Inflation still runs hot, Gold and Silver prices stabilize

As economic data comes in worse than expected, investor uncertainty is rattling markets. 

On Thursday, the Commerce Department released its estimate of Gross Domestic Product for the first quarter. GDP growth came in at a disappointing 1.6% -- well short of the 2.3% consensus forecast.

Stocks sold off on the news. But gold and silver markets bounced modestly off their lows from earlier in the week.

The setback in metals markets may be temporary as inflation jitters and economic woes appear likely to persist. 

Of course, the Biden administration is attempting to reframe this week’s disappointing GDP data.  Treasury Secretary and former Fed head Janet Yellen claimed the economy is actually stronger than what the data show. She insisted future revisions will show an improvement in estimated GDP growth.

Critics argue that real economic growth is likely even lower than reported due to an elevated inflation rate.  The official GDP figure does reflect an inflation adjustment, but it tends to understate real-world costs of living – especially in the areas of housing, food, and energy. 

But even the Federal Reserve’s preferred inflation indicator is showing pricing pressures increasing rather than easing.  Thursday saw the release of the latest core Personal Consumption Expenditures index, which excludes food and energy prices. The PCE surged from 2% in the fourth quarter of 2023 to 3.7% in the first three months of 2024. That jump far exceeded economist forecasts, as inflation reports have tended to do in recent months. 

Persistently hot inflation readings are putting widespread expectations of Fed rate cuts this year in doubt.  Now the Biden administration and its backers within the central bank are going to have to do a complicated political dance around the framing of the economy.

Team Biden hopes to get a boost from the Fed this summer heading into the election. But central bankers would have to brazenly throw all their historical rationales for setting monetary policy out the window if they were to cut rates in an environment of high and rising inflation coupled with an economy that is as strong as administration officials insist it is.

Fed Chairman Jerome Powell has paved the way for rate cuts by twisting and contorting the supposed 2% inflation target beyond recognition. What Powell has made clear is that inflation staying elevated above 2% won’t necessarily stop the Fed from pumping more cash into the economy.  What remains to be seen is whether the PCE rising unexpectedly to 3.7% gives him any pause.

The more the Fed loses credibility on inflation, the more investors will be drawn to precious metals for wealth protection. Despite the recent setback in gold and silver markets, they are still in an impressive uptrend this year. 

Gold and silver have run up more rapidly than even many bulls were expecting. Year-end gold price targets of $2,400 an ounce were hit before the end of April.

Gold’s surge to new all-time highs occurred without the help of any rate cut by the Fed. Gold has risen despite expectations for rate cuts this year being continually pushed forward and dialed down. 

Even if rate cuts are canceled entirely, there’s no reason to presume that precious metals markets cannot continue going higher. They are higher today than they were when Jerome Powell and company started raising rates in 2022. And there is sound reason to believe they will continue to move higher over the long run, in terms of depreciating U.S. fiat dollars.  

How high is largely a question of how rapidly the currency loses value. Of course, fundamental factors such as mining supply, industrial demand, and investor interest in the metals can cause prices to experience cyclical swings. 

We have certainly seen more mainstream interest in gold following its run to record highs. But that followed a lull in investor buying of bullion and exchange-traded products over the past couple of years. 

Silver remains almost completely off the radar of Wall Street and most ordinary investors.

The bottom line is that gold and silver markets are far from overbought on any sort of long-term basis. They are under-owned.  

In the case of silver and the other white metals, in particular, they may be severely underpriced given their chronic supply deficits. Those deficits will eventually be closed either through plunging demand or higher spot prices that incentivize the creation of new supply.

Of course, ramping up mining production isn’t easy. It takes time – unlike ramping up the supply of new fiat currency.