October 2022 - Week 3 Edition
Gold’s Return Just a Matter of Time
Gold rose to $1,674 early Monday on a weaker dollar, then settled back to $1,665. Silver rose more, up 2%, from $18.32 to $18.70. The U.S. Dollar Index fell 1%, from over 113 on Friday to just under 112 on Monday, due to soaring interest rates in Europe, giving the dollar no real competitive advantage on returns. Year-to-date, gold is down in U.S. dollars due to the annual gains in the dollar but the tables are turning. As rates rise in all currencies, it will temporarily hurt gold, but it will win out in the longer run.
Now, is the time to begin your gold, silver, palladium and platinum accumulation plan. So, please reach out to our professional account representatives, today.
The U.S. Treasury’s Fiscal Year 2022 Ends $1.4 Trillion in Red Ink – As Inflation Soars!
Let’s take a look at inflation, the deficits and the dollar at the end of Fiscal Year 2022 (as of September 30, 2022). First off, the federal budget deficit was “only” $1.4 trillion in FY-2022 – about half of the FY-21 deficit of $2.8 trillion. This was entirely due to the “gift” of a roaring, low-tax, high-growth economy in 2021, bouncing back from the low-interest, low-inflation lockdown in 2020 with high tax revenues.
The Congressional Budget Office estimated total tax receipts were $4.9 trillion in FY-22, a 21% increase from FY-21, with individual income taxes up 29% from FY-21. (Thank you, U.S. taxpayers!)
President Biden’s reaction was to gloat over the “greatest reduction in deficits ever,” although this is not a reduction in debt, just a slowdown in the growth of debt due to exceptionally low interest rates during the previous year. As rates continue climbing to the Fed’s desired 4% to 5% range, the service on the national debt will grow almost 10-fold from President Trump’s last year (2020) to 2025. This cost is over and above all the deficit spending in the line-item costs of old and new spending programs by Congress.
One huge additional cost in 2023 will be an 8.7% increase in Social Security and other Supplemental Income programs as a “cost of living adjustment” (COLA), also enforceable in many federal contracts.
Inflation Continues to Be “Hotter Than Expected”
Turning to inflation, both major inflation indexes came out last week and both were higher than expected. On Wednesday, we learned that the Producer Price Index (PPI) rose 0.4% in September and 8.5% in the past 12 months. The core PPI (excluding food, energy and trade margins) rose 0.4% and 5.6% in the past year. Outside of the “core” prices, food prices rose 1.2% in September and energy prices rose 0.7%.
The next day, the Consumer Price Index (CPI) delivered similarly high numbers, rising 0.4% in September and 8.2% in the past 12 months. The core CPI, excluding food and energy, rose 0.6% in September and 6.6% in the past 12 months – the highest annual core rate in 40 years (since August 1982).
Both inflation numbers were “hotter than expected” for the second month in a row, guaranteeing that the Federal Reserve will continue to raise rates above 4% by the end of this year, and maybe 5% next year.
Why the U.S. Dollar May Have Peaked – Or Will Peak Soon
As for the dollar, its strength may be waning since European rates are beginning to rise to match the U.S. dollar rates of return, giving the dollar no competitive advantage over the euro or the British pound. Last week, 10-year bond yields reached 4.80% in Italy and 4.39% in Britain. The Bank of England intervened twice within 24 hours last week to stop surging interest rates but they failed to stop the rise.
Another reason why the dollar has been strong – and may soon lose that strength – is that our debt-to-GDP ratio is 133% and rising. We are now surpassing Portugal, among the worst European creditor nations, which are, in order, Greece (207%), Italy (159%), Portugal (131%), Spain (120%) and France (116%). The worst creditor nations are Japan (257% debt-to-GDP) and China (at least 280% ratio).
In the end, the Federal Reserve and U.S. Treasury caused this problem in 2020 and 2021 by creating over $6 trillion in new “fiat” money. That newly-printed money was sent to way too many working people who did not need the money, encouraging many to leave their jobs for lucrative $ 600-per-week benefits. This money fueled a bubble in cryptocurrency, real estate, stocks and several commodities (first lumber, then EV battery components and a lot more). Now, the Fed is belatedly trying to correct its own mistakes by raising rates the fastest they have ever raised rates in history, while also taking back $95 billion per month in “quantitative tightening.”
This is a proven formula for financial disaster, beginning with an inflationary recession similar to the 1970s when gold had its best market rise. The difference today is that the federal debt was well under $1 trillion in the 1970s. Today, debt is well over $30 trillion and rising by trillions each year and we cannot afford to service this high debt.
When asked where this $6 trillion came from, U.S. Federal Reserve Chairman Jerome Powell told 60 Minutes in 2020: “We print it digitally”. No truer words were ever spoken. He might as well have said, “it’s a magic trick.”
But there’s faint hope that some discipline may be coming to Congress. In three weeks, the mid-term elections determine whether the Republicans can gain back control of the House and/or Senate. Each of the last four Presidents lost their Party’s control of Congress in the mid-term elections – Clinton in 1994, Bush in 2006, Obama in 2010 and Trump in 2018. Biden is less popular and has a narrower Party margin in Congress than those other four Presidents, so he is likely to lose control of Congress soon.
At the start of September, the betting odds were overwhelmingly in favor of the Republicans taking control of both Houses, something like 90% in the House and 70% in the Senate, but those odds had slipped some but seem to be growing, again. Don’t be complacent, get out and vote.
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