What Could The Fed’s Actions Do for Metals Prices?
Federal Reserve Action To Propel Gold And Silver Prices
The Meeting of the Central Bankers at Jackson Hole has just concluded with the main item of interest being the speech made by The Chairman of Federal Reserve, Jay Powell. A major policy shift was the theme in that the U.S. Central Bank was to allow “average inflation targeting.” Roughly interpreted means the Fed will allow inflation to run “moderately” higher than the central bank’s stated goal of 2% “for some time”
This is a vague statement and begs the question of how much higher is inflation acceptable? 3% or 8% and for how long is “for some time” two months or three years? The Federal Reserve has no real targets and therefore can not be held accountable for their actions as this policy is opened ended to say the least. The takeaway from this Jackson Hole Jolly is that inflation is coming and that it will be supportive of gold and silver and their associated stocks.
A Brief Look At Some Of The Current Issues
As we see it there are two major issues, firstly we are heading into a recession which is long overdue, and it will present its own set of challenges for us all to face and deal with. The second issue is that the global economy is being battered by the Coronavirus pandemic. In an attempt to lessen the impact of the recession and also to battle the pandemic record amounts of cash is being generated in order to cushion these two body blows. This flood of cash is already having an impact on the US Dollar, it has been in decline for the last 5 months or so. Over a 12-month period it has increased in value from $1400/Oz to $1932/Oz registering an increase of some 38%, which is a terrific start for a Bull Market. Gold had managed to trade as high as $1700/Oz before being hit by the pandemic in March 2020, however, it recovered quickly and has continued its trek to higher ground.
Also worthy of note is that from March the US Dollar started to head south and gold started to head north suggesting that their inverse relationship remains intact. The days of The Central Bank targeting the ‘normalization’ of interest rates are dead and buried. Interest rates are now expected to stay low for the foreseeable future and coupled with more Quantitative Easing we expect the US Dollar to decline even further in value. This decline in value along with the misery amount of interest on offer for our investment funds will cause investors to rotate out of currencies and into the field of hard assets, one of which is the precious metals sector.
The Federal Reserve will continue to implement a policy of financial support via the mass production of Dollar Bills. This will dilute the value of the US Dollar and as gold has an inverse relationship to it, gold will be the beneficiary. A similar policy is also being implemented by other central banks so the US Dollar may find support as foreign investors flee from their currencies in the belief that the US Dollar is a safer place for their funds. I remain firmly in the camp that these dips should be bought aggressively as this bull market is in its infancy.