Gold, Silver and Equities All up on Latest Data

The gold price managed to end the past week above the $1,800 mark again, dominated by what appeared at first glance to be slightly less worrying inflation figures.  This was despite the yellow metal having made several attempts during the week to breach this psychological barrier, but always seeming to be held back from so doing. The silver price too improved to over the $20.80 mark, making for a considerably greater rise than gold in percentage terms and bringing the Gold:Silver Ratio (GSR) back to a much more respectable 86.4 from the over 90 levels where it had previously been languishing.  However, these prices could not be sustained in early trade in Asia and Europe at the beginning of the current week with gold retreating back below the $1,790s and silver the $20.50s and the GSR to the 87s.

The principal data items affecting precious metals prices have been last Friday’s encouraging employment report, followed by Wednesday’s Consumer Price Index (CPI) and Thursday’s Producer Price Index (PPI) data releases.  Employment figures came in better than expected and headline year-on-year CPI and PPI inflation levels lower than forecast, both of which were taken as suggesting that the Fed might be less aggressive than some had feared at the September FOMC meeting in raising interest rates.  The current CME Fedwatch predictions are, nonetheless, still at 56.5% for a 50 basis point increase and 43.5% for a 75 basis point increase with another CPI announcement forthcoming before the FOMC meeting date which could well lead to another re-assessment of the likely interest rate rise.  These are not great odds from the markets for a less aggressive approach from the Fed, but the FOMC meeting is still around five weeks away and much could happen to change the picture by then.

At the moment, oil prices seem to be declining, and if this continues the very significant energy price element of the CPI could continue to fall.  But if this should reverse – perhaps if Russia tightens the screws on European energy supplies and forces global prices higher, which is a definite possibility, inflation could well pick up again.   Global geopolitics is difficult to forecast with any degree of certainty, particularly where President Putin’s Russia is involved,  and while the Ukraine war continues, and there are no signs of it coming to a rapid end, there are any number of factors which could impact on the global economic situation.

The initial response to the better employment figures was to drive gold and silver prices down and equities upwards.  Then the lower CPI and PPI inflation headline counts also boosted equities and bitcoin, but caused gold and silver prices to pick up.  Somehow recession seemed more remote despite the technical definition of such of two successive quarters of negative GDP growth in the US already having been reached.  

More detailed analysis of the CPI and PPI figures should be raising some red flags as core inflation levels remain pretty much unchanged at nearer 6% - and this probably understates reality.  This indicates that the Fed’s target of 2% inflation probably remains as far away as ever.  High inflation is likely to be with us for some time to come.

On this assumption, this observer feels that equity prices, apart from gold and silver stocks, and cryptocurrency prices remain vulnerable to a general recessionary economic turndown through the remainder of the year and well into next, although perhaps not quite as severe a one as we had thought earlier.  Powell’s predicted soft landing prediction could still prove to be relatively intact dependent on how severe inflationary pressures turn out to be in the final two quarters.  

At the moment I would go with the flow in predicting a 50 basis point interest rate rise being imposed at September’s FOMC meeting, and perhaps a further similar increase in the following one at the beginning of November unless there  is seen to be a sharp fall in inflation.  We could thus see a year-end rate of perhaps 3.5% or higher which could depress equities and contribute to a slightly deeper recession in 2023, but perhaps diminishing Fed rate increase impositions thereafter.

As for gold and silver, there will probably be another $1,800 gold breakthrough, then taking it up perhaps to $1,900 and above – possibly even $2,000 – possibly before the year-end despite the likely higher interest rate levels.  A return to a Republican majority in the US Senate would likely help contribute to such a rise.  Silver could also trade higher in the $22-24 range with the GSR coming down to around 85, although any potential pgm gains would likely be moderated should the economy be recognized as moving into a real recession.