The Consumer Price Index Report released on Friday sent financial markets into a panic. The annual rate of 8.6% was a new multi-decade high, delivering a body blow to economists who thought inflation expectations had ended. Investors now believe the Federal Reserve will have to tighten policy even more aggressively. Both bonds and stocks were down at the end of last week’s trade.
The precious metals markets, on the other hand, improved. On Friday, gold recovered, while silver, which had been behind of late, managed to make a tiny gain. The price action in the mining sector was far more impressive (and perhaps more revealing). First Majestic (AG), Pan American Silver (PAAS), and Hecla Mining (HL) were the top silver producers on Friday, with gains of 6.6 percent, 5.9 percent, and 7.4 percent, respectively. The precious metals sector, which includes mining stocks as proxies for gold and silver, is proving to be a safe haven for investors. Naturally, no mining business or exchange-traded commodity based on precious metals spot prices can replace the genuine thing.
Physical bullion demand has remained high in recent months, and it could skyrocket amid the next bout of financial market volatility. As the Fed raises rates in the face of a deteriorating societal mood, the probability of a stock market catastrophe rises. Consumer confidence has reached an all-time low, according to the latest University of Michigan Consumer Survey. President Joe Biden’s approval ratings have also dropped.
The economy is in serious jeopardy as a result of a number of issues. Inflationary pressures are the most pressing of them. The CPI number of 8.6% does not reflect the entire scope of the inflation situation. Through substitutes, hedonic adjustments, and other gimmicks, the CPI understates housing, energy, and food expenses. The Everyday Price Index is published by the American Institute for Economic Research. Through the first five months of 2022, this alternative inflation gauge increased at an annualized rate of 20.6 percent, owing to rising gasoline expenses.
The Everyday Price Index is increasing 12.8 percent year over year, the fastest annual rate ever. “Sustained elevated price increases are likely distorting economic activity by influencing consumer and business decisions,” according to the American Institute for Economic Research. “Furthermore, price pressures have resulted in a new Fed tightening cycle, raising the risk of a policy mistake.” Since Fed officials have been wrong every step of the way in diagnosing the inflation problem, their attempts to cure it will likely fail as well. They were too late to act. Now the tough medicine they are trying to deliver could cause financial markets to convulse.
Risks to precious metals markets exist as well during periods of heightened volatility. However, the opportunities for stagflation-driven gains in the months and years ahead make gold and silver attractive as core safe havens from vulnerable stock and bond markets.
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