With the markets already starting to react to the Fed’s tapering and interest rake hike policies for 2022, we believe the markets are setting up for three possible scenarios, which we will highlight below and their potential effects on the precious metals.
1. Fed Stays True, And Indexes Continue Unchecked
Under this scenario, the taper that is currently in progress finishes in March 2022, and a minimum of three rate hikes are introduced. This is the narrative of the Fed as we stand here today.
Let’s assume that the markets do not react and either move sideways or continue the record-breaking bull run. Under this scenario, the would strengthen in the background, and real rates would begin to close the gap, potentially weakening and .
We see this as the least likely scenario as we do not believe the markets will react positively, nor see cooling due to interest rate hikes. It is also worth noting that yields were way above current levels in 2011 when gold and silver hit their previous decade highs.
2. Fed Changes Policy
Under this scenario, the Fed will instigate tapering and potentially raise interest rates to test the markets and see how they react.
The likely outcome is the markets enter a bear trend, and Fed reacts by leaving rates unchanged in the hope the markets can recover.
Gold and silver will likely struggle initially, but a change in Fed policy would send them higher.
3. Fed Reverses Policy Changes
For this scenario to play out, a combination of both of the above could occur, or the Fed could see the markets enter a bear trend by the time the tapering has completed and panic.
At this point (potentially pre Q2), The Fed would reintroduce QE. This would lead to the dollar tumbling like it did post Lehman collapse and following March 2020 when rates were cut, and QE introduced again.
This scenario would effectively see the markets saved and gold and silver rise dramatically under a further expansion of the Fed’s balance sheet. We see this scenario as the most likely, and the reasoning is simple.
The markets are so highly leveraged on cheap artificial debt that it would be almost impossible for them not to collapse following rising interest rates. What is also almost certain is the markets know they will be saved. They are too big to collapse.
The Decade Ahead
For years since the financial collapse of 2008 triggered accommodative monetary policies across the world, the debt bubble has risen and risen.
During these times, Wall Street executives have brazenly hit risky assets and financial instruments, privatizing the massive profits and expecting any significant losses to be socialized by the US government.
So, where does it end? Our Scenario 3 sees no change to this as it’s the only way the Fed knows.
Let’s also not forget, if the bond market was to go south, then the Fed has no choice, as it is ten times the size of the stock market.
And you must ask yourself: with 7% inflation, who in their right mind wants a yield of 1.7%? And where does this near $29 Trillion debt go?
All the fundamentals point to a decade-long inflationary period where assets are the things to own and cannot be exchanged with derivatives.
The world has to deleverage, and ending reckless paper derivative markets is the first step.
With a run towards physical, tangible assets, supply and demand will finally play a massive role in determining price, not paper futures markets.
If you are bartering to get your hands on gold and silver during this period, just like the Fed with its monetary policy, you are too late.
We still firmly believe gold and silver have a long, long way to run higher over the coming years, and the coming months will paint the picture of their future.