LAWRIE WILLIAMS: Week closes with gold and silver trending sharply higher
Precious metals volatility following last week’s FOMC meeting, and the announcement of yet another 75 basis point rise in the Federal Funds interest rate was nothing if not volatile in the extreme. The immediate reaction was for the gold price to surge to well above $1,670 an ounce and silver to around the $20 mark, only to see both precious metals fall back heavily, gold to around its lowest point in over 2 years, on Fed chair Powell’s rather more hawkish post-meeting follow-on presentation to the assembled media. In it he seemed to suggest that the Fed was not necessarily done with its aggressive approach to interest rate rises to combat inflation and bring it down to the target 2% level. It was better, he averred, to over-tighten, and subsequently reverse course, than to under-correct and for inflation potentially to become endemic.
But there were also signals that a reduction in the size of interest rate impositions might be under consideration too – a position seemingly supported by some other Fed officials in subsequent statements. This could even be as soon as at the December FOMC meeting. And this latter premise gave some possibly unwelcome encouragement to the equity markets late in the day Friday.
The Chicago Mercantile Exchange’s Fedwatch Tool is certainly also moving in this direction with the latest prediction now showing a 52% likelihood of a slightly reduced 50 basis point rate rise at the December meeting as opposed to 48% favouring a 75 basis point increase – a reversal of the position of only a day earlier. We suspect the next Consumer Price Index (CPI) data release due out on Thursday from the Bureau of Labor Statistics will thus set the scene for the next phase in precious metals and equity price movements. It will give the markets further ammunition for second guessing the Fed’s next likely interest rate move and affect the direction in which equity and precious metals prices may progress.
We suspect Thursday’s CPI data may well again be largely inconclusive, though, with regard to whether inflation has yet peaked. Inflation is likely still to remain higher than the Fed would like regardless, although whether it may come down sufficiently enough, if at all, to justify a reduction in the Fed’s aggressive rate increase programme remains to be seen. But even a reduction to a 50 basis point rate increase will leave year end rates at an eye-watering 4.25-4.5%, and probably 4.75-5.0% by end Q1 next year, which will certainly be a dampener on corporate earnings in any case.
Thus the recent late recovery in equity prices on Friday, in a volatile day’s trading, is to our minds, unjustified. We suspect further falls are in the pipeline as GDP again drifts into negative territory quite probably before the end of the current year, and almost certainly in 2023, and a possibly extended period of recession begins to take hold.
We suspect the U.S. mid-term elections this week may well make life more difficult for the Biden administration and the U.S. dollar will suffer to the benefit of gold and silver. The UK and Europe are also heading for even deeper economic troubles than the U.S. which could counter the dollar’s comparative fall to an extent, though, but perhaps also help bring home the perceived benefits of safe haven investments. $1,700 gold or higher before the year’s end certainly no longer looks unlikely, and the way markets have been behaving recently a considerably higher level cannot be considered impossible. But markets have been, to say the least, unpredictable for most of the current year and with possible geopolitical or geo-economic shocks potentially continuing to build up, anything could happen.
John Williams of U.S. site Shadowstats fame reckons the Fed’s ongoing series of rate hikes, even if future ones are going to be at a slightly reduced level, are all designed to intensify an already ongoing and rapidly deepening, but not yet formally recognised, recession. Or perhaps even an unfolding depression, with purported expectations of killing extraordinary economic inflation pressures, which he considers are monetary by nature. With headline inflation driven by explosive money supply growth and various pandemic issues, not by the Fed’s “overheating” economy scapegoat, the U.S. economy already is in what should become recognised as a deepening recession, and that applies to much of the rest of the world too. Hold on tight for a bumpy ride ahead.