LAWRIE WILLIAMS: Gold and silver finding new levels?
Last week’s precious metals highlight was, of course, the higher than anticipated Consumer Price Index (CPI) inflation reading of a 0.9% increase in October – which was also reckoned to show a 6.2% annual rise. This certainly seems to be in line with the kind of price increases being seen by the general U.S. public – indeed may even understate the real position particularly given the rise in energy prices which are being seen just as the cold winter months are approaching.
The higher CPI figures came in after an even higher Producer Prices Index level (PPI), so could thus move even higher during the next couple of months as these price rises filter through to the general market. Prices are definitely coming in well in excess of the Fed’s predictions that higher rates of inflation are but ‘transitory’ and that they will come back down again when the Covid-19 pandemic eventually exits the system and things return to near normal.
The higher PPI figure suggested an annual increase of 8.2%, but what might be considered particularly worrying for the American consumer is that the goods element of the Index rose by fully 1.2% in October suggesting the potential for an even higher annual rise in consumer prices going forwards. The overall PPI average was held down by the services element only rising by 0.2%, but that may be of little comfort to the general consumer seeing energy and food prices in particular rising strongly, with the prospect of these increasing further if there is a harsh winter, which many forecasters are predicting.
In retrospect, the Fed’s effective pumping of money into the system via its bond-buying programme was bound to be inflationary in its effect. Indeed the Fed had for some time been indicating that it was looking for a higher inflation level in order to bring its average up to around the 2% it had been undershooting for some time. We suspect that it was aiming for perhaps a 2.5-3.5% rise for a few months – certainly not the higher levels it has been seeing of late. However the higher current levels may not be entirely unwelcome if they can be brought under control – particularly if their management can be achieved without the necessity to raise interest rates sooner rather than later.
While the Fed has been forecasting reducing its bond buying programme (tapering) in the current month, it has so far been reluctant to start raising interest rates for fear of slowing down its path to the priority ‘maximum unemployment’ level and derailing such economic recovery we already may be seeing.
Of course high inflation levels are not just an American concern. Inflation is running at high levels all around the world and is most certainly even more of a problem in many other countries as we exit from the strictures imposed to try and mitigate the adverse economic effects of the global pandemic. It is certainly possible that many nations will try to inflate themselves out of the huge debt positions they have built up to try and keep their economies relatively stable.
The results of the combination so far of ultra low interest rates and inflation levels that may be surging out of control has been beneficial for precious metals prices – particularly so for gold and silver, both of which have made a strong upwards move. Both have broken through assumed resistance levels and look to have been consolidating at around $1,860 for gold and $25 for silver. If they can at least hold on to these levels for now there is the prospect of another strong upwards move in prices before the year end and for gold to reach $2,000 an ounce again early next year and silver around $27. We do not see the kinds of massive price increases that some of the gold and silver ultra-bulls have been predicting.
Both gold and silver have opened strongly in early European trade today, but it has been North American markets which have, in reality, been setting precious metals prices. If this morning’s European push can be sustained in the American market, then our forecasts, such as they are, may well prove to be conservative. In this case the next upwards leg in prices may be coming sooner than we have been suggesting above. Altogether things are certainly looking more positive for gold and silver than has been the case of late.