Precious metals markets reacted this week to news of the Federal Reserve's tapering plans.
The Fed didn't deliver any real surprises, though. It left interest rates unchanged as expected and confirmed that it would gradually cut back on monthly asset purchases.
This gesture toward tightening does not represent any actual departure from ultra-loose monetary policy. Central bankers will still be stimulating already overheated markets. And they will still be adding fuel to the inflation fires that are spreading throughout the economy.
This year, price level increases have been so rapid and persistent that Fed chair Jerome Powell is being forced to walk back his previous "transitory" claims rhetorically.
During his press conference on Wednesday, Powell made a stunning admission. He acknowledged that the Fed has failed to achieve price stability as required by its dual mandate. He said,
"We're accountable to Congress and the American people for maximum employment and price stability. The level of inflation we have right now is not at all consistent with price stability."
"Transitory is a word that people have had different understandings of. It carries a sense of short-lived for some, and there's a real-time component measured in months, let's say. Really for us, what transitory has meant is that if something is transitory, it will not leave behind it permanently or very persistently higher inflation."
"So that's why we took a step back from transitory. We said, "Expected to be transitory." So, we're trying to explain what we mean and also acknowledging more uncertainty about transitory. It's become a word that's attracted a lot of attention that maybe is distracting from our message, which we want to be as straightforward as possible."
Powell's definition of "transitory" is even less clear than before. He isn't willing to do his job, at least not as previous Fed chairs understood it. Someone like Paul Volcker would be aggressively hiking rates and trying to tame money supply growth to combat the inflation that's been created.
Volcker inherited a raging inflation problem when he took over the Fed in 1979. He addressed it by hiking rates into the double digits.
Volcker's tough medicine ultimately worked. By January 1980, gold and silver prices peaked, and inflation worries receded over the following two decades.
If the 2020s are anything like the 1970s, we are still in the early stages of an inflation resurgence. Interest rates have much further to rise. And until they turn positive in real terms, the precious metals bull market has much further to run.
Gold bulls are eyeing a potential breakout above the current months' long consolidation pattern. They will be looking for a strong weekly close above the $1,800 level to confirm bullish momentum is gathering.
Current spot prices are attracting bargain hunters in the bullion market. Demand for coins, rounds, and bars continues to come in strong.
Robust physical buying keeps premiums elevated and forces some modest shipping delays on orders made through Money Metals Exchange. However, most bullion items are in stock and available for purchase, but we are seeing some tightness again on certain things that are resulting in modest delays.
There may come a day when demand overwhelms scarce supplies of precious physical metals. Whether it's a panic buying episode due to a financial crisis of some sort or its heavy volumes being sustained over time, the potential for shortages and price spikes exists.
It's much to an investor's advantage to accumulate bullion ahead of any mad rush for metals. A change in investor psychology may be afoot. This week's election results suggest that the record-high stock market isn't reflecting the public mood.
Voters turned against the party in power – the Democrats – in a big way in Virginia. The Democrat incumbent governor in New Jersey also nearly got thrown out in a race that he had expected to win easily. Nationally, approval ratings for President Joe Biden are tanking.
Political pundits point to social issues such as rising crime, critical race theory, and vaccine mandates driving growing anger among voters. But whenever the party in power suffers a dramatic plunge in popularity, there are usually underlying economic frustrations behind the backlash.
Maybe the economy isn't as strong as the headline numbers suggest. Perhaps inflation is even worse than reported. Perhaps the daily struggles of millions of ordinary Americans aren't being priced in on Wall Street or by futures markets.
A negative turn in social mood is often a precursor for trouble in financial markets. Equities have been artificially inflated by Fed stimulus to extremely lofty valuations. This kind of market distortion makes for a difficult time to be buying. History shows that Fed-fueled asset booms lead to busts – whether in nominal or real terms.
Given the inflation backdrop, investors have few safe places to hide. Money markets yield nothing essentially, and bonds don't yield much more – certainly not enough to deliver positive actual returns.
The last thing central bankers and their beneficiaries on Wall Street want to see is a massive flight from financial assets into gold and silver. But precious metals are one of the last remaining asset classes that offer solid value. They are also among the only asset classes that tend to perform well during periods of stagflation like we saw in the late 1970s.
Given Fed chairman Powell's admission that we no longer have price stability in this country, we expect to see more supply disruptions and price spikes in various economic goods. These pressures will eventually, at some point, likely work their way through precious metals markets – perhaps in a dramatic fashion.