It’s been a bit of a frustrating week for gold and silver bulls. Precious metals markets failed to follow through on their recent strength and traded lower through Thursday’s close.
Metals markets are caught between fears of Federal Reserve tapering and the forces of inflation. Price levels continue to rise in the U.S. and around the world.
On Thursday, the European Central Bank announced it would slow its bond purchase program amid inflation surging to a 10-year high in the Eurozone.
In the United States, inflation is running at more than double the Federal Reserve’s target. And that’s using the Fed’s own preferred inflation gauge, the “core” PCE. Along with the widely reported Consumer Price Index, these official inflation measures are highly flawed.
The CPI used to be a fairly accurate measure of price level changes. But in 1998, the Clinton administration tinkered with it so that inflation could be reported as running lower.
Lance Roberts of The Real Investment Show explains why this change came about and what it means today.
Lance Roberts: We needed to change the calculation of inflation to suppress the amount of payments that go out every year for Social Security. Those are called the COLA adjustments, cost of living adjustments for Social Security.
So, the Clinton administration brought in the Boston Commission, the Boston Commission said, "Oh yeah, we can make some changes here." And we changed things from home prices to homeowners' equivalent rent. And we adjusted for things called hedonics, saying, "Well, if you bought a computer in 1990 versus a computer today, computers today are a lot more powerful and they cost less, so that's deflation." So, we did all these jiggerings to CPI...
Michael Lebowitz did a very interesting deep dive into one of the major components of the CPI calculation. Mike, what did you find out?
Michael Lebowitz: 30% of CPI is broken down into what they call shelter. Shelter is broken down into two categories, owner's equivalent rent, which we call OER, and then just rent. You're probably asking yourself, "Well, what about housing? House prices are going through the moon, shouldn't that be part of inflation?"
And the Fed's response would be that that's a financial asset, that that doesn't count. Even though most of us live in the houses that we pay a mortgage on, and that's probably our biggest dollar outflow every month, that doesn't count.
Home prices, stock market indexes, cryptocurrencies, and other financial assets have of course gotten pumped up by inflationary currency creation. Yet when price increases show up there, it’s not counted as inflation. It’s instead called a bull market here and a bull market there by the financial media.
When “bull market” rates of price increases begin to hit raw materials and manufactured goods on a sustained basis, then the bad side of inflation will take hold. And that will likely be bad news for interest rate sensitive financial assets.
The Biden administration’s unprecedented deficit spending binge threatens to propel inflation even higher.
One Democrat, Joe Manchin of West Virginia, is trying to put the brakes on some of the spending contained in the $3.5 trillion so-called infrastructure bill. Manchin specifically cited inflation concerns in a recent op-ed that irked fellow Democrats.
But trying to tame government spending now is like trying to padlock the barn door after the horses were stolen. The Treasury Department has already committed to enough spending to run a $3 trillion deficit this year.
Any hopes for the deficit narrowing next year and beyond will hinge more on economic growth potentially driving more tax revenues than Congress and the White House ever deciding to become more fiscally responsible.
Unfortunately, the COVID resurgence appears as though it could contract the economy all over again. Airlines are reporting declining ticket sales while retailers and restaurants are growing more cautious about hiring.
Growing evidence shows that the vaccines lose their effectiveness over time. Public health officials and pharmaceutical companies are now saying we will all likely need to get booster shots.
But the long-term effects of multiple jabs are unknown. And even though mask-wearing and social distancing rules imposed by businesses and governments have never proven to be very effective at stopping the spread of coronavirus, they are now being reimposed.
These ominous signs are likely to give the Fed pause when it comes to tapering their monthly bond purchases. If the Fed begins to signal that it will put off tapering, we could see a drop in bond yields and a dip in the U.S. dollar index.
That would be a bullish backdrop for precious metals markets, especially if inflation expectations stay elevated enough to drive real interest rates more deeply into negative territory.
When it comes to inflation, though, investors would be wise to pay less heed to the official headline numbers and focus more on the ever-expanding currency supply. The Fed’s printing press creates the feedstock for future price level increases – and future bull markets.
Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.