold and silver.
Mike Gleason is a Director at Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. A graduate of the University of Florida, Gleason also has hosted a weekly precious metals podcast since 2010.