Fears of inflation remaining stubbornly high, and interest rates going higher, rattled financial markets this week.
On Wednesday, the Federal Reserve left its benchmark funds rate unchanged as expected. However, Fed chairman Jerome Powell left the door open for another hike in the near future. He also suggested rates may need to stay higher for longer than previously expected.
By Thursday, investors were fleeing from stocks and bonds. The S&P 500 broke down to a three-month low as long-term bond yields surged to their highest levels in more than a decade.
There were few places for investors to find shelter from the carnage except in precious metals markets.
Gold prices now are trading nearly flat for the week at $1,938 an ounce. Silver, meanwhile, is outperforming – up 2.3% since last Friday’s close to bring spot prices to $23.78 an ounce.
Turning to the PGMs, platinum and palladium are both essentially unchanged for the week now. Platinum currently comes in at $944 and palladium checks in at $1,287 per ounce as of this Friday morning recording.
Earlier in the week, crude oil futures ran up to a new high for the year above $92 per barrel. Oil prices pulled back following the Fed announcement. Some commodity analysts still see the potential for crude to exceed $100 per barrel before the end of the year.
Americans are feeling the pain at the pump. Motorists in some parts of California are now paying over $6.00 per gallon to fill up their gas tanks.
It’s not just an inflation problem. America is also facing a resource scarcity problem.
The Biden administration moved recently to crimp energy production out of Alaska by cancelling oil and gas leases on hundreds of thousands of acres of land, this despite the fact that top elected officials from Alaska as well as Native American groups opposed the move.
The administration has also drained America’s strategic petroleum reserve down to a multi-decade low. Despite promises to refill it, America’s oil reserves continue to remain historically low, leaving the country vulnerable in the event of an emergency.
Russia announced this week that it will ban exports of gasoline and diesel fuel to most countries, further crimping global supply chains.
Meanwhile, the U.S. continues to be dependent on China for supplies of critical metals used in electric vehicles and other technologies. The Biden administration risks increasing that dependence by threatening to impose royalties on metal producers operating under federal land leases.
The government is not able to collect royalties on minerals extracted from federal lands under a law that has been in force since 1872. But the Biden administration wants to change that. It proposes taking an 8% cut on the copper, gold, silver, and other metals extracted by miners.
At a time when the mining industry is already struggling with rapidly rising operating costs, government demands for royalties could drive some producers to operate elsewhere or significantly reduce their output.
Domestic mining and energy companies are also finding it difficult to obtain financing under new regulations that discourage banks from lending to carbon-emitting industries.
President Joe Biden claims that his policies are bringing down inflation. But restricting domestic supply of resources does the opposite. It puts upward pressure on prices.
The administration seems to believe it can work around the problem by aggressively pushing electric vehicle mandates and launching government programs aimed at transitioning the country to alternative energy. It is now launching a so-called “Climate Corps” program that will create more than 20,000 jobs for people who are supposedly going to combat climate change.
Whether they will have any measurable effect on global temperatures is in doubt. But the tens of billions of dollars they will receive in government funds will doubtlessly add to the national debt.
That debt just surpassed $33 trillion, by the way. And nobody in Washington, Republican or Democrat, seems to have any idea of how to pay it down. But servicing that debt is going to get a lot more expensive thanks to higher interest rates.
Individuals and businesses who face overwhelming debt burdens risk having their credit lines cut off if they don’t scale down their spending.
The political class in Washington feels no such urgency to get its finances in shape. That’s because it has access to a printing press. Even though the U.S. government’s credit rating was downgraded this summer, the Federal Reserve won’t hesitate to buy up Treasury bonds in unlimited quantities whenever the need arises.
Under our fiat monetary system, staving off a sovereign debt default is always possible. But it comes at a cost. That cost is paid through the inflation of the currency supply and the resulting devaluation of the currency’s value.
The risk is that given prevailing fiscal and political trends, central bankers may never be able to get inflation back down to target again.
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