The strange phenomenon of a rising Dollar Index continued to exert downside pressure on precious metals markets this week.
Metals markets retreated as the U.S. currency posted large gains against its foreign counterparts. On Thursday, the euro sunk to a 5-year low and the Japanese yen to a 20-year low.
The Bank of Japan vowed to keep interest rates ultra-low even as the Federal Reserve appears likely to deliver a 50-basis point hike next week.
Foreign currency markets along with stock and bond markets have already priced in a significant amount of Fed tightening. It’s possible that U.S. dollar strength against foreign currencies is peaking ahead of the Fed’s expected move.
Of course, this is occurring during a time when Federal Reserve Notes are actually depreciating in value at their most rapid pace in decades. The foreign exchange market is thus a terrible indicator of a currency’s underlying strength.
The rising U.S. dollar exchange rate is amplifying price inflation for foreign buyers of U.S. goods, making them less affordable. That hurts the profits of multinational corporations.
Over time, major currencies tend to swing back and forth against each other within wide ranges. No country’s government wants its own currency to appreciate too far for too long.
The current bout of dollar bullishness is likely to be transitory, especially considering the rapid deterioration now occurring in the economy.
Thursday’s GDP report showed the economy contracted by 1.4% in the first quarter. That massive disappointment could prompt the Fed to back off on its plans to continue hiking rates throughout the year.
It was exactly one year ago that Federal Reserve officials began calling inflation pressures “transitory.” Since then, price level increases have kept accelerating month after month. Just as we predicted here at Money Metals.
Now that the economy is contracting amid the worst inflation problem since the 1970s, stagflation is set to frame 2022 for investors.
Inflation will continue to squeeze both consumers and businesses as price hikes work their way through supply chains. That’s what Tesla CEO, Twitter acquirer, and man of the hour Elon Musk predicts.
In his most recent earnings call for Tesla, Musk said inflation is even worse than what’s being reported officially.
Elon Musk: Inflation is at like a 40 or 50 year high, and I think the official numbers actually understate the true magnitude of inflation. And that inflation appears to be likely to continue for at least the remainder of this year. What's sort of keeping our costs down, at least in the short term is that we have long term contracts with suppliers. But those long-term contracts will obviously run out and then we'll start to see potentially significant cost increases.
Elon Musk is concerned about being able to secure supplies of critical raw materials for producing car engines and batteries. Tesla’s battery systems require specialty metals including lithium. Demand for lithium is growing faster than supply, sending prices skyward.
Musk has suggested that he might have to get into the mining and refining business himself to secure adequate supplies of lithium. He may decide it’s wise to invest in other scarce metals as well, including silver.
Each Tesla requires close to 50 grams of silver. It may not sound like a huge amount, but if Tesla is to meet its production goal of 19 million more vehicles by 2030, it will need over 30 million ounces of silver.
Silver, unlike lithium, currently remains cheap on an historical basis. But silver is also projected to be in a supply deficit this year, with industrial demand set to hit a record high.
Rather than take on the risks of owning and operating a silver mine, Musk could begin building stockpiles of the white metal while it is still obtainable without having to pay a huge premium.
Tesla’s financial statements show that it gives itself the ability to hold alternative assets including Bitcoin on its balance sheet. The company also lists gold bullion as a potential reserve asset.
Elon Musk could be an ally of the sound money movement, but it’s not clear what exactly he believes. He has spent more effort promoting internet memes like Dogecoin than he has precious metals.
Musk often makes provocative statements but then turns around and espouses mostly conventional, centrist political views. While Republicans are now cheering his Twitter acquisition, he has a history of supporting Democrats including Barack Obama.
But unlike many on the left these days, Elon Musk does seem to have a sincere commitment to freedom of speech. And if a freer marketplace of ideas can flourish on Twitter, that is ultimately good for those who are trying to bring about fundamental change to the monetary system.
In other news, both houses of the Tennessee legislature overwhelmingly passed bills this week to make Volunteer State the 42nd state in the U.S. to remove sales taxes from constitutional sound money.
Tennessee’s House Bill 1874 and Senate Bill 1857, introduced by Representative Bud Hulsey and Senator Frank Niceley, now head to Governor Bill Lee’s desk for approval.
The new precious metals sales tax exemption will take effect immediately upon the Governor’s signature which is expected within the next week.
Overwhelming grassroots outreach – prompted by Money Metals -- appears to have tipped the balance in this long-running effort in Tennessee. In fact, during debate on the senate floor, Senator Janice Bowling commented, “I’d like to thank the half of the state of Tennessee that contacted us!”
The new law will allow Tennessee investors, savers, and small businesses to acquire precious metals without being slapped with sales and use taxes which, including local taxes, have ranged from 8.5% to 9.75%.
Meanwhile, similar sales tax exemption bills have recently been considered in Kentucky, Mississippi, Hawaii and New Jersey, as the nation’s inflation problem expands and as the national backlash against taxing constitutional money continues.
Including Tennessee, 42 U.S. states now fully or partially exempt gold and silver from the sales taxes. That leaves 8 just states and the District of Columbia as the primary jurisdictions that still harshly penalize citizens seeking to protect their savings against the serial devaluation of the Federal Reserve Note.