Are these winds of a rising storm?

“Markets have been extremely volatile in recent weeks, and this is expected to continue as the year progresses. There is a great deal of uncertainty in the markets regarding the direction of the global economy as well as the political landscape; this uncertainty and confusion is likely to see an uptick in the coming months.

On the economic side, the data have been mixed with some data suggesting ongoing strength while other data suggesting a loss in economic growth momentum. August was a strong example of such mixed data, where the July U.S. jobs report came in weaker than expected and was followed by other data like retail sales and inflation that suggested healthy economic conditions. Such a stream of seemingly conflicting data is expected to continue, which in turn will extend the current tendency of financial market sentiments flipping and flopping with every new data point.

The Fed gave its clearest signal yet, at the Jackson Hole Summit, of an interest rate cut at its September meeting. While this provides some clarity to the markets, there is now confusion over how many times the Fed will cut rates. Meanwhile, the Fed’s August 2024 The Beige Book outlined signs of weakening economic activity across a wide swath of the United States. U.S. employment data for August also suggested an ongoing weakening in economic conditions.

Economic uncertainty is not tied only to central bank monetary policy around the world but also to supply constraints relative to demand for goods and services, slowing demand, and political uncertainty, as stated several times in previous CPM reports. The U.S. presidential election will be held on 5 November and given the size of the U.S. economy, uncertainty around the election’s outcome is sure to keep markets unsettled in the interim. Who wins the election will have important implications for various precious metals, whether it be trade restrictions and its impact on inflation or changes in green energy policies, which could positively or negatively affect fabrication demand for silver, platinum, and palladium, depending on what the policies look like under the next administration.

In addition to this election related uncertainty, is the uncertainty, as mentioned before, regarding the Fed’s interest rate trajectory. Historically, the Fed has cut rates at least three times when it has embarked on a loosening cycle. That does not necessarily mean that is the number of times they will cut this time around. Additionally, it is not only about the number of times they cut rates but also about the timing of such cuts and whether they may cut more than their typical 25 basis points during any one of the meetings. The expectations of all these factors will keep changing as new data become available. If the data remain mixed, it could add to volatility in the markets, as has been the case of late. If the data suggest a net positive economic picture, gold and silver could see some reduction in their safe haven appeal, with the opposite being true if economic data projects a net negative economic image.

The reality is that the U.S. economy is at that vertex where inflation still is unacceptably high but economic expansion is maturing, slowing, somewhat – enough to be worrisome to policy makers, companies, consumers, and investors.

Thus, the Fed finds itself at a crossroads, an intersection, with two economic vehicles – real growth and inflation – competing for the Fed’s attention.

CPM has repeatedly stated two key points about interest rates. The Fed pays attention to the real economy. The Fed would not lower interest rates until it was clearly much more concerned about the prospects of a recession.

Independent of economic conditions, political risk will continue to be a supportive factor. It already has played the primary role in driving gold prices to fresh record levels over the past few years and is expected to remain a supportive factor going forward. While the U.S. election and its outcome are important contributing factors to this political risk premium, the political risk is not limited to the United States but is a widespread issue globally, both on a domestic level as well as internationally.”