Gold and Silver Double Whammy

Just when I’d felt that gold and silver prices were due for a nice upwards surge, they were hit by a double, or even triple, whammy and lost their recent gains. That was until they saw a pick-up in Europe over the US Thanksgiving holiday due to the emergence of a worrying strain of a new coronavirus mutation in Africa.

I was somewhat at a loss to explain why they were so badly affected initially and believe they will continue to recover when more rational analysis returns. I could be mistaken, though, as, in this writer’s view, current markets are behaving far from rationally.

Firstly, let us consider the two events that primarily had such a negative effect on precious metals when things had previously looked to be going swimmingly for them.

At the end of the previous week, a speech by Fed governor Christopher Waller seemed to have an adverse impact on prices. Waller is considered to be one of the more ‘hawkish’ figures on the Fed’s board so his views on what path the central bank should follow, given the current inflation worries, should not have come as a surprise to anyone.

Waller was advocating a more rapid tapering process than the Fed had appeared to be following, in turn leading to a possible raising of interest rates perhaps a little sooner next year than had previously been envisaged.

The publicity appeared to contribute to a drop in the price of gold, which previously had looked to have been consolidating around the $1,860 level. It also appeared to help shave more than a dollar off the silver price, which had earlier regained the $25 mark, still well below where many silver bulls feel it should be.

But this was only the half of it!

On Monday morning last week, just as U.S. markets were opening, President Biden announced that he would be nominating existing Fed chair, Jerome Powell, for another 4-year term in this position. This news, although not unexpected, seemed to have the effect of taking gold back to the $1,780s.

To me, the market reaction to this was even more irrational than that to the Waller statement. Powell may have been a Trump appointee, but he plowed his own furrow, frequently at odds with the views of the former President.

Powell has been largely responsible for guiding the Fed through its so far relatively ‘dovish’ tapering policy and in keeping interest rates ultra-low. He had been pretty adamant that the recent Fed program of tapering and retaining low interest rates would continue until unemployment fell to the supposed ‘maximum’ level of around 3.5% – the point where it had settled pre-Covid pandemic.

Perhaps the markets had been assuming that Powell would be let go and replaced by Fed governor Lael Brainard, who was thought to be even more ‘dovish’ than Powell. As it turned out, Brainard was appointed to the position of Fed vice chair, which puts her in line to take over the Fed’s top position when Powell’s new term ends in 2026 – although a possible change in the Presidency in 2024 could make this less than a certainty. Powell’s re-appointment strengthened the dollar too, which was also seen as something of an additional negative for precious metals prices (another whammy!).

I don’t read these events in the same way most of the market seems to be doing. Firstly, the market reaction was almost certainly overblown, as usually seems to be the case . I envisage Powell as continuing on the current tapering and interest rate course, while Waller may well remain crying in the wilderness, particularly if potentially three new Biden appointees to the Fed board, as existing board members are due to stand down, are of the dovish variety in the Brainard vein, as would likely be the case.

The Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) Index came in this week at 4.1% which may still be low enough to encourage Powell and the Fed board to maintain the current overall policy.

The reading still suggests inflation is running strong, but perhaps not as high as many observers and commentators have been suggesting. True, the PCE index tends to report lower than the Consumer Price Index (CPI), which perhaps better reflects the real experience of the general public. However, it is an index the Fed tends to take seriously. . That said, a few months of inflation at a little above 4% may not dishearten the Fed board given the original 2% inflation target had been undershot for so long. Higher inflation levels may just serve to bring the average back to what the Fed considers to be the ideal rate.

On Friday, at least in Asia and Europe, gold did recover some of its lost ground demonstrating its volatility around news items considered as favorable or unfavorable by the market movers.

However, it was brought back down again when US markets opened, closing the week lower in the mid $1,780s again. It has opened stronger in Asia and Europe again recently, demonstrating upwards gold price pressure outside North America, but it still remains to be seen in which direction the key US market takes it during the current week.

Any indication of a change of course from the Fed would, of course, be significant here, as would anything that suggests a continuation or weakening of the current path.

by Lawrence Williams

Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.

The opinions expressed in this article are the author's own, do not necessarily reflect the opinions or views of Rosland Capital LLC or its employees, and do not constitute financial or investment advice or recommendations from the author or Rosland Capital or its employees. The author is compensated by Rosland Capital for his articles.