Fed May Let Inflation Run Higher If Unemployment Surges | Arcadia Economics

➡Arcadia Economics talks about how the central bank might lower interest rates to prevent job losses, even if it causes inflation to rise a bit. Gold and silver prices have been going up, but banks are betting against silver, which could affect its price. The Federal Reserve still plans to cut rates three times in 2024, even though some thought it would only be twice. Lastly, there’s a chance the target for inflation might be raised from 2% to 3%.

Now, with unemployment edging up, the central bank is signaling a willingness to cut rates to head off a job cutting spiral, even if that means somewhat higher inflation for a while. Well, hello there my friends. Chris Marquis here with you for Arcadia Economics. Hope your day is off to a great start and thanks for joining me here as today we’ll take a look at some of the latest news in gold and silver, as well as one of the comments made by Jerome Powell and the Federal Reserve between their statement and press conference last week that certainly I think is worthwhile.

Being aware of. That got a little bit less attention from the coverage last week. So with that said, let us dig in and we’ll start with a quick look at gold and silver, where prices have been rallying since about 03:00 a. m. This morning. You can see here silver down to 24 70, close to $25 as I’m recording on 08:00 a. m. Tuesday here, similar picture in gold, which is up $20 and right within range of that $2,200 mark again, which it broke recently, came back in yet is pushing on that level.

And let’s take a look back. You see here we’ve had this rally that really began mid February and has left gold about 9% higher on the rally. Silver I think about 13 or 14%. So silver a little bit higher percentage wise though certainly gold getting a lot of the attention as it has taken out some new levels. And hopefully we’ll see that carry over a bit more to silver, even if silver is up a little bit on a percentage basis.

Although I know for a lot of people it doesn’t feel like it when we see gold in record territory. But one note I wanted to pass along here is that obviously we had the Fed meeting last week where the prices of gold and silver, that’s after which it hit the $2,200 mark, then came back in the following day. And what is particularly interesting about that is that if we look at the Cot report which covered up to Tuesday, the day before the Fed’s meeting, it showed that the banks were continuing to get short more so on the silver side, a little bit more mixed on gold.

But you can see this bank position in the swap dealers field added 3800 shorts, let go of 2800. We’ll call that longs and leaves them about 26,000 contracts short. And just to put that in perspective, here is our chart with the cot and this green line down here which is at 26,000 short position. You can see if you go through those dots there. That’s the lowest this has been in quite a while, in over three years.

So the most short v banks have been, obviously, you can see here when they were pretty short. This was back in February of 2022, as things were getting escalated in Ukraine, banks were very short and the price came down quite a bit. Hopefully that will not be the case this time. Although just in terms of looking at some of the patterns that we’ve seen play out throughout the metals in recent years and decades, something to be on watch for.

Similar situation in gold, maybe not as extreme, where here banks short about 178,000 contracts. And you see that they have been lower at that same time period. Back in February of 2022, banks were more short gold, although at least interesting to think about how this report again was issued on Tuesday of last week. So when prices were rallying on Wednesday, that was a loss piling up for the banks.

Not entirely surprising that the prices sold off quite a bit on Thursday. Has been quite a rally over these past couple of weeks. And I don’t know that even despite some of the dynamics playing out in the world, that there’s going to be a straight line up. So we’ll see what happens at least today. So far, prices higher, especially on the gold side, but pressure building, and we’ll see how that gets resolved.

Is it possible the shorts could get overrun? Yes. Do I think that’s the most likely outcome at this particular time? I would say not yet. Things can always change in either case, hopefully it makes people smile a little bit to see close to $2,200 gold, and we’ll see if celebration for the silver investors is on our way soon. But one note I did want to pass along, this was from metals focus.

That does the numbers for the World Silver survey that is put out by the Silver Institute. And they had a note that came out, this was last Monday, warning of downward pressure on silver could resume. Basically talking about the idea that the Fed rate cuts could be pushed out further. Now, this did come out before the Fed said that they were still forecasting three rate cuts in 2024 out of the market.

Was wondering if that would go down to two, although still penciling in three. And we’ll take a look at that as well. They mentioned growing risk of the Fed will signal a slightly more hawkish tone in the near term. As such, these factors will continue to underpin a firmer dollar. Yet also, perhaps more significantly, here you see as the investment case for both precious and industrial metals start to weaken, a good part of the recent buildup in speculative longs in the silver market could be unwound.

