Commodities, Gold, & Silver Weak Before Fed’s Moment Of Truth

The very most important Fed meeting of all time, ever.

It’s the moment market participants have been waiting for! At least, that’s what the mainstream financial press is saying. And that moment is no other than the second day of the Fed’s latest FOMC meeting. This June meeting is when, among other things, the Fed “decides” on its interest rate policy and releases a statement on its monetary policy with regards to the so-called “dual mandate” of full employment and price stability. All eyes and ears will be on Fed Chair Jerome Powell during his post-FOMC press conference, looking to see his reaction and hear his response to the single most important word in the entire dictionary, and that would be the word “transitory”, when used in conjunction with the word “inflation”, of course.

Houston, we have a problem: Prices have been rising for months.

We’re coming off of the US government’s latest report on inflation, the red hot Consumer Price Index (CPI) for May 2021. The latest report showed an increase in prices of 5% across all items from May of 2020. That’s three full percentage points above the Fed’s symmetrical inflation target of 2%. Even the most recent release of the Fed’s preferred inflation metric, Personal Consumption Expenditure (PCE), showed a rise in prices of goods and services of 3.6% on a year-over-year basis. It should be noted that the two reports’ month-over-month increases in prices is also not insignificant. Additionally, these inflation reports are going to be more important than ever going forward for many reasons that people may not even be aware of, such as President Biden’s “Executive Order on Increasing the Minimum Wage for Federal Contractors”, an order which indexes minimum wage hikes to the Consumer Price Index, and in Biden’s executive order, wages are sticky in the sense that once the minimum wage goes up, it can not go down, regardless of future CPI reports.

What will Fed Chair Jerome Powell say?

So far, Jerome Powell has been sticking to his guns: Inflation is “transitory”. He and the Fed have been quick to blame “the Covid-19 pandemic” for this “challenging time” in the US economy, as opposed to any fiscal or monetary policy errors that arguably have contributed to the “tremendous human and economic hardship across the United States”. Indeed, a few months ago, the Fed was blaming “base effects” for the inflation we’ve seen and felt so far, meaning that since prices collapsed in March of 2020 when governments at all levels shut down huge sectors of the economy by decrees, by edicts, and by whims, even though Powell won’t put it in those truthful terms, prices were bound to rise significantly due to recovering off of the lows of that complete “shock breakdown”, for lack of a better term.

Now, however, prices in some sectors of the economy are well on their way to recovering if not outright exceeding their pre-pandemic price levels, so “supply chain disruptions” are the Fed & Jerome Powell’s main go-to culprit for the continually rising prices. The big question for Powell right now is this: In light of the continued, high inflation, is the Fed now thinking about using its tools to deal with the rising prices? Of course, that question shows how Pavlovian the mainstream media has become, insofar as we can only talk about the Fed responding to inflation one meal at a time, and right now, the slop that’s offered is either thinking about fighting inflation or thinking about fighting inflation. That said, what comes after the Fed’s thinking phase, the “planning” phase?

Either way, there will be consequences.

There will be consequences for the markets and the economy. If the Fed and Powell acknowledge that price inflation is becoming a problem, the Fed will have to end the party on Wall Street sooner than later. In part, this means that interest rates will have to go up in order to deal with the rising prices, and as a consequence, rising interest rates would be problematic for the stock market, the housing market, and more. If market participants expect the Fed to end the party sooner than later, we could be in for some interesting volatility in the markets.

If the Fed and Powell maintain their position that inflation is transitory, there will also be consequences for the markets. Interest rates would not have to rise in response to a brief period of temporary inflation, so market participants can continue taking major financial risks and gambling on all sorts of crafty financialized products. In other words, the party rocks on.

The Fed’s alibis and the mainstream media’s propaganda against gold & silver.

The Fed currently has the convenient cover of correcting and crashing commodity prices on its side. Corn, wheat, and soybeans are all off of their highs. Copper is down over 10%. The price of lumber futures has been crashing. All of this price action in the commodities gives the Fed and Powell some sweet alibis for prices coming back down. The continued rising price of crude oil is the outlier, however, so Powell will probably just ignore that pesky little detail altogether. Therefore, superficially, if Powell wants to stick with the transitory inflation narrative, he does have talking points.

The Fed’s cheerleading mainstream financial press is always on a mission to cast gold & silver in a negative light. Here’s how I think the mainstream could spin either Fed reaction to inflation in a way that’s reported as being “bad” for gold & silver. If the narrative of transitory inflation continues, then market participants will prefer risk assets such as stocks to safe-haven assets such as gold & silver. If the narrative is that the Fed is thinking about dealing with inflation, then market participants will prefer to reduce their risk by moving into the safety of the bond market, as opposed to moving into gold & silver, because bonds pay interest and gold & silver do not. This is just my opinion on the coming propaganda if we get a post-FOMC “sell-off” in gold & silver. If the Fed is sticking to its transitory inflation narrative, then the mainstream media would also have the convenient cover of people not needing to hedge against inflation in the event of a gold & silver sell-off. The bottom line is the propaganda works both ways. The propagandists get to have their cake and eat it too!

There will be market movement, but in which direction?

I think the Fed sticks to its transitory inflation narrative, and it comes down to whether Powell can be convincing, or not. If Powell is convincing, then I’d be looking for continued weakness in gold, silver, and the commodities, and possibly even moves lower. If Powell is unconvincing, then theoretically, gold & silver should surge as, among other things, the US dollar’s purchasing power continues to decline as real interest rates continue to go more deeply negative.

In reality, it’s anybody’s best guess, and mine would be that there is more pain to come in gold & silver, but that would also be a wonderful time to add to that stack and protect thyself against our current ersatz dollar. I’m a Silver Bug at heart, so I’m really hoping that I can add to my stack at cheaper prices in the short-term, but if I’m wrong in the short-term and gold & silver take off from here, and silver premiums skyrocket again in conjunction with the massive, overwhelming demand for real, physical silver, then I’ll personally start looking at platinum as an opportunity because, in my opinion, platinum is the second-best value investment around. Platinum is second only to silver.

And now, let’s check out some really interesting charts of gold, silver, and more!

← Previous Next →
We can't find posts matching the selection.
Paul Eberhart
Paul Eberhart
Senior Market Analyst and Columnist

Paul Eberhart has been actively trading and writing about precious metals for more than a decade. A U.S. Army Iraq War Combat Veteran, he holds an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill...