By Mike Gleason, Money Metals Exchange
Another volatile week of trading saw precious metals markets rally to new highs for the year on Tuesday before suffering a sharp drawdown on Wednesday and more selling on Friday. Metals markets were wrestling with the risks of supply disruptions caused by war and sanctions. They were also weighing shifting Fed rate hike expectations and growing inflation pressures.
On Thursday, the government released the latest Consumer Price Index report. And it was another doozy.
News Anchor:
"The latest report on inflation was released. It was higher than expected. Increases in gasoline, housing and food were the largest contributors to that rise."
Bertha Cooms (CNBCC):
"We saw inflation hitting a fresh 40-year high, the Consumer Price Index coming up about eight tenths of a percent for the month of February. That puts consumer inflation at 7.9% year over year."
Stuart Varney (Fox Business):
"Speaking for the president, Jen Psaki blamed it all on Putin, ignoring the fact that gas and oil prices were rising way before Ukraine was invaded. The president blames Putin and the oil companies."
That was Stuart Varney of Fox Business there at the end.
The inflation blame game as played by politicians ignores the root causes of price increases.
First, they said inflation was transitory. Then when that line became untenable, they said inflation was a sign of a recovering economy. Then when polls showed most Americans believed they were losing ground financially, the White House blamed corporate greed. Now they’re saying it’s all Vladimir Putin’s fault.
But Putin didn’t force Uncle Sam to run up an accumulated debt load of over $30 trillion. Nor was it his idea for the Federal Reserve to hold interest rates near zero and launch trillions of dollars’ worth of Quantitative Easing programs.
Years of ultra-loose fiscal and monetary policies are now bearing the ugly fruits of a depreciating currency.
Mainstream economists repeatedly told us not to worry about inflation because money velocity remained low and technology would continue to drive greater cost efficiencies.
Technology has made things like televisions cheaper and better over time. But it hasn’t made essentials like food, fuel, housing, and healthcare more affordable. In fact, these costs are rising faster than average wages.
According to the CPI report, gasoline costs are up 38% over the past year. Meat prices are up 13%. New cars cost 12% more on average. And electricity bills are running 9% higher for the typical household.
And according to some alternative measures of inflation, price increases are even more severe than what’s being reported officially.
The American Institute for Economic Research puts together what it calls the Everyday Price Index. Based on its 24 components, Everyday Prices are up 9.5% from a year ago. The biggest contributors to the higher reading on the index were food and energy.
Meanwhile, the ShadowStats Alternate Inflation Index shows a whopping 16% year-over-year jump in consumer prices. That’s double the headline CPI number!
Even more alarming is that none of these data sets account for the spikes seen in energy and agricultural futures so far this month. When the March data come out, the inflation picture could look even worse.
Until recently, precious metals markets have lagged behind inflation.
The inflation run-up began after the COVID crash of 2020 as Congress and the Fed began flooding the economy with liquidity. In the early stages, there were a lot of disbelievers and a lot of apologists for the Fed’s "transitory" inflation pronouncements.
But now everyone, including even politicians and central bankers, recognize that inflation has become a problem.
We are now also likely entering the recognition stage of a precious metals bull market. More investors now recognize that they need to protect against purchasing power losses—and that stocks, bonds, and cash won’t suffice.
Bullion dealers, including Money Metals Exchange are seeing huge buying volumes, including from newcomers to precious metals. Still to come may be the panic phase, or mania phase, of the gold and silver bull market. That’s when fears of inflation, of shortages, and of just plain missing out on the bull run, drive parabolic price increases.
The last great mania in precious metals began in the late 1970s and peaked in January 1980. While gold has since taken out those highs in nominal terms, it likely has much further to run in real terms—especially when measured against paper assets such as stocks.
Silver remains depressed in both real and nominal terms compared to its former bull market highs. When it starts getting pressured to the upside in a significant way, it could make gold’s percentage gains look modest by comparison.
The biggest moves in these assets typically occur toward the end of their bull markets. That can make knowing whether to sell or to keep hanging on after seeing large gains difficult. Getting out at the exact top will be next to impossible.
Prudent investors don’t try to pick tops or bottoms. They average into their positions while prices are attractive. And they consider selling parts of their holdings over time as prices meet their objectives—or as other asset classes start looking more attractive.