Fed Chairman hints at new dovishness, warns of unbacked currencies

Global markets are in turmoil as the Russian invasion of Ukraine triggers nuclear fears.  

Inflation fears are also being triggered. Crippling economic sanctions imposed on Russia are constricting exports of oil and other commodities.   

President Joe Biden is being urged by some prominent politicians of both parties to ban imports of Russian oil completely. That could send prices at the pump rocketing to new record highs.

Oil futures are now trading at over $110 per barrel, but that’s not the only thing surging. Grains and other agricultural commodities skyrocketed by double digits this week.

The moves in precious metals markets so far during this crisis are less dramatic. But gold and silver continue to gain technical strength as upside momentum builds. 

Of course, broader price pressures will continue hitting the economy, punishing consumers and investors. 

President Biden acknowledged the inflation problem in his State of the Union address. But he offered no credible plan to arrest rising prices. Bringing down inflation would require tighter fiscal and monetary policy. Few politicians have any interest in that. 

Biden renominated Federal Reserve chairman Jerome Powell in part to keep loose monetary policy in place. 

Powell testified before Congress this week. He suggested the central bank will move ahead with rate hikes, but the size and pace of hiking is now likely to be more modest than previously expected. Even though inflation pressures are worse than ever, the Fed doesn’t want to risk adding to instability in financial markets by hiking aggressively. 

Powell also stated that the Fed continues to contemplate implementing a central bank digital currency, or CBDC. 

Many members of Congress have bashed privately issued cryptocurrencies for facilitating fraud and possibly helping Russians get around sanctions. And Powell denigrated digital currencies for not being backed by anything. Yes, the person in charge of pumping fiat Federal Reserve notes into the economy by the trillions is concerned about the proliferation of unbacked currencies.

Jerome Powell: The existing digital currencies, that, again are not backed are really vehicles for speculation. They're not used in payments. They're not a store of value. They're a speculation like gold. That's what they're used for, whereas potentially a US CBDC would have a wider view.

I do want to stress we have not decided to do it, but we do understand our obligation is to really get to the bottom and understand both the technical and the policy issues that need to be answered.

Powell either doesn’t understand the role of gold as a store of value or is deliberately trying to mislead people.  Gold is sought after by long-term investors because it is the opposite of a speculation. It is a safe haven.

Sure, traders can go into the futures market and speculate on gold prices if they are so inclined. But people who buy and hold physical bullion are generally doing so for long-term wealth protection. They know that over time gold will retain its purchasing power.

You can’t say the same thing about any fiat currency or government-issued bond. Given how artificially low interest rates have been suppressed compared to inflation, there is virtually no chance that an investor will retain purchasing power by buying Treasury bills. 

About the only thing going for them is that they are losing value less rapidly than Russian stocks.  

Sometimes bonds and cash instruments will also seem to be less volatile than precious metals. The gold market does experience periodic downswings. And silver’s drops can be even more severe.   

But that volatility can also be quite rewarding on the upside.  The biggest, most dramatic moves in gold and silver prices are likely yet to come.

Conventional cash savers will miss out on them. They will instead experience a steady loss of value in real terms, as guaranteed by the Treasury Department and Federal Reserve. 

Those who save in sound money – gold and silver – stand to preserve their wealth from the corrosive force of inflation.