It’s no secret that precious metals have enjoyed a relatively robust past couple of years…
The latest run began in earnest toward the end of 2018, when concerns the contentious trade war between the U.S and China would have more profound effects than originally thought. Then, halfway through 2019, the Federal Reserve announced interest rates would be heading back down after a 2018 in which they had been hiked no fewer than four times. The signal was growing ever clearer: Both the domestic and global economies were, in actuality, standing atop most unstable ground despite a decade of broadly accommodative monetary policy administered by the world’s central banks. Precious metals heartily welcomed the message. From December 2018 through December 2019, gold and silver appreciated 24% and 26%, respectively.
And all of that was, of course, prior to the onset of the global pandemic in early 2020, which has served to energize metals even more. The combination of general worry about a crisis that pushed the U.S. unemployment rate to its highest level since the Great Depression along with virtually unrestrained applications of “emergency” accommodative monetary policy and deficit spending provided tremendous fuel to precious metals last year. The net result is that from December 2018 through the end of last month, gold climbed 44% and silver jumped nearly twice that, to 82%.
Throughout the last two-plus years, there was no real sign of one of precious metals’ most favorite sources of energy – inflation. That, however, suddenly has changed. According to the Labor Department, the April Consumer Price Index (CPI) – by far the most popularly cited inflation measurement used – surged 4.2% on a year-over-year basis from April 2020. It is the fastest increase in the inflation rate since September 2008. The figure stunned even professional observers; economists surveyed by Dow Jones just prior to the release of the April figure expected a more subdued 3.6% CPI increase. Long-absent inflation, it seems, has returned.
As I noted, precious metals have been motoring along rather well for some time now on the back of general economic uncertainty as well as the ultra-easy money policies and profligate deficit spending that normally accompany it. But if it turns out that the April CPI jump is more than a momentary blip on the radar screen, the addition of chronic inflation to an existing environment of both easy money and unrestrained spending could produce a particularly high octane fuel for precious metals.
Analyst: Onset of Inflation Means “Gold Can Go a Lot Higher”
Precious metals have a reputation of thriving during periods of inflation. But the truth is that some periods of inflation potentially provide more upward momentum to gold and silver than others. And as it happens, one important feature of the inflationary climate that seems to be upon us now could be particularly beneficial to metals.
That feature is the publicly declared disinclination of the Federal Reserve to raise interest rates at the first sign of meaningful inflation. In the “old days,” America’s central bank would waste no time taking action to suppress an inflation jump such as the one represented by April’s CPI. But the nation has been absent an inflation rate of any significance for so long that the Fed thinks it would be in the country’s best interests to allow a modest level of ongoing inflation as a way to confirm real economic growth is in play. So last year, Federal Reserve Chairman Jerome Powell announced an important policy update, essentially saying the Fed would switch from an inflation-fighting posture to one more along the lines of inflation management.
More specifically, Powell said in August 2020 that the Fed would adopt a policy of “average inflation targeting” in responding to inflation signs. In a nutshell, this means the Fed wants to see an average inflation rate of about 2% and accepts that achieving this average might mean not responding at all during months when inflation spikes well above that figure. As long as the spikes remain essentially singular events and average inflation stays around 2%, the Fed will not move to raise rates as an inflation containment measure.
It is because of this outlook that you won’t see the Fed raise rates in the wake of April’s 4.2% inflation jump. Indeed, Jerome Powell lately has been reiterating his commitment to near-zero interest rates, declaring that “an episode of one-time price increases as the economy re-opens is not the same thing as, and is not likely to lead to, persistently higher year-over-year inflation.”
I said at the beginning of this section that some periods of inflation potentially can be better for metals than others. Inflation periods unaccompanied by higher rates – such as the one in which we appear to be right now – are an example. Higher rates can mean more competition for metals from interest-bearing vehicles such as certificates of deposit and bonds. But when rates don’t increase as inflation rises, the “opportunity cost” associated with holding a non-interest-bearing asset such as gold can be eliminated. In that scenario, precious metals can look even better when nominal interest rates are near zero, as they are presently. That’s because real interest rates – nominal rates minus the inflation rate – are below zero in the current environment. Gold and silver likely aren’t going to have as much competition when it costs retirement savers money to own interest-bearing assets in their place. The result is an even better environment for precious metals, potentially.
