LAWRIE WILLIAMS: Gold and silver still under pressure as equities and bitcoin make gains
The markets are certainly moving in mysterious ways as inflation continues its upwards path and consensus moves towards the probability of the U.S. moving into recession- or already being in one. Fed chair Jerome Powell’s softish landing talk is looking optimistic, particularly after Wednesday’s well-above-expectation Consumer Price Index (CPI) data reading of a 9.1% inflation rate increase and Thursday’s Producer Price Index (PPI) reading of an 11.3% rise. Energy and Food inflation will remain elevated. But there are signs that other elements may be beginning to come down so perhaps the ultra-high inflation levels we have been seeing are peaking at last. We are almost certainly going to be stuck, though, with hugely above average inflation levels which may come back to 5-6% for the foreseeable future. These may make the Fed’s target level of 2% something of a pipe dream.
Should the inflation rates fall to the level we are suggesting above, the Fed will no doubt claim at least partial success, but will probably continue with an aggressive interest rate raising policy leading to a continued above average rate rise programme which will be somewhat negative for U.S. growth in the short term, but may not prove to be quite as sharp as once feared. Hence the improvements seen over the past couple of days in equity and bitcoin prices, despite the overall economic picture still looking pretty bleak to us. It’s just not looking quite as downbeat as it was only a few days ago, and any improvement in perception is being seized on as a positive by the ever-optimistic risk-on markets. But for how long?
We still suspect that ever-rising prices, probably accompanied by shrinking GDPs, will start putting a dent in profit margins and earnings distributions and begin to adversely impact equity prices. The recoveries in bitcoin prices may be shortlived too as more cracks appear in some of the seemingly increasingly dubious major players in this marketplace. In short Government-promoted optimism in the globe’s capacity to weather the current economic storm may be found wanting.
The twin catalysts for all these problems facing the global economy of course have been firstly the COVID pandemic, and the various measures taken to try and bring it under control, followed rapidly by the Russian invasion of Ukraine shortly afterwards, just as the COVID situation might have been easing its way out of the system. As with COVID, some of the measures taken to try and bring the Russia/Ukraine war to a rapid end have themselves had an enormous impact on the global economy, as has the war itself, with its direct impact on global energy and food prices in particular.
President Putin is, of course, correct, in saying that the continued supply of modern Western weaponry to Ukraine can only prolong the war perhaps indefinitely. It will enhance Putin’s determination not to concede any element of defeat against Ukraine’s similar desire not to suffer any loss of territory, and perhaps to regain Crimea. This war could run and run and continue to destabilise the global economy for years to come.
Currently equities and bitcoin seem to be in an up-phase after turning down quite sharply in the immediate aftermath of last Wednesday’s CPI announcement. Gold and silver both suffered too and are still weak with gold at around $1,710 as I write and silver below $19 and the Gold:Silver Ratio (GSR) around a disappointing 90.5 for those who follow this. We are still anticipating some kind of recovery in gold back up to the high $1,800s in the next month or so and silver probably to regain $20-$21 but the true inflection point may well not come until after the Labor Day holiday in the U.S. on September 5th once market makers are back from their summer holidays and markets tend to resettle. Much could happen geopolitically by then which could set a totally new path for the global and U.S. economies going forward and have a huge impact on decisions likely to be made at the September FOMC meeting due to be held on the 20th and 21st .