Longtime bullion investors have been evaluating whether to buy, sell, or hold in recent months. The change in leadership in Washington DC has prompted some searching as to the direction of the markets.
Demand for precious metals tends to come in three broad categories: inflation hedging, safe-haven buying, and speculation.
Inflation Hedging
Gold and silver will generally get a look from investors when investors are looking for ways to protect their savings from the ravages of inflation.
Given the imperative for ongoing inflation in our debt-based currency system, and the history of all fiat currencies, more inflation in the long run is all but guaranteed.
Inflation remains above the Fed target rate, but the central bank has already begun a new cycle of rate cuts. The consensus among Fed watchers is that the central bank will cut rates twice more this year.
Lower interest rates are inflationary as reducing the cost of funds stimulates borrowing, which adds to the money supply.
President Trump spoke publicly last week about interest rates being too high. He signaled that he will be pushing Jerome Powell and other Fed bankers for even more rate cuts.
The Federal Reserve Bank has always been marketed to the public as an independent institution, simply pursuing its dual mandate for protecting the value of the dollar and fostering full employment. In truth, the Fed never was independent and never will be.
The Fed Chairman is appointed by the president and serves at his pleasure. Trump may very well succeed in getting what he wants from Jerome Powell.
Meanwhile, Congress has an absolutely abysmal record when it comes to controlling spending.
It is possible this time will be different, but Trump himself has never been a budget hawk.
Last month, he advocated for Congress to finally dispense with the debt ceiling altogether.
To the extent Trump imposes new tariffs, some price inflation is likely. A 25 percent tariff on imports from Canada and Mexico, for example, is almost certain to drive prices higher on goods imported from those nations.
Higher-than-normal inflation in the year ahead looks like a good bet.
Safe-Haven Buying
Forecasting safe-haven demand from investors who worry about crises ranging from wars to troubles in the financial markets is trickier.
War tensions are falling in the two main international conflict zones – Ukraine and the Middle East.
Here at home, the COVID pandemic, which stimulated a wave of gold and silver buying that began in March of 2020, is now in the rearview mirror.
Many feel health officials exaggerated the risks of COVID and are in no mood to entertain another pandemic scare.
As a sign of the times, Trump withdrew the U.S. entirely from the WHO last week.
While Americans seem well inoculated against another health panic, other troubles are possible.
The mass deportations promised by the Trump administration are an example of a reform which could come with the cost of at least some social chaos. The round-up of millions of illegal immigrants could generate some violence.
The equity markets remain significantly overvalued when looking at the average Price-to-Earnings (PE) ratio. A significant correction in stocks is inevitable, though it is impossible to predict the timing.
Speculative Demand
Gold and silver prices have performed well in recent years, but the price action of late hasn’t been enough to entice a wave of speculative longs into the markets.
For the moment prices are range-bound. There is currently nothing in the metals markets to compare with the energy in cryptocurrency markets where buying seems to beget more buying.
Gold and silver bugs have long anticipated a short covering squeeze. Whether or not they will get it in the next year or two is completely uncertain – like predicting the next major correction in the stock market.
That said, inventories are dwindling and the shortage is showing up in premiums for COMEX deliverable bars. The premiums for these bars have generally been stable, despite periodic shortages of retail gold and silver products in the bullion markets.
This provides some basis for wondering if the long-awaited reckoning for shorts is nigh. If speculators find some reason to go heavily long gold and silver, leverage in the future markets could make for some explosive price action.
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