Gold, Silver, The Fed and Price Suppression

In some other recent articles I intimated that the gold price (closely followed by that of silver) would continue to be mostly data driven, but even so the magnitude of the setback for gold and silver following the recent ADP private sector employment report still took me by surprise.

I did suggest too, following this event, that the consequent price falls for precious metals were too far too fast as markets often tend to overreact and while this indeed did turn out to be an accurate forecast, there was yet another big price takedown at the end of last week suggesting there may be other forces at play here too.

The precious metals prices indeed fell too far too fast post-ADP and then made a pretty rapid recovery. They have been fairly volatile since, seemingly dependent on views on US inflation and whether the Fed will, or will not, taper because inflation might be seen as getting out of control.

What may be considered strange, though, is that every time the gold price hit the perhaps psychological $1,900 level it quickly reversed by up to $20-$30. This is a significant move given that it has tended to occur within a single day’s trading. It has seemingly happened before at other supposed psychological barriers and may thus represent computer algorithm generated profit taking, but there could also be other forces at play.

Some commentators and observers take a more controversial view putting the precious metals price setbacks down to market manipulation and price suppression instigated by central banks – not least the US Fed – and by their bullion bank allies. Much of this anti-gold opinion dates back to Paul Volcker – the literal and figurative giant of the U.S. Treasury and the Fed in the 1970s and 80s - who certainly had somewhat negative views on the place of gold in the global and US economies and was a huge proponent of a strong dollar with a rise in the price of gold being seen as a dollar devaluation.

When at the Treasury, Volcker was credited with being instrumental in President Nixon’s decision to close the gold window and cease the convertibility of the dollar for gold.

And, as Fed chair from 1979 to 1987, he is credited with defeating then possibly out-of-hand US inflation by the controversial measure of raising the Federal Reserve rate to 20%, with an initially devastating effect on the U.S. economy at the time. Whether the Fed is quite so anti-gold nowadays is less clear, but the doubts persist and gold’s price performance when it breaches what might be seen as key inflection levels is used as support for such views.

Regarding current inflation, personally I think that the Fed will hold firm and not change its ultra-low interest rate policy until U.S. unemployment falls back to pre-pandemic levels. An ultra-low rate policy coupled with climbing inflation, is strongly gold positive as it means gold is even more competitive with bonds and fixed interest securities that lose capital value in an effective rising negative real interest rate environment.

There were also positive PMI data released during the week, and the dollar index gained as well, so markets breathed a sigh of relief that the US might be recovering from the virus pandemic more rapidly that had previously been envisaged. Perhaps an over-optimistic assumption.

Fed policy on interest rates will become clearer after the ‎Federal Open Market Committee (FOMC) meeting this week, but one suspects that although a possible tapering initiative will come under discussion, as I noted above, I suspect the U.S. central bank will hold firm on its current interest rate and QE programs. There is leeway available on perceived inflation, in that the Fed’s AVERAGE inflation target has been undershot month in, month out. Thus there is definitely room, in the Fed’s thinking, for a period of above target inflation as long as it feels it has the tools available to keep the headline level under control, which it has often stated it does.

The very fact, though, that an enhanced interest rate agenda may even be talked about by the FOMC meeting participants could move the markets. Anything suggestive that the Fed may bring possible changes to its current easy money policy into consideration ahead of its previously stated timetable, however remote, will be seized on by the markets and perhaps lead to a small reversal in equity prices and positive moves upwards in gold and silver.

Whether this could create enough momentum to bring gold for a substantial period of time back above $1,900, and silver maintaining a $28 plus price level, is a little less certain, but one can rest assured that the potential specter of rising inflation, and possible Fed moves to combat it, will remain a subject of strong interest to the markets.

If inflation does continue to rise, but the Fed does keep to its low rate policy, there looks to be little to stop prices rising higher, perhaps putting $2,000 gold and $29 silver in prospect. But I am very much of the opinion that those calling for $5,000, or even $10,000, gold and $100 silver and above, and those who purchase precious metals on this prediction, are living in cloud cuckoo land. As Jeff Christian of consultancy CPM Group comments, these commentators have been playing this tune for 40 years or more and we are still little closer to their predictions. Caveat emptor.

Past gold and silver performance when gold has initially stalled around prior ‘psychological’ levels suggests that a $1,900 breach may well occur sooner rather than later. We could yet be in for northern summer price fireworks taking gold and silver upwards, but only by a few percentage points at best. However, a few words of warning: watch out for Labor Day. Big U.S. holidays often seem to precipitate major inflection points, often downwards, in precious metals pricing.

The latest data pointing to perceived gains in the job creation sector will encourage the Fed to believe it is following the right policy (ultra-low interest rates plus QE) in what it considers its principal priority in bringing unemployment down to its pre-pandemic level. However, it still has a way to go to achieve this, and until it does so I see it as unlikely to change tack unless it sees inflation as rising completely out of control.

It does not appear to be anywhere near this stage yet so the current easing and low rate program will likely continue, perhaps well into next year. As long as real interest rates at least stay where they are, this will remain positive for gold and silver, which may resume their upwards paths before long.

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.