Anyone who’s been paying attention knows that gold and silver have been stumbling a bit lately. Not badly, but once they hit August, the metals stopped surging the way they did April through July.
(I spoke about the correction in this recent update.)
Despite the slowdown, analysts and fund managers remain very positive about the future of precious metals. For those who own gold and silver as well as those still considering a purchase, that’s comforting news. But even better news comes in the form of a recent assessment of the economy’s future by a key member of the Federal Reserve. Analyst wisdom can be very useful. However, it’s difficult to dispute that a pro-gold outlook from those who actually have a hand in running the country’s economic machine is more compelling.
During a recent Brookings Institution webcast, popular Federal Reserve Governor Lael Brainard provided just such an outlook. It should be noted that Brainard mentioned neither gold nor silver even one time as she spoke. She didn’t even refer to precious metals more generally. So why am I saying that Brainard has such good news for gold and silver? Because while she didn’t mention the metals explicitly, she made clear the fundamental drivers of metals will remain in place through the foreseeable future.
Fed Governor: “Next Phase of Monetary Policy”
The shorter-term price action of gold and silver – like other assets – can be influenced by momentum and psychology as well as by fundamentals. However, when it comes to sustained price trends, the real determinants of where the metals are headed tend to be those foundational fundamentals. And on that issue, Lael Brainard has great news for those hoping the good times keep coming for gold and silver.
The purpose of Brainard’s webcast appearance was to provide a look into the future of the Fed’s monetary policy as the pandemic and its economic effects continue to evolve. And as she spoke, it became clear that the ground for precious metals will remain very fertile, even as she had nothing to say about the metals directly.
Brainard did say that “with the recovery likely to face COVID-19-related headwinds for some time, in coming months, it will be important for monetary policy to pivot from stabilization to accommodation.” She also declared that “the next phase of monetary policy” will see the Fed deliver “the requisite accommodation to achieve maximum employment and average inflation of 2 percent over time.”
In other words, the Fed will continue applying all of precious metals’ favorite monetary policy initiatives – such as quantitative easing (QE) – through at least the near term. The “pivot from stabilization to accommodation” she mentions is simply Fed-speak for “lots more of the same drastic loose-money mechanisms you’ve been seeing since the pandemic hit.”And that’s because stabilizing the economy and restoring the economy are accomplished in precisely the same manner when you’re a central bank: by going on a massive asset-buying binge.
Brainard has mentioned previouslythe Fed goals of maximum employment and a 2% average inflation rate. In an appearance at the U.S. Monetary Policy Forum back in February, Brainard suggested that interest rates should be kept at zero until those objectives are reached. In response, MarketWatch’s Greg Robb said at the time that the agenda “could leave rates near 0% for a long time. The Fed has yet to hit its 2% inflation target a decade after the 2008 financial crisis. And many economists don’t think full employment [following the financial crisis] has been reached either.”
For an influential Federal Reserve governor to speak in this manner – on multiple occasions – about the Fed agenda makes it reasonable for observers to conclude that highly accommodative monetary policy will remain the standard. Given this, it’s also reasonable to conclude that precious metals will strengthen well into the future, notwithstanding any shorter-term corrections or signs of price consolidation.
Brainard’s Fiscal Policy Expectations Also Bode Well for Gold and Silver
Brainard’s comments about the direction of monetary policy certainly are reassuring for precious metals owners hopeful that conditions will remain optimal for gold and silver. But the remarks she additionally made about fiscal policy further underscore the rosy outlook for metals.
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“While the virus remains the most important factor, the magnitude and timing of further fiscal support is a key factor for the outlook,” Brainard said. “As was true in the first phase of the crisis, fiscal support will remain essential to sustaining many families and businesses.”Brainard is telegraphing that the Fed fully expects the government to do its part by continuing to pursue the record-level deficit spending efforts already underway.
The 2008 financial crisis marked the last time the economy was placed on a years-long diet of quantitative easing and unprecedented levels of deficit spending. The result was a three-year run – from 2008 to 2011 – by gold and silver that resulted in the metals appreciating 160% and 400%, respectively. With both the Fed and the government now on pace to outdo even those Herculean efforts, it stands to reason that gold and silver are poised for potentially even bigger gains over the coming years.
Federal Reserve Governor Lael Brainard didn’t have anything to say directly about gold and silver during her recent Brookings Institution webcast. But what she said indirectly is every bit as valuable as if she had mentioned the metals overtly. By confirming that the most pro-gold monetary and fiscal policies available will remain deeply embedded in the economic landscape, Brainard has signaled to retirement savers that gold and silver should continue to be rewarding assets going forward.