LAWRIE WILLIAMS: No let up for gold and silver
Contrary to our expectations, gold and silver prices continued to weaken Wednesday as the dollar strengthened again and U.S. Treasury yields picked up again after dropping back a little on Tuesday. This choppy nature for the principal precious metals seems more or less set to continue for as long as the U.S. Fed appears to be committed to its current aggressive approach to raising interest rates to try and counteract the current high levels of inflation that are currently afflicting U.S. retail markets. The 0.4% rise in the core inflation level demonstrated by the October 13th Consumer Price Index (CPI) data from the Bureau of Labor Statistics made at least a 75 basis point Federal Funds rate rise at the early November FOMC meeting a virtual certainty, and a year-end interest rate level of between 4.5 and 4.75% is now the predicted outcome. This will almost certainly lead to an even stronger U.S. dollar and potentially even weaker gold and silver prices as U.S. Treasury and 10-year TIPS yields rise accordingly making non-interest-generating assets like gold ever increasingly less favourable investment assets.
The only real hope now it seems for the precious metals investor is that the FOMC participants will become aware of the damage that the high interest rates are likely to do to the U.S. economy – they will certainly drive it into recession, if it is not there already, which some reckon it is. At some stage they may thus ease off the pressure and start to reduce the levels of the rate rises as inflation begins to come down, but perhaps not as quickly as the Fed would like, towards the 2% target rate. Again, looking at the Fedwatch Tool, some market observers see this happening by mid 2023, but others still see the Fed maintaining its aggressive approach for longer.
Either way, gold has something of a chequered history as an inflation hedge. Over the long term it tends to come out fairly well as a wealth protector but short term, as now, the performance tends to be rather more mixed. It does tend to perform better – or perhaps that should be less poorly – than most other asset classes though which is some consolation for the gold holder. Silver, on the other hand, tends to be altogether more speculative and, as at present, can seriously underperform its yellow sibling. At one point last week the Gold:Silver ratio (GSR) slipped back to 90 (a high GSR is bad for silver- out and out silver bulls reckon it should be around 16-20) and it is currently sitting above 88 as I write).
Equities performed rather better over the past week than we might have expected from the overall global recessionary trend. U.S. earnings performance was, perhaps, a little stronger than might have been anticipated but the equity indexes were all beginning to turn downwards again towards the week’s end, although had not given back all the gains made earlier – but give them time! Recessions are negative for stock prices and we could well see some severe falls as economies continue to suffer from the inflationary trends and the consequent economic downturns worldwide. U.S. markets tend to be ever optimistic though so they could buck the likely pattern as we see it developing.