The Fed has actually slayed the inflation dragon?

On the latest episode of the Money Metals Exchange podcast, host Mike Maharrey sat down with Brien Lundin, the editor of Gold Newsletter and CEO of the New Orleans Investment Conference. The discussion was timely, recorded on the day the April Consumer Price Index (CPI) data was released, showing a slight decrease in inflation. Here are the key takeaways from their conversation.

Inflation and Federal Reserve actions

The interview opened with a discussion on the latest CPI data, which showed a 0.1% cooler month-to-month inflation than expected. Despite the positive news, Lundin expressed skepticism about the Federal Reserve's ability to achieve its 2% inflation target. He believes inflation will settle between 3% and 4%, making it difficult for the Fed to declare victory over inflation.

Lundin highlighted the alarming cost of servicing the federal debt, which has surpassed $1 trillion annually, second only to Social Security in the federal budget. This cost is expected to rise further as Treasury debt resets at higher interest rates. Even if the Fed were to cut rates significantly, the federal debt costs would continue to increase due to the current high interest rates.

“The Fed is searching for an excuse to cut rates, and I think they got one today,” Lundin said, pointing out that the markets were celebrating, with gold prices rising by about $30 an ounce.

Gold market dynamics

Lundin delved into the factors driving the recent gold price rally, which saw prices fluctuating between $2,300 and $2,400 an ounce. He attributed the rally primarily to central bank buying, notably by the People’s Bank of China, and increased domestic demand in China due to a struggling real estate market and stock market.

Speculative demand on the COMEX and Shanghai Futures Exchange also contributed to the rally, while the GLD gold ETF saw decreased demand. Lundin emphasized an undercurrent of buying driven by concerns over debt loads and interest rates, suggesting that large portfolios are shifting towards safe havens like gold.

Interest rates and economic outlook

The conversation then shifted to the broader economic outlook. Lundin compared the current high-interest rate environment to the prelude of the 2008 financial crisis, suggesting that something significant is likely to break under the pressure of elevated rates.

He noted that the Fed's historical pattern of rescuing the economy with rate cuts and easier money is likely to continue, leading to much higher gold prices when the Fed eventually pivots to rate cuts.

Silver market insights

Lundin's views on silver were particularly insightful. Unlike many analysts, he downplayed the importance of industrial demand, focusing instead on silver’s monetary history. He argued that silver has consistently outperformed gold during bull markets and expects this trend to continue.

“Silver is the poor man’s gold,” Lundin explained, noting that it offers leverage and is more accessible for the average investor. He also mentioned that junior silver stocks provide additional leverage opportunities.

Mining stocks performance

Addressing the performance of mining stocks, Lundin noted that while gold mining stocks have technically outperformed gold, they haven't met investor expectations. He attributed this to the dramatic and sudden price rise in gold, which left investors cautious and waiting for a more favorable entry point.

Lundin observed that the recent stabilization in gold prices has attracted generalist investors, leading to significant gains in stocks like Newmont Mining.

Key questions and answers:

Do you think the Fed has actually slayed the inflation dragon?

Brien Lundin does not believe the Fed has conquered inflation. He predicts it will settle between 3% and 4%, making it difficult to reach the 2% target. Lundin highlights the rising cost of servicing federal debt, which is over $1 trillion annually, second only to Social Security in the federal budget. Even with significant rate cuts, federal debt costs are expected to increase. He suggests the Fed is looking for an excuse to cut rates, with the recent CPI data potentially supporting that move.

What drove the recent gold price rally?

Lundin attributes the recent gold price rally to central bank buying, particularly by the People’s Bank of China, and increased domestic demand in China due to a struggling real estate market and stock market. Speculative demand on the COMEX and Shanghai Futures Exchange also contributed, while the GLD gold ETF saw decreased demand. He emphasizes an undercurrent of buying driven by concerns over debt loads and interest rates.

Do you think something breaking in the economy is inevitable with current interest rates?

Lundin believes that the high interest rates will eventually cause significant economic disruptions. He compares the current situation to the prelude of the 2008 financial crisis, suggesting that something significant is likely to break under the pressure of elevated rates. He expects the Fed to continue its pattern of rescuing the economy with rate cuts and easier money, leading to much higher gold prices when the Fed eventually pivots to rate cuts.

What is your fundamental case for silver?

Lundin focuses on silver's monetary history rather than industrial demand. He argues that silver has consistently outperformed gold during bull markets and expects this trend to continue. Silver is seen as the "poor man’s gold" and offers leverage, making it more accessible for the average investor. Junior silver stocks provide additional leverage opportunities.

Why have gold mining stocks lagged despite the rally in gold prices?

Lundin explains that while gold mining stocks have technically outperformed gold, they haven't met expectations due to the dramatic and sudden price rise in gold, which left investors cautious and waiting for a more favorable entry point. Recent stabilization in gold prices has attracted generalist investors, leading to significant gains in stocks like Newmont Mining.