Gold and silver bulls attempted to start a rally last week, but prices were capped by a strengthening U.S. Dollar Index.
The buck has been advancing strongly against foreign currencies over the past month. Currency traders are encouraged by the Federal Reserve’s apparent plans to taper asset purchases and begin raising interest rates way out in 2023. Dollar buyers also seem convinced that the recent inflation spike is transitory.
That’s a huge speculative assumption on the part of anyone who holds U.S. currency. The big question investors will have to answer for themselves is whether high inflation is transitory or a strengthening U.S. dollar is transitory.
Those in the transitory inflation camp point to signs that recent price pressures are abating. For example, the spike in lumber prices this spring appears to have reversed, with lumber futures tumbling over the past few weeks.
But there is no evidence housing costs are coming down. And a labor shortage in the retail and restaurant industries continues to persist, which is putting upward pressure on wages. While good for workers in the short-term, a resulting wage-price spiral would be bad news for consumers.
It's difficult to view the skyrocketing national debt and ongoing Fed monetization of that debt as good news for the U.S. dollar long-term.
But for now, the greenback is getting a bid in the foreign exchange market. And that is helping to keep precious metals prices depressed.
Metals and commodity markets could get a boost from massive new infrastructure spending set to come out of Washington. Last Thursday, House Democrats passed a $715 billion transportation and water infrastructure bill.
Additional infrastructure spending proposals totaling over $1 trillion are coming down the pike.
The current legislation does not include any specific funding mechanisms. The costs would presumably be paid for by being added to an already record-high budget deficit.
The government is testing the willingness of creditors to continue to lend by buying its bonds at ultra-low interest rates. Normally, lenders like to have promises to pay backed up with some form of collateral—whether it's cars that can be repossessed, in the case of auto loans, homes that can be foreclosed upon in the case of mortgages, or jewelry or other valuables that are pledged in the case of pawn shop loans.
What backs up Treasury debt is the power of the printing press. That can be viewed as a feature that renders default extremely unlikely. But it also renders losses of purchasing power via inflation much more likely.
Pawn shop owner and reality TV star Rick Harrison understands the risks of losses due to default, theft, and fraud. He also appreciates the more insidious risks of inflation and the role of precious metals in providing protection.
"There's a reason my shop is called Gold & Silver. It's my two favorite things to buy. When you've been a pawn broker as long as I have, you know real gold when you see it. Once you account for inflation, an ounce some gold buys you basically the same thing today as it did back then. The value really hasn't changed, just our money's got worth a lot less. That's why they've been using gold as money for 6,000 years. And all paper money was, was a promise to pay you real money. Silver is the best conductor of electricity there is."
Rick Harrison Sr: "I've been collecting silver sun for the past 30 years. Silver and gold are a hedge against hyperinflation."
Rick Harrison: "That is the deal."
Harrison recently told Kitco News that he is having difficulty obtaining and keeping inventories of physical silver.
Rick Harrison:
"It's very hard to keep any bullion stock in stock. And the bullion we do we have, I mean, I'm selling them for like $4, $5 over spot when it comes to silver because I just can't get it right now. It's very difficult to get. I mean, just physical silver is a very hard thing to find right now. And I know a lot of people in this business and like people do retail in it. Physical delivery is very hard right now."
Kitco News: "Why? Why do you think that is?"
Rick Harrison: "Well, it's a big thing with the COVID and everything. The US government stopped making Eagles for a while there, they got really behind. So, there was a lag there and all last year there was massive physical demand. There's a lot of physical demand right now and it's just whole supply chain issues."
Supply chains for retail bullion products have been stressed for well over a year now. It’s been frustrating for dealers as well as investors. Part of the solution may be higher spot prices to incentivize more output at the top of the supply chain.
In the meantime, bargains can be had within the precious metals space after the recent price slump. Gold and silver at today’s prices are cheap relative to the risk of future currency depreciation.
Precious metals have also recently become less costly to obtain after considering taxes in states such as Ohio.
Last week, Ohio Governor Mike DeWine signed a law ending sales taxation of gold, silver, platinum, and palladium bullion and coins. The Buckeye State joins Arkansas as the two states having canceled taxation of the monetary metals so far this year.
Backed by the Sound Money Defense League, Money Metals Exchange, Campaign for Liberty, grassroots activists, and coin dealer representatives, the Ohio legislation bill restores the right of Ohio investors, savers, and small businesses to acquire precious metals without being slapped with sales and use taxes.
Including Ohio, 41 U.S. states now fully or partially exempt gold and silver from state sales taxes.
That leaves nine states—Vermont, New Jersey, Maine, Tennessee, Kentucky, Wisconsin, New Mexico, Mississippi, and Hawaii—and the District of Columbia as jurisdictions that still harshly penalize citizens acquiring the monetary metals to protect their savings against the serial devaluation of the Federal Reserve Note.
Of those remaining nine states, Hawaii, Maine, Mississippi, New Jersey, Tennessee, and Wisconsin have recently considered measures to remove the sales tax in their states.
To be sure, the nine states that still fully tax the monetary metals are increasingly embarrassing themselves, because the national tide has turned decisively against this foolish and unjust practice.