More Americans Are Realizing the Fed’s Role in Causing Higher Prices

Precious metals markets enter trading for the month of September with bulls hoping positive seasonal forces kick in.

Gold and silver markets have traded mostly lower since late spring. They did rally, though, during the second half of August.

For the week, gold prices are up 1.2% to trade at $1,950 per ounce. Silver is essentially unchanged on the week to bring spot prices to $24.47 an ounce. Platinum is picking up 1.8% since last Friday’s close to come in at $985. And finally, palladium is dipping 3.8% this week to trade at $1,271 per ounce as of this Friday morning recording.

Metals markets have been showing signs of gathering strength in recent days as expectations for an end to Federal Reserve rate hikes build.

Fed policymakers are weighing the risks of further tightening against those of letting inflation continue to run untamed.

On Thursday, the Commerce Department reported that the Fed’s preferred inflation gauge – the core Personal Consumption Expenditures price index – rose 0.2% last month. That fell in line with expectations and translates into an annual rate of 4.2%.

Official inflation readings have stabilized over the past few months but remain well above the central bank’s 2% target.

Although Chairman Jerome Powell continues to talk tough on fighting inflation, Fed watchers speculate that monetary central planners are no longer actually committed to bringing inflation down to 2%. Reportedly, some policymakers favor raising the target to 3% or even 4%.

Powell has insisted publicly that bringing inflation down to 2% is still the Fed’s objective. But his actions may prove otherwise. If he declares the Fed no longer feels the need to use its tools to fight inflation while it is still running above 4%, then the stated 2% target is just a public relations ploy.

Some investors may be lulled into complacency about inflation risk. But they can only be fooled for so long.

As the fiat Federal Reserve note continues to depreciate at an elevated pace, inflation will manifest itself in ways that cannot be denied or ignored. Investors who lack a sound inflation-protection strategy will find themselves vulnerable to suffering real losses – even on investments that generate nominal gains. Many who think they are fully hedging themselves against inflation may find out the hard way that they are not.

One example of an unsound inflation-protection strategy is to pile into so-called Treasury Inflation Protected Securities, or TIPS. They may perform better than conventional fixed-rate bonds in an environment of rising inflation, but even that isn’t guaranteed.

The actual yield on TIPS doesn’t rise automatically with inflation. Instead, the principal adjusts according to changes in the Consumer Price Index.

The biggest problem with TIPS is that the CPI tends to understate inflation – a reality that is rarely disputed anymore. Over the years, the formula for calculating the Consumer Price Index has been tinkered with for political reasons. By suppressing the CPI, the government reduces the Cost-of-Living Adjustment it has to pay out every year to pensioners, especially Social Security recipients.

In fact, if the CPI were calculated the same way today as it was in 1990, the government would have to admit to an inflation rate of over 7% -- far above the 4% it currently reports. By the older measure, the inflation rate last year was well into the teens.

Investors who are seeking yields above 7% will not find them in any securities issued by the Treasury Department. They could potentially find them in junk bonds or in stocks that pay out large dividends. But junk bonds carry a significant risk of default. And stocks carry significant market risk, including the risk that deteriorating financial conditions could force companies to reduce or eliminate dividend payments to shareholders.

Unfortunately, there is no single investment that is guaranteed to deliver inflation-beating returns every single year. But the longer the time horizon, the greater the certainty precious metals holders can have that gold will retain its purchasing power.

Take the last 100 years, for example. During that time, an ounce of gold went from $20 to $2,000 per ounce… that’s reflective of a 99% decline in the purchasing power of the Federal Reserve note versus gold.

Of course, gold and silver also have the potential not only to retain their purchasing power over time, but also dramatically grow their purchasing power during periods when market conditions are favorable for them. Rising investor interest in sound inflation-protection strategies could help create those conditions in the years ahead.

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 wonderful Labor Day weekend everybody.

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