Volatility Increases as Markets Worry about Higher Rates

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Gold and silver markets gyrated up and down following the Federal Reserve’s policy meeting on Wednesday.

Fed chairman Jay Powell recommitted to keeping the central bank’s benchmark funds rate near zero. This, even as surging bond yields seem to be sending a market signal that rates need to move higher across the board.

Fed policymakers are insisting they won’t hike rates at all this year and most likely not in 2022, either. Powell vowed that accommodative monetary policy will remain in force until the Fed sees official inflation rates persist above 2% over an unspecified period of time – likely well into 2023.

Jerome Powell: With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to 0.25% target range for the Federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. I would note that a transitory rise in inflation above 2%, as seems likely to occur this year, would not meet this standard. The median inflation projection of FOMC participants is 2.4% this year and declines to 2% next year before moving back up by the end of 2023.

Investors received Powell’s comments as dovish. But he offered up no specific program to tame the bond market. Bond yields continued to rise on Thursday, triggering something of a breaking point for some stocks and commodities.

The Nasdaq sold off hard yesterday, as did crude oil and other raw materials. Precious metals markets, meanwhile, held up relatively better.

As of this Friday morning recording, the gold market is posting a weekly gain of 0.5% to bring spot prices to $1,743 an ounce. Silver is up 0.7% since last Friday’s close to trade at $26.29 per ounce. Platinum checks in at $1,200 and is down by 1.5% so far this week. And finally, palladium is powering up with an 11.1% surge for the week to command $2,674 per ounce.

The impressive move in palladium represents a breakout from a trading range that had been in force for several months. A new all-time high is likely just ahead.

Will gold and silver markets follow palladium’s lead? Or will they succumb to pressure from rising rates and a breakdown in crude oil and other commodities?

Technically, gold remains oversold and has plenty of room to rally if a flight from equities triggers safe-haven buying. The other trigger which may coincide with a gold rally is a relief rally in the bond market.

Treasury bonds have suffered their worst drawdown in years. And while Treasuries may continue to be a poor investment long term, there is too much at stake for too many powerful invertors to let yields continue spiking.

After all, the government’s debt management strategy depends on being able to issue trillions of dollars in bonds at negative real rates – a strategy that also happens to be a primary driver of higher gold prices.

As for silver, it has the potential to soon break out above its 50-day moving average. It ran into resistance there multiple times this week. Once that line is broken, silver could “do a palladium” and quickly race up to the $30 level and beyond.

Yes, a silver squeeze could still play out. The idea of forcing the large institutional short sellers in the silver futures market to capitulate remains a hot topic on some corners of the internet.

But silver and hard assets in general continue to be overshadowed by internet-fueled crazes in stocks such as GameStop and cryptocurrencies such as Bitcoin.

The latest speculative buying frenzy is occurring via a new blockchain vehicle for trading digital assets. They’re called non-fungible tokens, or NFTs.

NFTs are essentially digital collectibles – art, video clips, tweets, and the like. The strange thing is that some are selling for millions of dollars despite conferring no actual intellectual property rights. They are literally just tokens linked to various digital creations.

The NFT craze is certainly a sign of the times. So much newly created cash is sloshing around that assets are being invented out of nothing for it to buy. And so many people live so much of their lives online that they seem to have lost the ability to distinguish a real asset from a virtual asset.

But perhaps some are learning or re-learning basic lessons in economics – such as what a fungible asset is.

Fungibility refers to being interchangeable and divisible in any amount. For example, gold is said to be fungible since any troy ounce of the precious metal carries the same value as any other troy ounce.

Generally, any gold bullion bar regardless of its mint mark will be worth the same as any other bullion bar of the same size.

Coins such as American Eagles can be worth a bit more than other coins or rounds of the same size. But the gold content itself is fungible and still determines the bulk of any bullion coin’s value.

Coins with historic or collectible properties that can be valued more highly than the actual metal content are non-fungible. Their value is individually unique depending upon subjective numismatic criteria such as condition.

Non-fungible numismatic coins tend to carry large bid/ask spreads. And it can be difficult to know whether you’re getting a fair price when buying or selling. These specialty products often attract scam artists who aim to profit from deception.

Owning fungible gold and silver bullion gives you liquidity similar to cash since precious metals are widely recognized and traded everywhere in the world. And their value will endure long after any online fads have fizzled.

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.

      

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