Gold Flirts with $2,000 on Middle East Conflict, New Spending Demands

October 22, 2023

As financial markets gyrate, investors are finding safe haven in precious metals.

The stock market sold off on Thursday on interest rate fears. It’s not so much the threat of additional rate hikes by the Federal Reserve that has investors scared. It’s more the spike in longer-term bond yields.

The 10-year Treasury yield rose to a 16-year high near 5% on Thursday. The 30-year bond blew past 5.1%. And 30-year mortgages are now topping 8% -- threatening to put a freeze on the housing market.

Given the economic tightening being done by the bond market, the Fed is widely expected to stand pat on rates for the remainder of the year. However, Fed chairman Jerome Powell failed to offer much clarity about the future direction of monetary policy in his remarks this week.

Investor angst on rates along with concerns about the war in the Middle East are helping drive gold prices back up to the $2,000 level. As of this Friday morning recording, the monetary metal checks in at $1,998 an ounce on the heels of a 2.8% gain this week.

Turning to the poor man’s gold, silver is putting in a weekly advance of 3.2% to bring spot prices to $23.62 an ounce. Platinum is up 1.8% to trade at $913. And its sister metal palladium is slumping 4.6% this week to come in at $1,142 per ounce.

On Thursday, President Joe Biden told the nation he wants to spend $100 billion to help Israel and Ukraine in their war efforts. Where all that extra cash will come from, Biden didn’t bother to say. He didn’t propose spending cuts elsewhere in the federal budget to pay for the $100 billion in foreign aid. Presumably, he intends to charge it to the national credit card.

Despite the chaos in Congress with the House of Representatives still unable to get a new Speaker of the House installed, the White House will almost certainly find a political mechanism for getting the emergency funding request approved.

It’s possible that the Israeli-Palestinian conflict will de-escalate in the days ahead and cause some of the impetus for the fear trade to unwind. But there will be no unwinding of the U.S. government’s debt problem.

The headline numbers are disturbing enough -- $33 trillion in official national debt and annual deficits of over $2 trillion projected. But the Treasury department now also faces a historic jump in debt servicing costs.

The Committee for a Responsible Federal Budget is sounding the alarm. It recently reported that interest costs will surpass $800 billion this fiscal year, more than double what they were just two years ago.

If rates stay elevated and fiscal policy continues on its current path, then by 2025 debt servicing costs will exceed spending on national defense. By 2026, interest payments will be a bigger share of the federal budget than Medicare, which in turn will require more financing to keep afloat.

The pain of higher borrowing costs hasn’t yet fully hit home in Washington, D.C. But when it does, you can bet politicians will be begging the Federal Reserve to slash interest rates and boost the money supply by buying government bonds.

Given the state of federal finances and the political pressures that are likely to be brought to bear on the Fed, central bankers may never be able to get inflation back down to their 2% target.

Yes, inflation has come down from its post-pandemic peak. But investors who expect price levels to continue moderating could be in for a nasty surprise. Stock and bond values could have a lot more downward readjusting to come.

At the same time, precious metals markets have yet to fully reflect the risk of higher inflation. Gold and silver rallies were initially capped by the perception that inflation will be transitory, then by the fear that the Fed will keep raising rates.

Fed policymakers have indeed hiked rates more aggressively than they have in decades. That has been a major headwind for metals bulls.

But the level of interest rate pain that financial markets, the economy, and the government can withstand without breaking is now being tested. Jerome Powell and company don’t yet want to come out and say they are done hiking.

But as expectations build for the Fed to throw in the towel on its inflation fight, there’s a good chance the ceiling on precious metals prices will soon be lifted.

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 wonderful weekend everybody.

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Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.


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