Precious Metals in a Rising Storm

Sean Brazney: Hello, my name is Sean Brazney, Sales Director for Monex Deposit Company. I'm here with managing member and founder of CPM Group. Of course, one of my favorite analysts out there for the commodities markets, Mr. Jeffrey Christian. Thank you for being with us today, Jeffrey.

Jeffrey Christian: Thank you, Sean, and happy New Year. Best wishes for the year.

Sean Brazney: Thank you. Happy New Year to you. We're kicking off a new year, which means that we're going to have a new report. We were in the Eye of the Storm last year, which resembled some calm sideways range trading market. This year, we're coming into 2024 with Precious Metals In A Rising Storm, which means the storm surge is headed in and we're looking forward to hopefully some volatility in the precious metals market. Of course, the need for all of your expertise, and data, and analysis in the commodities market.

I kind of want to kick off this year with two themes that I’m kind of going with today. One is liquidity and the other one is inflation. When we came through the end of last year, the Fed came out and confused the market a little bit with some language that came out in the Fed meeting, and talked about the need to potentially cut rates as early as March. When I think about inflation, I don't really see inflation coming down too far. Really looking forward to your analysis on that. It looks like it's going to be sticky and remain high. I don't think they cut in March. Maybe it's more summer to later in the year, if they do cut. Maybe the NQT, I'm not sure. Then when you think about liquidity, with QT that's been going on, quantitative tightening, of course, you think of a lack of liquidity in the markets. I'm wondering your take on both of those topics as we come into the new year.

Jeffrey Christian: It's a broad area to deal with succinctly. Let's start with inflation, because the inflation factors then flavor my views on interest rates. Look, inflation has come down over the last 18 months. Headline inflation has come down faster in recent months than has the core inflation, and therein lies our major concern about inflation. Headline has come down and overall inflation have come down, because of very large drops in oil prices, or rather the prices of petroleum products, heating oil, and gasoline, and natural gas. Those are very volatile things. They've gone, petroleum has gone from $93 down to $70 - $73 a barrel. That has helped lower overall inflation rates, and it can turn back. We don't look at oil prices skyrocketing. We don't look at inflation going back to 8% the way it was two years ago, but we do think that the rate of decline in inflation overall could slow or even stop, and you could see some increase in inflation rates, because of rising oil prices, as well as increased upward pressure on prices for services. Those are the two areas where you're still seeing a lot of inflationary pressure. Food prices have been variable, some coming down, some staying high, so that's there. So, we're looking at a modest inflation expectation. Now, that factors into our interest rate view.

The interest rate view is, we've been listening to the Fed, and the market has suffered several wrong-footed moves over the last 18 months by refusing to believe what the Fed is saying. The Fed has been saying stuff and doing what it's been saying. The Fed has said they see two or three interest rate cuts this year, if the economic environment requires it. One of the points that we keep making is, you have to understand, what scenario would see the Fed cutting rates? If the economy stays strong and inflation continues to decline, they'll probably maintain interest rates to continue to see inflation get down. If inflation gets to 2 percent, the economy is strong. Why would you cut interest rates? You might feel that you can cut interest rates, but there's no impelling reason to do it. The Fed most likely will only cut interest rates when the economic environment is significantly deteriorating. So, it's not a good thing. I mean, if we see lower interest rates, people shouldn't be like dancing on the rooftop and shooting their automatic rifles off in the air for joy. Interest rates will fall when the economy is significantly heading towards significantly worse conditions. So, that's probably the second half. So, we think that the Fed might lower interest rates two or three times, mostly in the second half of this year. March is a possibility, May is a possibility, but probably the second half of the year is most likely. The market consensus, right now, is still five or six interest rate cuts this year. The Fed has said that's unlikely. The economic environment really doesn't support that. You would have to be going into a major significant recession in the first half of this year for the Fed to cut interest rates five or six times. The last time the Fed did that was during a severe liquidity crisis in 2019, going into 2020, and you and I spoke about that before we started recording. The Fed cut interest rates. They start cutting interest rates in July of 2019, because of a severe liquidity problem.

Now, we are worried about liquidity. On the one hand, some of the excess liquidity that was pumped into the economy in 2020, 2021, is being sucked out of the economy, and that's helping control inflation or bring inflation under control, and it's not necessarily deteriorating the economy. Some of the liquidity that's being squeezed out is now potentially problematic for the economy, and it's not just the liquidity that you have to worry about, It's also the unintended consequences of financial regulations. There are a lot of regulations that are kicking in either January 1st of this year or over the next several months in banking and in finance, in brokerage houses, in commodities trading. In the United States, in Europe, in the UK, and some of those regulations, if you read them as the banks and brokers are doing, they're going to the regulators and saying, you don't understand, for me to comply with this regulation as is worded now, I have to stop lending to companies. I have to stop lending to people. So, what you're seeing is some of these regulations, their implementation is being delayed, pending review, because they could really put wrenches in the works of the economy.

So, we're kind of worried about the economy. We do still think that we'll see a recession, possibly in the second half of this year. We think that it may not be as severe of a recession as we were expecting two or three years ago, but we do think that you're going to see a significant slowing of the economy over the course of this year with a possible recession in the second half of this year in the United States and some European countries. And in that environment, the Fed will lower interest rates. It will be negative for industrial commodities like copper and it probably will be positive for silver and gold, because they are financial assets, and they are assets that people turn to when they want to protect themselves from falling stock prices, currency market volatility, interest rate volatility, and overall economic problems.

We also, just to fill up, we think that political issues, not only in the United States, but really around the world, domestic and international political issues, will also add to investors' concerns that could stimulate gold and silver investment demand, and complicate monetary authorities' efforts to try to keep the economies out of a recession. And remember, recessions generally don't get caused by monetary policy. They get caused by financial policies and supply and demand imbalances in the real economy.

Sean Brazney: That's good for our viewers. You got to rewind and watch this again. It's a lot to unpack, and man, you delivered, I think, a lot better than I teed it up, Jeffrey. So, thank you for that information. To remind our viewers, this is a new year, a new report, 2024 Precious Metals in a Rising Storm. We look forward to many more conversations with you, Jeffrey, as we move throughout the year. Thank you again for all your time.