As investors weigh conflicting economic data and the prospects for a Fed pivot, precious metals markets are quietly basing out.
Thursday’s Gross Domestic Product report showed the economy growing at a better-than-expected 2.6% annual rate in the third quarter. That’s a major improvement from the negative GDP growth seen during the first two quarters.
The Biden administration is trying to spin the news as a sign of a resilient economy – just as they have been touting the recent $1.6 trillion budget deficit as a huge success compared to the federal government’s $3 trillion deficit in the prior fiscal year.
However, skeptics point to some troubling indicators that suggest not all is well.
For one thing, rising consumer prices continue to outpace wage growth. As a result, consumer spending remains depressed and fails to confirm the reported 2.6% gain in GDP. Much of that superficial economic growth rise came from a trade deficit narrowing amid an unusually strong Federal Reserve note on foreign exchange markets.
Depleted savings and rising debt levels characterize the real economy consumers face to stay afloat. Millions struggle to afford groceries and other essentials that are skyrocketing in cost.
Another warning sign for the economy comes from the housing market. Sales volumes are plummeting amid spiking mortgage rates.
Economist Ian Shepherdson forecasts that housing prices could plunge by up to 20% over the next year. That would likely coincide with a double-dip recession.
Legendary real estate investor Sam Zell announced recently that he is investing in gold for the first time in his career. The billionaire sees precious metals as a way to protect against inflation and the risks facing the U.S. fiat dollar regime. He warned on Bloomberg Television that a currency crisis is building. He said,
We're dealing with a crisis in the fiat currency world. Ever since Bretton Woods, the whole idea was to create stability in the currency markets. And to a large extent, we've done that. And then COVID came and we lost all of our discipline. And the net effect of which is that we've created staggering new obligations that are going to have to be paid for in the future. Part of it is being paid for with very significant inflation. I think the dollar is in great jeopardy, and that's what I've been worried about and, frankly, more than anything else. And we need discipline, and it starts in Washington, DC, where there has been very little of it.
Perhaps the people currently presiding over the Washington, D.C. establishment will get a big rebuke from voters in the upcoming election. But even if Republicans sweep into power, there’s little prospect for them being able or willing to tackle the massive fiscal gap they will face.
Even if the next Congress stops deficits from expanding, the existing debt will become increasingly costly to service, thanks to the recent surge in interest rates.
The big question facing investors is how quickly the Federal Reserve will pivot back toward monetary easing. The apparent uptick in third-quarter GDP may be a blip ahead of another round of economic declines. For now, though, the Fed will likely perceive some leeway to continue with additional hikes next month.
That could mean further pressure on precious metals markets – and stock markets. But not necessarily. Other central banks, including the European Central Bank, are now engaging in large-scale rate hikes. That should help blunt the dollar’s strength versus foreign currencies.
The U.S. Dollar Index is down for a second consecutive week, increasing the odds that it peaked for the year last month.
Meanwhile, inventories of gold and silver on the COMEX futures exchange are rapidly depleted as demand for physical delivery surges. Since May, registered gold supplies have fallen by 6.35 million ounces. At that pace, COMEX vaults could be emptied within a year.
Registered silver inventories are becoming even scarcer. A potential shortage of physical precious metals looms.
That could translate into run-on available bullion products. We have already experienced shortages in Silver Eagle coins produced by the U.S. Mint for several months. Silver Eagles now carry hefty premiums over spot prices – and Money Metals is paying more than $11 per ounce more than spot for those wishing to sell their Eagles to us.
Premiums on many other everyday bullion products are also being pressured due to heavy demand and limited supply. The best way to avoid the premiums is to focus on larger bars or to set up a Vault Metals storage account to accumulate gold, silver, or platinum ounces on the cheap.
Investors would be well advised to accumulate physical precious metals while they can still do so at reasonable prices. When these markets finally break out to the upside, the magnitude of the moves could be breathtaking.