Gold, Silver, and Rates Gyrate As Bank runs Occur at Small Banks

As the Fed signals further rate hikes ahead, precious metals markets are probing for support levels.

Gold prices currently come in at $1,866 an ounce essentially unchanged now for the week as of this Friday recording. Silver, meanwhile, was getting slammed this week through Thursday but is getting a bit of a bounce here today and is now showing a 3.8% weekly loss to bring spot prices to $20.66 an ounce. Platinum is off 2.6% to trade at $967. And finally, palladium is down 4.8% since last Friday’s close to check in at $1,429 per ounce.

Metals markets struggled after Federal Reserve chairman Jerome Powell delivered testimony to Congress.

Powell seemed to walk back his remarks from just a few weeks ago when he confidently declared disinflation was taking hold. He now says interest rates will have to rise further than previously forecast.

Central bankers have already raised interest rates by 4.5 percentage points over the past year. The Fed funds rate could top out at 5.75% this year, according to some projections.

Before all the turbulence in the banking sector, especially with some big selloffs in regional bank stocks here at the end of the week, the odds of a 50-basis point hike at the Fed’s next policy meeting had jumped, scaring some investors out of equity and hard asset markets.

On Wednesday, Powell spoke before the House Financial Services Committee. He was asked by Republican Congressman Blaine Leutkemeyer about threats posed by Russia and China to the U.S. dollar’s status as world reserve currency. Powell’s response included a whopper about the dollar retaining its value.

Rep. Leutkemeyer: In the wake of Russia's unprovoked invasion of Ukraine, the Fed took action to prevent the Kremlin from accessing more than $300 billion in reserves, roughly half of Russia's reserves. However, this led to an accelerated effort by countries like China to de-dollarize their official foreign exchange reserves. Just last week there was an article in The Wall Street Journal titled Russia Turns to Yuan in an Effort to Ditch the Dollar. Are you concerned about these actions by Russia and China to establish different reserves and conduct transactions in non-U.S. dollars?

Jerome Powell: So, the U.S. dollar is the widely accepted and really the only serious candidate for the world's principal reserve currency, and that's because of our democratic institutions, our liquid markets, the rule of law, and all those kinds of things. And also, the fact that the dollar has held its value over time.

It’s a bit much for Powell to boast about the Federal Reserve note retaining its value at a time when inflation is still raging. For the past two years, the Fed has failed to achieve price stability by its own definition.

Of course, rising prices are a direct consequence of the currency losing value. Since the Fed’s creation in 1913, the U.S. dollar has lost roughly 98% of its purchasing power. Put another way, it has retained only 2% of its value over time.

Contrary to what Powell suggests, there is an alternative competing currency to the U.S. dollar that is held as a reserve asset by other countries around the world. It retains 100% of its purchasing power over time. That currency is gold.

In 1913, the gold price was fixed at $20.67 per ounce. The fact that it commands over $1,800 an ounce today isn’t indicative of the yellow metal being any more precious today than it was over a century ago. It’s a reflection of the dollars in which gold is priced becoming steadily less valuable.

Far from being a relic of the past, gold continues to play an important role in the global monetary system. In fact, central banks that are grappling with inflation and growing concerned about the sustainability of U.S. dollar hegemony are stocking up on bullion in record quantities.

The trend of de-dollarization isn’t confined to China and Russia and other U.S. adversaries. Many other countries in Europe, Asia, the Middle East, and Latin America are seeking to diversify away from U.S. dollars.

El Salvador is trying to spearhead a monetary revolution toward a Bitcoin standard by making the cryptocurrency legal tender. However, Bitcoin’s notorious volatility and relatively brief track record as a store of value makes it problematic as a potential primary reserve currency.

No digital or fiat monetary asset offers the solidity and stability of gold. In addition to foreign central banks, some individual U.S. states are also taking steps to mitigate their risk exposure to fiat cash with physical gold.

Several states are currently considering bills that prompt the establishment of a gold reserve.

With inflation ravaging state budgets (as well as family budgets), an increasing number of legislators are realizing monetary metals can provide an important hedge. Bills in Idaho, Tennessee, Maine, Missouri, and Mississippi are under consideration. In fact, the bills in Tennessee, Missouri, and Idaho have already passed out of one legislative chamber.

Far from being the only viable monetary reserve asset, King Dollar is in the process of being dethroned. It may not happen suddenly with a single action or announcement. But the growing demand for sound money among foreign central banks, states, institutions, and individuals will undoubtedly diminish the dollar’s standing while raising gold’s.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

*********