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Precious Metals & The Fed
January 9, 2023

Should we expect turbulent markets?

“There is a great deal of uncertainty heading into 2023. One of the concerns is a recession, when one might arrive and occur, and how deep and long it might be. The concern of a recession is, at least in part, tied to monetary tightening by central banks around the world, which is tied to inflation.

While many of the reasons being put forth to support the ‘certainty’ of an ‘imminent’ recession are being attributed to monetary tightening, the reality is that fiscal policy and stalemated government have played an equally if not more important role in driving up inflation and hurting economic growth. Politicians are glad to let the public blame monetary authorities for the problems politicians have perpetuated on the fiscal side. These fiscal imbalances meanwhile are unlikely to be resolved anytime soon, leaving much of the burden of limiting the damage caused by fiscal policies to fall on the shoulders of the Fed.

It is broadly expected that the Fed will raise rates in another two 25-bip hikes during the first quarter 2023, and a third 25 bps hike is expected in June. Then the Fed is expected to pause hiking the federal funds rate during the third quarter of this year. But there is less clarity about what it will do after. This is due to the reality that the Fed will be reacting to economic realities as time progresses. The supply of and demand for goods and services may support further tightening in the first quarter, warrant or allow a plateauing of interest rates in the middle of the year, and then suggest modest reductions in the final quarter should the economies of the United States, Europe, and Japan weaken further and tilt toward a real recession. This uncertainty is expected to create a volatile trading environment across markets during 2023.

The median federal funds rate for 2023 at the Fed’s last Federal Open Market Committee (FOMC) meeting in December 2022 was projected to be 5.1%. The Fed says that it plans to hold rates around this level at least through 2023 or until it feels that inflation has been brought under control. Some market participants, especially gold and silver promotional entities, continue to say they are counting on the Fed reversing course sooner.

Despite the Fed saying, at its last FOMC meeting in December, that it will raise rates and keep them high, yields on 10-year bonds have moved lower than where they were in October and November of last year. This disconnect between what the Fed is saying it will do and what the market is doing and expecting from the Fed could cause further turbulence in financial markets, especially if the Fed thinks that financial conditions are getting loose and thereby offsetting the Fed’s efforts to tame inflation.

While inflation remains high, it seems to be showing signs of softening. Inflation will most likely continue to moderate. Economic growth also is likely to slow in coming quarters. While a recession can occur at any time over the course of this year, it is more likely to occur in the fourth quarter of 2023 or 2024. Interest rates meanwhile seem most likely to CPM to plateau after their initial rise during the first half of this year.

All of these factors will have countervailing implications for the precious metals markets. Real rates are likely to rise and the U.S. dollar is likely to stall out if the Fed does in fact raise rates during the first half of 2023 and then holds them steady at that level for the remainder of the year. In an environment where inflation is expected to moderate and rates raised and held steady real rates would rise, acting as a headwind to precious metals prices.

Meanwhile, the dollar, which rose strongly during 2022, is likely to stall around present levels or even decline some, given the expectation that other central banks have a lot of catching up to do especially the European Central Bank and Bank Of Japan.

The relative strength of the U.S. economy compared to these other countries and regions should provide support to the dollar and keep it from falling sharply but a lot of the Fed’s tightening already has been factored into the dollar value, providing little reason for the currency to move higher as it did last year. This could be a tailwind to precious metals prices.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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