Tim Hayes, chief global investment strategist at Ned Davis Research, is especially high on gold right now because of the Fed’s new “management” approach to inflation. Speaking recently to Kitco News, Hayes believes the combination of rising inflation with a Fed standing fast on rates means negative real rates for the time being. Hayes further thinks that if and when the Fed finally does act to contain rates, it could be too late. Inflation is “the genie in the bottle,” Hayes told Kitco, “and once it is let loose, it is difficult to get back in.”
In fact, Hayes is so bullish on gold right now that he expects it to go much higher in the years to come. “Gold can go a lot higher from here; we’re not just looking at record highs,” he said. “Once we get a breakout, it will bring in a whole new group of investors who will start to buy into the idea that they need gold as an inflation hedge.”
Currency Strategist: “You Can’t Have a Better Environment for Gold” Right Now
Tim Hayes also sees inflationary pressure stemming from a weaker dollar and is anticipating a good deal of dollar weakness during the Biden years. Among the usual consequences of a weak dollar are more expensive imports and commodities, factors which certainly can contribute to inflation. Along with so many others, Hayes is convinced the new administration’s aggressive and expensive policy agendas will necessarily mean significant levels of deficit spending through the foreseeable future.
It is difficult to underestimate the potential effect on both the deficit and federal debt of the Biden regime given how vigorously the president and Democrats seem to be legislatively pursuing what amounts to sweeping social change. We’re just four months into a four-year presidential term and facing the prospect of up to $6 trillion in new spending. $1.9 trillion of that already has become reality in the form of the American Rescue Plan, Biden’s version of pandemic stimulus. But no sooner did the American Rescue Plan become law than the president proposed both the $2.3 trillion American Jobs Plan and the $1.8 trillion American Families Plan. Granted, the latter initiatives are a long way from becoming law at this point, but given the Democratic control of Congress, it seems a safe bet the country at least will see another many trillions in spending in the near term. According to The Balance, the cost of the American Rescue Plan alone is expected to help drive the deficit to a record $3.4 trillion this year.
Like Tim Hayes, Adam Button, chief currency strategist at ForexLive.com, believes all of this spending bodes very well for gold, particularly in light of the Fed’s commitment to keeping rates at historic lows.
“You can’t have a better environment for gold,” Button said. “The government wants to spend more money and the central bank is going to keep interest rates low.”
Inflation Signs Potentially Improve Existing Pro-Metals Environment
It is hard to envision “a better environment for gold” than the one shaping up before our eyes. There now are strong indications that meaningful inflation is returning after having been missing in action for so many years. We also have a Federal Reserve committed to keeping interest rates at or near all-time lows even in the face of a burgeoning inflation problem. And then there’s the seemingly single-minded focus of the current presidential administration to spend the nation into prosperity, an effort that surely will perpetuate massive deficits and continue sending the federal debt ever higher.
But among precious metals, it’s not just gold that appears to have an especially rosy outlook. Silver also has been revered by countless numbers for millennia as a safe-haven asset, which means it is well-positioned alongside gold to potentially benefit from the current economic climate. Silver also offers another advantage to astute retirement savers seeking to hopefully maximize their opportunity in precious metals right now: its indispensability as an industrial metal. Because silver is the best overall conductor of both heat and electricity, it has the potential to thrive in the ongoing economic recovery. Moreover, given that green energy products – such as solar panels and electric vehicles – are expected to receive extra emphasis by governments and business during both the recovery and future global economic expansion, silver’s conduction properties could translate to outsized industrial demand for the metal going forward.
Of course, there’s no way to know for sure just what the future holds for gold or silver. That said, it seems difficult to argue against the idea that key fundamentals which often have benefitted metals in the past – to include rising inflation – look as though they could be improving in the near term. Retirement savers have much to consider as they consider how best to navigate the foreseeable future. But for those inclined to perhaps include precious metals among their holdings, the outlook for both gold and silver does look promising currently.