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Audio: Fed Postures as States Grow Alarmed at Currency Debasement | February 3rd, 2023

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

As the Federal Reserve winds down its rate hiking campaign, precious metals bulls are anticipating a favorable environment for gains ahead.

On Wednesday, Fed policymakers raised their benchmark rate by just a quarter point. Chairman Jerome Powell also delivered remarks widely interpreted by markets as dovish. He suggested the Fed was close to declaring victory over inflation.

Powell also claimed that disinflation is now taking hold. After getting his inflation forecast wrong for two years by insisting it would be “transitory,” he is now trying to take credit for predicting the supposed trend of disinflation.

Jerome Powell: The committee decided to raise interest rates by 25 basis points today, continuing the step down from last year's rapid pace of increases. Shifting to a slower pace will better allow the committee to assess the economy's progress toward our goals. We can now say, I think, for the first time that the disinflationary process has started. We can see that, and we see it really in goods prices so far. Goods prices is a big sector. This is what we've thought would happen since the very beginning, and now here it is actually happening, and there are many different forecasts, but generally it's a forecast of slower growth, some softening in labor market conditions, and inflation moving down steadily, but not quickly.

Despite somewhat of a pullback here the last couple of days, precious metals markets aren’t necessarily reflecting disinflation. They have been on the rise over the past few months on the whole, playing catch up with the broader inflation pressures that have been building since 2020.

And government deficit spending, one of the primary drivers of new currency creation, isn't about to start dis-inflating. Although technically the government's borrowing capacity has run into a statutory ceiling, bureaucratic work-arounds by the Treasury Department ensure Uncle Sam won't have to tighten his belt.

President Joe Biden met with House GOP leader Kevin McCarthy this week to discuss formally raising the debt limit. No deal has been reached yet.

Some in the mainstream media are hyping the debt showdown as potentially triggering a catastrophic default.

But the bond market, which possesses much more accumulated wisdom than journalists and pundits, is currently reflecting a 0% chance of default and a 100% chance that the government will borrow more currency into existence in order to pay its bills.

The bottom line is that there will be no disinflation of the currency supply.

Jerome Powell may be partially correct, however, in forecasting price pressures to ease in certain areas of the economy as it softens. We are currently seeing home prices and car prices come down. We could also see downside pressure come to bear on economically sensitive commodities.

The Fed's focus is shifting from fighting inflation to trying to engineer a soft landing for the economy. As a consequence, expectations are growing for central bankers to end their tightening campaign soon and possibly pivot to rate cuts later in the year.

That could be a formula for further declines in the Federal Reserve note “dollar.” The Dollar Index dipped to a 9-month low on Wednesday although it is rallying here on Friday.

Gold, meanwhile, rose to a 9-month high of $1,950 an ounce before giving back some of those gains on Thursday and again here today. As of this Friday recording, the monetary metal trades at $1,871 for a weekly loss of 3.3%.

Turning to the white metals, silver is off big here today and is down 5.3% for the week now to bring spot prices to $22.53 an ounce. Platinum shows a weekly decline of 3.9% to trade at $992. And finally, palladium is unchanged since last Friday’s close to come in at $1,674 per ounce.

Precious metals markets often move in the opposite direction of the economic cycle and of conventional financial assets.

Gold and silver prices lagged as broader inflation pressures hit the economy in 2021 and into the first half of 2022. The metals are now showing signs of outperforming.

That outperformance could persist as the Federal Reserve continues to shift its policy stance away from inflation fighting and toward bailing the economy out of recession.

In other news, the Wyoming State Senate this week passed a bill prompting the treasurer to hold gold and silver “specie.” The bill also establishes a process to receive certain tax payments in specie.

Introduced by Senator Bob Ide, the bill amends and further implements the Wyoming Legal Tender Act, a popular 2018 law that had removed all tax liability from gold and silver transactions and affirmed that the monetary metals are legal tender in Wyoming.

The Wyoming state treasurer would have the authority to deal directly in constitutional money. That includes receiving certain tax payments in gold and holding gold as an asset to help the Cowboy State hedge against its high exposure to Federal Reserve note dollars. The state could also invest in precious metals leases and bonds.

Here are some of the arguments made in favor of gold on the floor of the Wyoming Senate this week:

Senate Reading Clerk: Senate File 101, Wyoming Legal Tender Act Amendments sponsored by Senator Ide, an Act relating to the Wyoming Legal Tender Act.

Senate President Ogden Driscoll: Senator Case.

Senator Cale Case: Thank you very much, Mr. President. I'd like just to think about this a little bit, Mr. President. The Boy Scout motto was, always be prepared. And I think this is a bill about preparation, and it's a bill that's thinking about preparing for a time when our currency might be worthless.

Senator Larry Hicks: Gold was the currency that was recognized around every world. All the countries printed their currency. It was the gold standard and it was an international gold standard, and then we talk about the volatility of gold. And then the 1930s come along, and the Federal government abolished the ability of private citizens to own gold. You know why Mr. President? Because the U.S. currency collapsed, the Great Depression. And so we confiscated, we actually made it illegal to own gold in this country, because the U.S. dollar wasn't worth anything.

So that went on, and then we got to 1971, and still the gold standard was on the books, Mr. Chairman, but we had a presidential order, because the dollar was pegged to the value of gold, even though they confiscated it, made it illegal to own it. We were still on the gold standard technically.

And the reason that the president at the time got rid of the gold standard, is because it was pegged to the value of gold. And we could not print money and spend money, because it was pegged to the value of gold. Mr. Chairman, I don't think we're going to see people overwhelming the treasurer's office for the very reasons that my friend said. It's because most people are going to hold it, because of the U.S. dollar's more likely to collapse than the value of gold. It just recognizes a longstanding tradition that they'd be able to do transactions with gold and silver. Thank you, Mr. President.

Senator Bob Ide: There's not a whole lot of downside in protecting against inflation with gold. The dollar, since the Federal Reserve came into existence in 1913, the dollar's lost, you see a lot of different numbers, 96 to 98% of its value. And it's the story I gave you earlier in general file was, if you had a one-ounce coin, you could buy a good suit. It was worth $20 back a 100 years ago. And today, you can still buy that. Over time, gold retains its value.

After the amendments to the Legal Tender Act narrowly passed the Senate, the legislation now heads to the Wyoming House for further consideration.

Since 2018, Wyoming has established itself as a leader on sound money issues. It earned a first-place finish in the 2023 Sound Money Index.

Several other states are considering their own sound money bills right now, including Alaska, Missouri, Mississippi, South Carolina, Idaho, Minnesota, West Virginia, Kentucky, and Tennessee. We’ll be sure to update you on notable developments in this extremely important policy area. Members of Money Metals’ staff are actively engaging with legislators in every one of the states I mentioned, and there promises to be a lot of action in the coming weeks.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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