Is the Most Recent CPI Reading Bullish or Bearish for Gold & Silver?
This past Monday’s consumer price index (CPI) report shocked the markets when it came in flat. The consensus was a .2% month over month increase. The stock market, cryptocurrency market and precious metals markets all responded positively to the news.
I’m reminded of the movie “Elf” when Will Ferrell walks into a New York coffee shop claiming to be the world’s best coffee. He uttered with excitement “Congratulations! You did it, you really did it!” This is what the market must be silently thinking about the Federal Reserve and their two-year effort to try and tame inflation by raising interest rates from 0% to 5.5%.
Granted, we’re not quite out of the woods yet, as inflation doesn’t move in a straight line. When we look back at prior instances of high inflation in the 1940’s & 1970’s and 80’s, we see that there were years of little to no inflation followed by years of extremely high inflation. In fact, inflation can jump dramatically in just a year’s time.
Getting back to our point about inflation, the market views the flat inflation reading as a sign that the Federal Reserve is done raising interest rates and that the next interest rate move will likely be a cut. Of course, that remains to be seen, as one month doesn’t necessarily make a trend, but it’s certainly worth noting and trying to project future monetary policy.
Many of our customers and readers are curious how gold and silver will respond in 2024 if the Fed takes a neutral approach to monetary policy or begins to cut rates. You may be surprised to read that we believe gold and silver will likely respond just as well to lower rates compared to the current high interest rate environment, if not better.
The primary reason is that gold and silver are effectively a bet against the dollar. In other words, there’s typically an inverse relationship between the strength of the dollar and gold and silver prices. The fact that gold and silver prices have risen while the Fed has pursued a tight monetary policy bodes well for the future, as these are usually headwinds for the precious metals market.
While gold and silver have historically been one of the best performers during high inflation, even if inflation is no longer a threat, we can still expect to see higher prices in response to a loose monetary policy, geopolitical issues, a struggling economy, a financial crisis or a banking sector collapse. While we don’t know which of these factors will be a catalyst for higher gold and silver prices, it’s a fairly safe bet that a black swan event will occur at some point in time.
On the other hand, the most recent CPI reading could be an anomaly and a pause in an otherwise high inflationary environment.
Of course, this creates enormous issues for the Fed and the government, as annualized interest payments on national debt are now estimated to be north of $1 trillion, making it the largest line item in the budget. Much higher interest payments could cause our debt servicing costs to spiral out of control. Check out reported national debt numbers HERE.
Of course, if the Fed tries to reduce interest rates by buying bonds and expanding their balance sheet, they will create more inflation, which will negate all the progress they’ve made over the past year and a half or so. Under Paul Volcker, the Fed was able to raise interest rates to the point where it defeated inflation, but this was at a time when our national debt was substantially less and we had the financial strength to pay higher interest rates on our debt.
Any way you slice it, in our opinion, it’s a safe bet that gold and silver will be strong performers for the foreseeable future. Of course, if events in Ukraine or the Middle East escalate, we could find ourselves in the middle of World War III. If that occurs, the sky is the limit for gold and silver prices, as demand will be insatiable. Like you, we’ll be interested to see where things go from here. Also, like most of you, we are not financial advisors, and this is not financial advice. This is, however, our true opinion on what may lie ahead for the markets in 2024 and beyond.