Investors finally got some good news this week on the inflation front. Thursday's Consumer Price Index report shows that price level increases moderating somewhat sent stocks, bonds, and precious metals soaring.
CPI inflation still elevated at an annual rate of 7.7% through October. But that was slightly lower than analyst expectations. The 7.7% reading also represents a possible deceleration trend from earlier in the year when the CPI was running well above 8%.
The Federal Reserve will likely start scaling back its interest rate hikes, with the official inflation rate heading down slightly. Expectations for Fed softening helped drive the U.S. Dollar Index down to a two-month low.
Metals investors are hopeful that a dovish turn by the Fed will lead to bullish price action in the months ahead.
They are also trying to figure out how accommodating or threatening the political climate will be following the mid-term election. The results were undoubtedly disappointing to Republicans who had hoped to win a large majority in the House of Representatives and retake control of the Senate.
While a few key races still undecided, it appears unlikely that the GOP will end up with anything better than a razor-thin majority in the House and an evenly split Senate. Fiscal conservatives who seek major budgetary reforms and a fight with the Biden administration over significant issues like raising the debt ceiling will likely be deterred.
Not much is likely to change in Washinton, D.C., during the next Congress. Looking ahead to 2024, speculation is growing that Florida Governor Ron Desantis could be the GOP nominee for President.
Desantis won re-election overwhelmingly by running on his record of freeing the state from COVID restrictions and banning Woke indoctrination in schools. We will probably learn more in the months ahead about where he stands on fiscal and monetary issues at the federal level.
In the meantime, one issue Congress will likely take up soon is the regulation of cryptocurrency markets. This week crypto markets got rattled by the collapse of a major exchange known as FTX. FTX had faced a wave of customer requests for withdrawals and announced it was experiencing liquidity issues. A digital bank run ensued.
FTX had specifically touted itself as a safe and secure platform. That turned out not to be the case. FTX mismanaged its finances and may have misappropriated client accounts funds. Now the entire crypto industry is coming under closer scrutiny by politicians and regulators.
However, the FTX debacle is complicated because its owner, Sam Bankman-Fried, has been a huge financial contributor to Democrats. The crypto billionaire gave $40 million to Democrat candidates in 2022, making him the party’s second-largest donor. In 2020, he pumped $10 million into Joe Biden’s campaign for President.
It’s also no secret that the big retail banks not only give lots of money to members of Congress but also push former executives to fill top positions at regulatory agencies. That creates conflicts of interest when it comes to cracking down on financial institutions involved in manipulating precious metals markets, for example.
There is a risk that amid the clamor for tighter regulations on crypto markets, politicians will move to limit the freedoms of investors to allocate capital wherever they wish instead of holding fraudsters accountable at both the individual and institutional levels.
Investors cannot depend on free and fair markets when they engage with crypto exchanges, futures exchanges, brokerages, or banks. Holding funds with any financial institution entails at least some measure of counterparty risk.
But precious metals in physical form insulate investors from the counterparty risks associated with digital and financial assets.
The collapse of FTX could be the canary in the coal mine, warning of broader risks on not only crypto exchanges but futures exchanges, stock exchanges, and the banking system itself. The aggressive pace of interest rate hikes by the Federal Reserve and the resulting volatility in debt and equity markets could raise liquidity concerns at major financial institutions.
The best way for investors to protect themselves against such risks isn’t to hope for stronger regulations or a bailout from the government. Instead, investors can take matters into their own hands by owning tangible assets, including gold and silver, outside of the financial system.