Elevated inflation and stock market turbulence continue to hurt investors. Some are hoping for a quick turnaround. Others are just looking for a hiding place.
Unfortunately, outside of energy and gold, there were virtually no safe havens from the broader carnage.
Gold has been one of the best performing assets this year as it has held up better than stocks, bonds and cryptos. But the yellow metal came under heavy selling pressure in futures markets this week.
Metals markets appear to be trading more in line with fears of an economic slowdown and Wall Street margin calls than inflation. That’s likely to change if the recent spate of panic selling triggers subsidies.
But volatility is sure to continue. In a stagflationary environment, markets can collapse when fears of stagnation prevail and bounce back just as dramatically on inflationary pressures.
Gasoline prices hit another new high this week as fears of food shortages continue to push up food costs.
Wednesday’s consumer price index showed that the rate of cost inflation fell slightly in April from the previous month. But the CPI was still higher than expected at 8.3%.
According to a report by CBS News, supply problems will persist even as Federal Reserve rate hikes force consumers and businesses to cut spending.
CBS Newscaster: The pace of inflation eased slightly for the first time in months, the Labor Department says the CPI rose 8.3% year-on-year in April, actually down 0.2% from March.
CBS News Reporter: But the President blamed the war in Ukraine for tightening grain supplies and driving up food prices around the world.
President Joe Biden: Putin’s war has cut off important food sources.
CBS News Reporter: In grocery stores, prices for meat, poultry, fish and eggs are up more than 14% year-on-year. citrus fruits, almost 19%.
Market Commentator: Much of this inflation that we are witnessing has its roots on the supply side rather than the demand side. The Federal Reserve is raising interest rates to slow the economy, that will address the demand side, but it won’t fix the supply chain, it won’t broker peace in Eastern Europe and it won’t open the ports in China.
CBS News Reporter: And until we see movement on those fronts, the high prices are likely to continue. Many economists are now predicting that this high inflation will be with us into next year.
Rising gasoline prices aren’t hitting the typical family’s budget as hard as higher housing and healthcare costs. But high gas prices are a major political drain on the party in power. Joe Biden and the Democrats are scrambling to deflect blame and offer voters price relief.
The political pose probably won’t work. Even with the release of strategic reserves, oil will remain undersupplied for months to come. And the Biden administration’s cancellation of new oil and gas well leases will stifle domestic production for years to come.
Perhaps the administration sees some kind of solution in reducing demand. Locking down the country again because of a new virus variant would be enough. It’s also possible that Fed rate hikes could push the economy into a deep recession, causing demand to collapse.
But it’s hard to imagine any of those scenarios will boost Democrat fortunes this fall.
Recent polls suggest the political landscape could shift dramatically in favor of Republicans after November’s midterm elections. This has huge implications for investors in general and potentially for precious metal holders in particular.
On Tuesday, the Republican primary in West Virginia pitted two incumbents against each other for a newly drawn congressional district. One candidate had the support of the establishment, including Democratic state Senator Joe Manchin. The other had the support of Donald Trump and grassroots activists, including sound money advocates.
In the end, West Virginia Republicans handed pro-solid money candidate Alex Mooney a resounding victory. Rep. Mooney is one of the leading voices in Congress for reviewing the Federal Reserve and reducing its powers.
He has urged Treasury Secretary Janet Yellen to clarify the government’s ongoing intervention in the gold market. And he has introduced legislation that would eliminate discriminatory capital gains taxes on gold and silver bullion and require a full audit of US gold reserves.
Congressman Mooney will obviously need many more allies in Congress – and ultimately a more liberal White House – to push through these solid monetary reforms. But with millions of voters angry about inflation, smart politicians will acknowledge the root cause of the problem and propose real solutions to it.
At the root of the inflation problem is excessive government spending, which drives excessive currency creation by the Federal Reserve.
No one seemed to mind inflation as it was channeled into financial assets and inflated profits on Wall Street. But now that it’s hitting the real economy, it’s a real problem for everyone.
As more and more investors seek protection from rising price levels and unstable financial markets, inflation will eventually be reflected in the precious metals markets. The cycle of inflation that hit financial assets first and then the real economy will not be over until solid money as the ultimate solution has its moment to shine.