Recent Events Driving Gold and Silver Prices Higher
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Economy
For anyone who had hoped that inflation was a bad dream that was fading away, the latest inflation report poured cold water on those hopes. While the official inflation rate remained steady at 3.7% year on year, and core CPI fell to 4.1% year on year, those numbers are still far higher than most people would like. And the impact on most people’s finances certainly feels higher than that.
While the Federal Reserve has made great strides in bringing the inflation rate down, reducing both the size of its balance sheet and the overall money supply, there’s still a lot of work to be done. And if reducing a trillion dollars off its balance sheet still can’t get inflation to keep falling consistently, it looks like the Fed may have to get far more aggressive in its monetary tightening if it really wants to get inflation under control.
The Federal Open Market Committee (FOMC) meets on October 31st for its next policy meeting, at which it will decided what its next move on interest rates is. The FOMC paused rate hikes in September, despite the inflation rate rebounding upward. It’s hard to imagine that it would keep the pause in place now that inflation is remaining stubbornly high.
At nearly double the Fed’s target rate of 2%, inflation has to come down if the Fed wants to retain any credibility as an inflation fighter. But with interest rates the highest they’ve been in over 15 years, and with those rates already impacting the economy, the Fed obviously wants to tread carefully to keep further interest rate hikes from further depressing economic activity.
With inflation remaining stubborn, however, pressure is going to be growing on the Fed to do something to bring it back down. With several inflation reports having come in since the last rate hike, and with inflation having risen since the last hike, the Fed can’t risk allowing inflation to rise even further.
If for some reason the Fed doesn’t decide to hike rates at the next meeting, there’s still one more FOMC meeting in mid-December that could see a rate hike. That meeting will come after two additional inflation reports, so the Fed could get a better sense of what’s happening with inflation and how its monetary policy is impacting inflation.
Let’s say that the Fed decides not to hike this month and instead waits for December. And let’s say that the inflation rate rises to 3.8% and then 3.9% over the next two inflation reports. Then it would be all but certain that the Fed would hike rates in December.
If inflation were to remain at 3.7%, or to fall to 3.6% and 3.5%, then there would most likely be a continued pause. But hopes of a rate cut, which Wall Street has been hoping for for months, are highly unlikely. Until inflation gets below 3% and shows continued movement towards 2%, an interest rate cut doesn’t seem in the cards, barring some unforeseen black swan recessionary event.
With over a trillion dollars having been cut from the Fed’s balance sheet, and with over a trillion dollars having disappeared from the money supply, you might be wondering why inflation is still as high as it is.
Indeed, that’s the question that’s bugging everyone. While those actions have done a great deal to push inflation down from its highs, the sheer volume of the money supply increase in 2020 was so massive that we’re still feeling the after effects of it.
The money supply today is still 34% higher than it was at the beginning of 2020, yet the consumer price index is only 19% higher, which means inflation could still remain problematic. And the rate of decrease of money supply growth doesn’t look like it’s as great as the rate of increase from 2020-2022.
While what’s happened so far has done a good deal to bring inflation somewhat under control, the fact that inflation was allowed to surge also shook up people’s inflation expectations, which in turn impacted consumer behavior.
If you expect inflation to keep rising, you’re going to be incentivized to spend in the present, before prices increase. Long-term acquisitions are going to be moved into the short term, and that kind of behavior can put upward pressure on prices.
While that isn’t strictly speaking inflationary, since inflation is an increase in the money supply, that kind of behavior can impact prices by pushing them up, which would then be captured in inflation rate figures that report increases in the price level.
We’re still working through the impact of the Fed’s interest rate hikes on the economy. Prices of goods tend to increase pretty easily, but decreases tend to be sticky.
Take housing, for example, in which both prices and interest rates are at multi-year highs. Housing affordability is about as bad as it has been in decades. Yet housing prices still haven’t fallen to offset the rise in interest rates. Why not?
Many people still expect the Fed to cut interest rates at some point, at which point they expect mortgage activity and home buying to pick back up again. For now, people are happy to wait things out, listing homes at high prices or keeping homes off the market until interest rates fall again.
But that can only last so long before economic necessity forces people’s hands. And when it does, we can expect to see significant movement on prices. When that will happen, however, is anyone’s guess.
In the meantime, inflation continues to erode the purchasing power of the US dollar, and continues to eat away at the trillions of dollars of savings that Americans have socked away for retirement. With an official inflation rate of nearly 4%, your investments need to yield at least that much each year for you to break even. And with markets having performed in lackluster fashion over the past couple of years, that kind of performance doesn’t seem very likely.
Enter gold, which has a reputation for holding its value over the long term and acting as a hedge against inflation. During the stagflation of the 1970s, gold’s average annualized growth rate was over 30% per year, growing 15-fold over the decade despite inflation rates that reached double digits.
If the next decade ends up becoming another decade of stagflation, and gold were to perform in similar fashion, gold owners would find gold providing them with significant protection from inflation-related loss. That’s one reason so many people today are choosing to buy gold to protect their savings.
There are numerous options available to protect yourself against inflation with gold, from rolling over tax-advantaged retirement savings into a gold IRA, to making direct cash purchases of gold to store at home. No matter which form or method you want to use to buy, own, and hold gold, there’s an option available for you.
Goldco has helped thousands of customers benefit from owning gold, with over $2 billion in precious metals placements and over 5,000 5-star reviews. If you’re interested in learning how owning gold can benefit you, call the precious metals experts at Goldco today.