Meanwhile, as the near term price indicators turn bearish, tactical investors are also likely to put on fresh shorts, creating further downward pressure. That said, this pullback is likely to be temporary and limited, with the $21 to $22 range still providing good price support. So hopefully we don’t go that low. Although again, interesting that they are citing the same thing of more shorts being added, which at least historically has not gone well for the near term trajectory of the price.

But we shall see how that plays out. And in terms of the Fed news, obviously the big event last week was that summary of economic projections still showing three cuts in 2024 as opposed to two. Though another thing that got mixed in was Jerome Powell suggesting that even if inflation hasn’t gone down to their targets, that if there are issues in the labor market where we’ve seen at least the government labor report suggests that unemployment did rise from 3.

7 to 3. 9% a couple of weeks ago. And here you see as inflation surge in 2022, Fed has moved to prevent a wage hike spiral by jacking up interest rates. Now, with unemployment edging up, the central bank is signaling a willingness to cut rates to head off a job cutting spiral, even if that means somewhat higher inflation for a while, which is certainly a significant shift from what they’ve been saying where along getting inflation down was goal number one and there wasn’t really any options added on to that reminds me of what Vince Lancia has said several times in the past year.

Where do they have a problem getting inflation down to 2% and eventually say, well, maybe 2% isn’t the required target, maybe it’s 3%. So seeing a little variability there. And let’s take a quick look from drone’s press conference last week, and he mentioned this several times, but we’ll just play one of them here so you can hear how he phrased it. The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably down toward 2%.

Of course, we’re committed to both sides of our dual mandate, and an unexpected weakening in the labor market could also warrant a policy response. So there it was. I’m sure we’ll be hearing plenty more about this in the weeks and months ahead. Interesting to look at the labor numbers. Obviously discrepancies between the establishment survey, the household survey, and also ADP, which show a mixed picture. And at the same time we’re reading reports on a daily basis.

It seems like of companies that are announcing layoffs. This is all before we’ve had any fallout from the expiration of the bank term funding program, which was put in place last March to help the banks that were struggling. Now, we have New York community bancorps at a capital injection a couple of weeks ago, but running into issues in the banking sector which could accelerate. Add to that, we’re seeing the reverse repo tank drained and getting closer to its bottom.

So some of the things that could change some of those labor projections. And here, if we take a look at their summary of economic projections, I found this one really interesting because just thinking about how even despite with inflation still elevated according to some of the government metrics, obviously if you use shadow stats, it’s well elevated. But for them to say that with everything that’s going on, they’re still expecting the three rate cuts.

And then if you look in here, here are their PCE inflation numbers, which their median projection has 2. 1% down to 2%. Now, their central tendency, which as they defined here, excludes the three highest and three lowest projections for each variable in the year. So they have a case where it’s at 2% next year. And it’s not saying that it’s going down to 2% if rates stayed where they are now, but that’s factoring in a projection of 3.

4 to 4. 1%. So about 1. 6% lower than we’re at now. If you use the median point of that, which, wow, seems a little bit tricky to believe, they also have GDP still going around 2%, unemployment rate staying at 4. 1%. And in the end, if they’re looking at all of this, and whether I agree or not, they still seem to think that they’ll be able to cut rates and get inflation down.

That certainly obviously had quite an impact to the market last week, and we’ll see how that plays out. But just fascinating to see that their projections are including their inflation number coming down to 2% even in the face of not just three rate cuts this year, but a handful of them next year, and small probability of a cut priced in for the May meeting. I think it’s at 65% of a cut in June and possibility of two cuts by July.

So certainly something that will have quite an impact on the metals as well as everything that’s going on in the Fed dominated economy. And if we take a look just at some of these numbers so you can see where things stand here is the US unemployment number, which back in May of last year we were at 3. 4%, and that’s gone up to 3. 9%. So, see, there’s some variability yet a decent chunk of half a percent in just under a year.

And in terms of some of the inflation metrics, this is the one I found interesting. This is the headline CPI, and you can see that this has somewhat stabilized since last July, was at 3%. The reading for March, that came in on March, that was February’s number, though, came in at 3. 2%. And you see that at least the headline CPI has stopped going down. If you strip out food and energy for the core, you see that it’s still going down slightly here.

