Why did precious metals get clobbered this week?

Precious metals markets got clobbered early this week as gold and silver broke down from their high-level consolidations.  

Strength in the U.S. Dollar Index seemed to be the catalyst that got the selling going.  Once key technical levels got breached, the selling intensified.

Gold prices fell below the $1,900 level on Wednesday. Meanwhile, silver plummeted below $24 an ounce and traded as low as $22 on Thursday before recouping some of those losses by the end of the trading day. 

Some of the volatility seen in metals and equity markets in recent days is attributable to the failure of Congress and the White House to agree on a new stimulus package, with the focus shifting to filling the Supreme Court seat once held by the late Ruth Bader Ginsberg. 

Although the economy is in the process of rebounding from the deep second quarter contraction caused by virus lockdowns, it is far from fully healed.

In March, President Donald Trump signed the CARES Act, a $2.2 trillion relief bill that included stimulus checks sent to most Americans. It also swelled the federal budget deficit to over $3 trillion.

Such a figure would have been unfathomable just a year ago, when Washington was overspending by around $1 trillion.

With a razor tight election coming up that where both the presidency as well as control of the U.S. Senate are up for grabs, fiscal restraint isn’t the order of the day. President Trump wants more stimulus checks sent out – or else a way to pin the blame on Nancy Pelosi and the Democrats for withholding them.  

On Thursday, House Speaker Pelosi and Treasury Secretary Steven Mnuchin agreed to revive negotiations over the stalled second round of coronavirus relief. But President Trump’s expected nomination of a new Supreme Court justice on Saturday could throw a wrench in to the process. 

Democrats are incensed that Trump is attempting to fill the vacant seat before the election. They are likely to focus on trying to obstruct or delay the confirmation process any way they can.

But if House Democrats, Senate Republicans, and the White House can somehow find common ground on a new debt-funded stimulus bill, that would likely give another temporary boost to asset markets – and reverse the recent rally in the Federal Reserve Note 

Longer term, the purchasing power of the currency is destined to decline regardless of whether new budget-busting fiscal stimulus gets rolled out. 

The Federal Reserve is now explicitly committed to depreciating the dollar at a more rapid pace as it vows to keep its benchmark interest rate near zero for at least another three years.

Fed Chairman Jerome Powell’s stated new mission in life is to push the official inflation rate above 2% for an extended period. 

St. Louis Fed president James Bullard recently warned that inflation soon could run unexpectedly hotter. He cited the combination of loose credit, huge government deficits, and supply bottlenecks caused by coronavirus lockdowns.

We’ve certainly seen some supply issues develop in the bullion market this year with demand surging and the U.S. Mint shuttering for some time. Scarcity of American Eagles and other popular coins forced premiums to skyrocket.

They have since come down a bit – as have spot prices for gold and silver.  But mining analysts see a dire supply outlook in the months and years ahead. Annual production of precious metals will be way down this year and likely won’t fully recover next year.

Demand for things like gold coins and gold jewelry can recover much more quickly. The white metals – silver, platinum, and palladium – are driven more by industrial demand. But as we saw earlier this year with silver, a sudden surge in investment buying can also drive a big move in spot prices.

The next big catalyst for investment demand could be the upcoming election, although depending on how it turns out the impact may be short lived.

A longer lasting and more dramatic impact will be felt in the gold and silver markets when inflation expectations fundamentally shift from doubt to fear. Right now, many investors doubt that the Fed will even achieve an inflation rate above 2% anytime soon – at least when using the understated government numbers. 

But when they begin to fear that inflation might run even higher than advertised, then precious metals could see a massive and sustained surge in safe-haven demand. 

That, of course, would imply a spectacular rise in prices.  

The recent pullbacks in metals markets give investors an opportunity to accumulate more coins, rounds, and bars ahead of the herd.  

And frankly, that’s exactly what Money Metals customers have been doing this week.  Sales volume had doubled from levels seen earlier this month, with the bulk of the buying happening on the silver side.  

As mentioned above, premiums have come down some in the last two or three months… particularly on privately minted bars and rounds.  

Of course, if we see a few more days of heavy volume, that could change.  For the moment, however, bargain hunters can access BOTH lower premiums and lower spot prices.