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LAWRIE WILLIAMS: Gold and silver prices taken down sharply but recovering fast

After a seemingly unstoppable upwards run, gold and silver prices were brought back down to earth in Wednesday’s trading, with severe price weakness continuing Thursday morning in Europe. The gold price was hovering around the $1,815 mark and silver at $26.90 at one point after both metals had seen prices in the $1,840s for gold and over $28 for silver on Tuesday.  Whether this was just a correction brought on by profit taking, or a sign of structural price difficulties remains to be seen and will presumably become more apparent by the week’s close.  So saying there has been something of a recovery on Friday morning, and at the time of writing precious metals prices had come back to the mid $1,830s for gold and well over $27 for silver

Precious metals in general had been having a good run over the past couple of weeks, so we are inclined to go with the perhaps overdue correction scenario, as most factors still seem to favour ongoing price positivity.  In particular more doubts are being raised concerning the Fed’s interpretation of inflation data.  The figures the Fed uses to measure this are viewed as somewhat dubious by a number of economic analysts, and certainly fly in the face of factory gate and consumer-experienced price rises which tend to suggest that inflation is perhaps increasing to levels outside of the Fed’s potential control.  That the Fed still sees inflation rises as ‘transitory’ is starting to look increasingly out of reality in the eyes of many economists and commentators.

The recent statement by U.S. Treasury Secretary Janet Yellen, although she was quick to backtrack on it, may actually be understating the Fed’s true position on inflationary pressures.  As a former Fed chair, Yellen is probably closer to the Fed’s views than most and while she may have diverged from following her erstwhile employer’s usually extremely opaque statement pattern, she may have been far closer to the truth than may have been generally realised.  Indeed, in our view she may well have been guilty of, if anything, to dumbing down the true problems that lie ahead for the American central bank.  The Fed is supposedly independent of government policy, but in the choice of a former Fed chair as Treasury Secretary it looks as though the Biden Administration is attempting to bring the Fed and the Treasury into closer harmony than has usually been the case in the past.

What this probably all means is that true U.S. inflation coming out of the effects of the pandemic is running at around 4% or even higher.  While the Fed might welcome a spell of inflation in excess of its target 2% in an attempt to bring its average down after undershooting it for many months, 4% plus, if this is indeed the case, might be a level too far.  There will be pressure on the Fed from the Administration to not ‘rock the boat’ by raising interest rates and cutting back on QE which could well lead to a hugely visible equities downturn, thus potentially putting a big dent in the public’s perception of the supposed  economic recovery.

Indeed there have already been signs of equities coming off their recent highs well in advance of any Fed tightening action.  Asian and European equities were trending sharply lower on Tuesday and Wednesday, and even high-flying bitcoin has been coming back hard following a statement by Elon Musk that Tesla would no longer be accepting bitcoin as payment for its vehicles.  Market weakness tends to beget further weakness, and if the trend resumes, equity and bitcoin downturns could well turn into a rout given how many commentators see the seemingly unstoppable stock market rises as being unsustainable.  Is the bubble just beginning to burst perhaps?

In the event, equity prices opened much more strongly in the U.S. on Thursday and in Asia and Europe on Friday with stock indexes, and precious metals all recovering to an extent, so it would be premature to suggest the bubble may be bursting – yet.  The next FOMC meeting, when the Fed might make some policy changes, or perhaps give a little more information on how it views future policy on interest rates and QE, is due mid-June, and whatever transpires then could well have a much more definitive impact on the markets.

14 May 2021

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