Gold, Silver: The Fed’s Year Of The Hike

The Fed knows it has to taper soon, but won’t tell this blatantly. However, people started to notice. What does this mean for the precious metals?

The Talk of the Town

While I’ve been warning for months that the U.S. Federal Reserve (Fed) will likely taper its asset purchases much sooner than investors expect, the gossip has finally reverberated across the financial markets.

To explain, I wrote on Jun. 21:

With the Fed’s announcement turning the financial markets upside down, the U.S. 10-Year Treasury yield’s rollercoaster performance didn’t capture the magnitude of the move. For example, with the front-end of the U.S. yield curve becoming increasingly unhinged, the U.S. 2-Year, 3-Year, and 5-Year Treasury yields surged by more than 62%, 38% and 12% respectively following the Fed’s announcement.

Please see below:

To that point, with the Fed’s critics growing louder by the day, even its own members are sounding the alarm on inflation. Case in point: after St. Louis Fed President James Bullard told CNBC on Jun. 18 that officials saw “more inflation than we were expecting” and added that “I think it’s natural that we’ve tilted a little bit more hawkish,” he reiterated his stance on Jun. 21.

Please see below:

Source: Bloomberg

Singing a similar tune, Dallas Fed President Robert Kaplan also said on Jun. 21 that the liquidity splurge has run its course and that “the issue on the table today and in the near term is the timing and adjustment of these purchases.”

Please see below:

 Source: Bloomberg

If that wasn’t enough, former U.S. Treasury Secretary Lawrence Summers also voiced his concern that the Fed is already materially behind the inflation curve.

“Much of the consensus of professional forecasters in February was that we would have inflation just above 2% this year,” he said. “We’ve already had more inflation than that in the first five months of the year. This suggests that people should not just modify their forecasts but should think about what their errors of thinking were that led them to be so far off in their forecasts.”

Piling on the poor Fed, former U.S. Treasury Secretary Steven Mnuchin added on Jun. 21 that “there’s no question the Fed needs to go into a period of normalizing rates and normalizing the portfolio … and I do think the markets are underestimating this risk.”

And why does he believe that?

Well, for one, Bank of America’s latest Global Fund Manager Survey revealed that institutional investors are “bullishly positioned for permanent growth, transitory inflation, and a peaceful Fed taper.” Essentially, they expect a Goldilocks environment. And with that, the narrative is that inflation has already peaked.

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