Investors Grow Extremely Nervous Over Coming Rate Hikes

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

Another hotter than expected inflation report jolted markets this week.

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:

Brian Cheung: 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. The U.S. dollar is rapidly losing value 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.

As of this Friday recording, gold prices check in at $1,841 an ounce – up 2.4% since last Friday’s close. The silver market shows a weekly gain of 3.2% to bring spot prices to $23.29 per ounce. Platinum is essentially unchanged for the week to trade at $1,024. And finally, palladium prices are down 7.6% this week to come in at $2,227 per ounce.

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. With inflation now running at 7.5% officially, the central bank would have to initiate 15 rate hikes of 50 basis points each in order to get out in front of it. There’s no chance that will happen!

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.

In other news, Money Metals is moving forward aggressively in about a dozen states to promote sound money policies, including repeal of unjust sales and income taxes on gold and silver.

Sound Money Defense League director Jp Cortez travelled to Nashville, Tennessee this week to testify in a state house committee hearing in support of sales tax repeal legislation pending there. Take a quick listen…

Chairman Hicks, members of the Finance, Ways, and Means House Subcommittee, thank you for the opportunity to testify before you today.

My name is Jp Cortez and I am the policy director for the Sound Money Defense League. I ask you to please vote YES on House Bill 1874, a measure that removes sales taxation from gold and silver coins and bullion.

Just two months ago the Tennessee Advisory Commission on Intergovernmental Relations released a report on the feasibility of creating a state gold depository.

While the report concluded that a bullion depository would not be feasible in Tennessee at this time, TACIR pointedly concluded that the state should consider a sales tax exemption from precious metals coins and bullion.

There is a national trend to remove sales taxation from precious metals. According to TACIR’s report, 42 states have already done so in whole or in part. Mississippi, Hawaii, Kentucky, and New Jersey are expected to consider measures to remove sales taxation from precious metals in the upcoming weeks.

Tennessee has considered measures similar to House Bill 1874 for seven years. While it has failed so far to pass this commonsense measure, six other states have ended the practice of taxing precious metals over the same amount of time. (WV, OH, LA, NC, KS, AR)

Under current law, Tennessee citizens are discouraged from insuring their savings against the devaluation of the dollar because they are penalized with taxation for doing so. House Bill 1874 removes the disincentives to holding gold and silver for this purpose. Here are a few reasons why I strongly urge you to vote YES on House Bill 1874:

-Taxing gold and silver is a de facto investment penalty on Tennessee citizens (usually of humble means) who seek to hold some of their savings in real assets that are insulated from inflation and financial turmoil. It’s also discriminatory, because purchases of stocks, bonds, mutual funds, ETFs, real estate, and every other financial instrument are not subject to sales tax.

From the TACIR Report:  “Anyone buying and storing precious metals in Tennessee owes Tennessee’s sales tax, and state and local rates combined can be as high as 9.75%”

-Purchasers of precious metals are not “consuming” them, making a sales tax and/or use tax inappropriate in the first place. Precious metals purchasers are holding these metals for resale or exchange, like a currency or investment.

The exchange of one dollar for four quarters is a nontaxable event. Exchanging dollars for the only form of money mentioned in the U.S. Constitution should not be taxed.

Taxing the purchase of monetary metals also undermines Tennessee businesses (and reduce Tennessee state revenues). Many Tennesseans will buy and/or store their precious metals in nearby Alabama, Georgia, Missouri, North Carolina, and Virginia, which do not charge sales tax on precious metals. 

Studies have shown that states actually lose revenue when they tax the purchase of gold and silver. Washington and Nebraska considered repealing longstanding exemptions on precious metals in their states but legislators realized the major policy error this would entail and the measure didn’t make it out of committee in either state.

Louisiana and Ohio both briefly imposed a sales tax on precious metals recently – but the legislatures in both states quickly reversed course after one year when businesses, coin conventions, and state revenues left the state.

That’s why any revenue collected from precious metals sales taxes would almost certainly be surpassed by the tax revenue lost from coin conventions, businesses, and other economic activity leaving the state.

By voting yes on House Bill 1874, you will be following an example set by 42 other states which have already reduced or eliminated sales taxes on precious metals, honoring the only form of money mentioned in the U.S. Constitution, and lowering the tax burden on your constituents.

Jp Cortez and his team have been hard at work advocating for these important policies. Please keep your eyes peeled for Money Metals email action alerts regarding sound money legislation that may be pending your own state. We can tell you with certainty that your calls and emails to lawmakers really do make a difference!

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 g