Hot New Inflation Reading Spotlights Fed Failures

On Thursday, the Labor Department released the latest Consumer Price Index report. The CPI surged 7.5% in January from a year earlier. That exceeded most forecasts and marked a new four-decade high for consumer price increases. Brian Cheung of Yahoo Finance gives his take on the situation:

Price’s (are) rising in the United States across the board by 0.6% on a month-over-month basis. If you index it over a year-over-year period, 7.5% was the growth that we had seen in the report. That is well above the Street's estimates of 7.3% and continues to ratchet up. We've seen Joe Biden talk very frequently, lately, anytime he has the podium about the impact of inflation on Americans. That's because this is becoming a huge and already is becoming a huge political issue for him. Now, of course, all eyes are not just on the White House, in Congress where they engineer fiscal policy, from the Federal Reserve as well -- where the extraordinary monetary stimulus has obviously led to some sort of demand push that is leading to inflation that is not fading as fast as Federal Reserve officials had originally hoped or messaged in the beginning of 2021. That's going to be a very interesting story as we get to that mid-March meeting where the Fed is expected to start raising rates.

Rising prices are a reflection of a falling currency as the Federal Reserve keeps ultra-loose monetary policy in place. 

Fed officials are of course talking about tightening. They are widely expected to finally begin lifting interest rates at their March meeting.

Expectations are growing for a 50-basis point hike instead of the typical quarter of a percent hike. The Fed hasn't executed such a move since 2000.

St. Louis Federal Reserve Bank president James Bullard said he now supports raising interest rates by a full percentage point over the next three policy meetings. That would imply at least one half-percent hike.

Bond yields rose sharply on the news, while stocks gave back gains. Precious metals markets also reacted to the threat of steeper Fed rate hikes, but gold and silver managed to hang on to most of their gains from earlier in the week through Thursday’s close.

It’s possible that metals rallies will continue to be capped until the Fed does make it official and raise rates next month.

The psychology of markets is such that fear of something happening triggers selling pressure.  But when the adverse event actually occurs, traders often breathe a sigh of relief and cover their short positions.

Markets typically move before the news rather than in response to it. Today’s trading now reflects an expected 50-basis point rate hike with more hikes to follow.

Unless something totally unexpected occurs during the Fed’s next meeting, there’s no reason for investors to make drastic adjustments to their core positions.

The fundamental case for owning gold and silver is strong and will remain so after the Fed starts hiking. 

Meanwhile, the supply and demand dynamics for metals are trending positive. On Wednesday, the Silver Institute reported that it expects demand for physical silver to reach a record high of over 1.1 billion ounces this year. That would represent an 8% increase from 2021 and likely outpace any mining supply growth.

The Silver Institute cites rising industrial demand as the global economy emerges from supply chain bottlenecks. Longer-term it expects continued demand growth from green energy projects including solar panels that are being installed at a record pace.

And the kicker for the silver market is that investment demand is expected to grow even faster than industrial uses. The Silver Institute forecasts sales of silver bullion products to surge 13% higher in 2022.

We continue to see robust buying of silver coins and rounds here at Money Metals Exchange. Some who are new to precious metals investing may be confused about the difference between coins and rounds. They both have the same sizing and purity and sometimes even feature similar design elements.

The only real difference is that coins are produced by a government mint and generally have a face value, meaning they are legal tender. A round is produced by a private mint. It won't have a face value. A round isn’t legal tender in any particular government currency. 

Does the legal tender value of an American Silver Eagle, for example, make it superior to a privately minted round? The answer is, not really. The intrinsic metal value of a Silver Eagle far exceeds its face value. The face value is never likely to come into play in any conceivable sale or trade.

Coins such as American Eagles tend to have significantly higher premiums than rounds. By opting for rounds (or bars for that matter) instead of coins, you get more ounces for your money.