Back in May, we’re at 4. 8%. So core has come down. And if we take a look at the PCE index, you can see that a little bit mixed, but lower on the year. And with the core PCE, you see that one is coming down as well. So interesting that the Fed believes that these numbers, I guess your PCE doesn’t have that much further to fall at 2.

8% for the core and 2. 4% for the headline number. Yet they’re projecting that they can cut rates three times this year, three or four times next year, and get these numbers to come down to 2%. I’m not sure that I see that happening, but that is what we’ll keep an eye on. And one other note that I just wanted to pass along here is that this was a story that came out last year, although has come back into the news because there’s Reliance Industries in India, and they have been planning to commission the first phase, five gigawatt of its 20 gigawatt module manufacturing capacity by 2024, setting up a solar photovoltaic factory.

And we did have a report from Alastair McLeod that they’ve actually had trouble sourcing the metal. Now, I’ve seen estimates that for every gigawatt of energy, that’s taking about 500 to, at least in terms of solar using about 500 to 700,000oz of silver. So 20 gigawatts, you’d say that would be 1012, 14 millionoz of silver, which certainly is a lot. Now, that wouldn’t explain the number that we saw imported into India of 70 million.

Now, obviously there could be more factories like this, but in India and certainly around the globe. But we did see that 70 million ounce import number for silver going into India in February. You would imagine this would be part of it. And it was interesting what Alastair McLeod reported on his substac here, where he said the key to this activity is India. The indian government produced a solar production link scheme, Reliance Industries.

I am informed by industry sources that they are unable to source sufficient silver from refiners. Reliance has been buying what it can in silver markets, including the Comex. So again, I’m going to reach out to Alastair and see if we can get him on the show soon to get some more insight into what he’s hearing. Again, we’ll be careful of how he phrases I’m foreign by industry sources, so hopefully we can get some clarity from him on is that close to 100% accurate? Is there still some debate over the exact details there? But interesting note, if they have been unable to source sufficient silver, won’t get into all the declining inventories that we’ve seen in New York, London and China.

But if we are indeed in a deficit, as the Silver Institute suggests, which would match the declining inventories that we’ve seen, if the metal has to come from somewhere to meet that deficit, and if this is accurate, as he is hearing, then certainly interesting sign if we might be getting closer to tightness in the physical market. Again, to be clear, I think it’s a little bit early to say that inclusively, but again, hopefully we’ll catch up with Alastair soon and find out a little bit more.

So either. Oh, and one other thing. I think I had mentioned this one before, but also have in terms of solar demand. Here’s Elon Musk telling Joe Rogan that the US could be powered with 100 x 100 miles of solar, and according to him, you could actually power the entire US with solar. And he says it’s not hard and very feasible to power the entire country with solar because the sun is converting more than 4 million tons of mass to energy every second and requires no maintenance.

That thing just works. We have a giant fusion reactor in the sky, and if you can create enough energy from solar panels and store with batteries, you can have energy 24 hours a day. I don’t know how likely this is to happen, but especially with some of the energy concerns that we have, and certainly with large portion of the globe, including energy producers seemingly being cut off by the US, interesting to see that at least this, according to Elon Musk, is something that’s even possible.

And I won’t calculate this morning how much silver that would require if something like this were constructed, but perhaps just a sign that the applications and demand for solar certainly interesting out there, and we’ll see if that meets some of our needs going forward. So anyway, going to wrap up for now and in closing, did want to thank Silverviper who is our kind sponsor and brought us today’s show.

Was supposed to catch up with Steve Cope this week. Think that will be next week and we’ll look forward to getting an update on their project, their law Virginia project in Snora, Mexico. And certainly one of the things that attracted me to Steve when I first met him is his expertise and knowledge of not just silver, but the mining space and has been great getting to hear him comment on those in the interviews we’ve done.

He was part of the team that did the Belcar group, which did the orca silver, La presciosa silver gold deposit in Durango, Mexico that proved over 270,000,000oz of silver and sold to core for over 350,000,000oz. So certainly in mining where team that is running the company, probably the biggest thing that you would look to first, they do have a good team as well as a mineral resource estimate that showed a total of 49 millionoz of silver equivalent.

They are still on track to be updating that and also looking to eventually get out and do further drilling on some of their other targets later this year. So again, I think we’ll have Steve probably next week and we’ll look forward to seeing how things are coming along there. And anyway, with that said, going to wrap up for today, but hope you’re having a great afternoon out there.

Thanks for spending some time with us here and will see you again tomorrow. .

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