LAWRIE WILLIAMS: FOMC meeting: potentially tough for gold and silver
The latest U.S. Consumer Price Index (CPI) figures have been released and are not good news for Americans in general. The headline figure is for annual inflation at 6.8% - the highest level for almost 40 years. With the next U.S. Federal Reserve’s Open Market Committee (FOMC) meeting coming up mid this week, these figures are likely to weigh heavily on the deliberations therein.
The big question now is which way the Fed will jump and how aggressive it will be in its recommendations. Its principal brief is both to control inflation and seek to restore ‘maximum’ employment – which may well be seen as diametrically opposed in terms of interest rate policy going forward. An advance in the interest rate rise schedules next year could severely dent any post-Covid economic recovery, and lead to an equity market crash. The Fed is under substantial pressure, though, to raise rates faster than it has previously been suggesting lest inflation gets further out of hand.
With newly re-nominated Fed chair, Jerome Powell, stating that the word ‘transitory’ as applied to U.S. inflation is no longer relevant, there are already indications that the Fed’s so far conservative interest rate raising programme could well be speeded up. While high inflation tends to boost the gold price and, by association, that of silver too, higher interest rates have the opposite effect. They lead to a stronger dollar which, in turn, depresses precious metals prices in dollar terms. With the European Central Bank, and Bank of England, among others so far maintaining their ultra-low interest rate levels, the mere speculation that the Fed will start to raise rates sooner, and more aggressively, is already seeing additional strength in the dollar index.
The latest consensus opinion in the U.S. is that there could be at least three 25 basis point Federal Fund rate increase in 2022 and that the Fed may also speed up running down its bond buying programme (tapering) so as to complete it earlier in the first half of that year. This would be a faster rate than had previously been indicated. If this is indeed what may appear to be coming out of the FOMC meeting discussions then this would probably be negative for gold and silver. Just how negative remains to be seen given that some of this will already have been discounted in the two metals’ current prices. On recent performance such a decision could well knock $50 or more off the gold price and another dollar or so off silver as knee-jerk reactions.
Underlying all this though is the Covid pandemic. U.S. infection figures and mortalities are already running far too high, and the new potentially more contagious Omicron virus mutation has yet to make any serious impact – but it inevitably will. This could cause the Fed to be a little more circumspect in its projected forward programme, which could be positive for gold and keep it at $1,780 and above. The effect on silver might not be so positive though with the Gold:Silver Ratio (GSR) up to 80 again and trending higher. (The higher the GSR the worse it is for the silver price vis-a-vis gold.)
So, much will depend on this week’s FOMC meeting with respect to precious metals price progress, or otherwise. There is a chance, given the unpredictability of the spread of the new virus variant and the existing high U.S. infection rate anyway, that the Fed may kick the can down the road on its interest rate raising programme until the following FOMC meeting, which is currently due to be held on January 25th and 26th . However this is unlikely, although any decision taken this week could yet be altered again in January dependent on economic and virus spread developments in the meantime.
If you are a gold or silver investor, prepare for the worst, but hope for the best. We remain positive on the gold price longer term. General equities and bitcoin are looking nervous which may lead to more people investing in gold, in particular, as a wealth protector. But it is worth noting that despite gold and silver’s price pick-up late on Friday, with both closing higher on the day, gold and silver equities both trended downwards and these are often leading indicators for the respective bullion prices.