Yesterday, Jerome Powell, Chairman of the Federal Reserve testified to the Senate Banking Committee that interest rates would need to go much higher than anticipated to quash an inflation rate that refuses to fall. This caused silver and gold to sell off on the market losing nearly 5% on the silver side, and nearly 2% on the gold side. However, when diving deeper into Fed Chair Powell’s testimony, you find that the outlook for silver and gold is not as bleak as the daily reaction we saw yesterday in response to Powell’s hawkish comments would suggest. Off the top, when you consider why the Fed is looking toward higher rates, it suggests you SHOULD hold silver and gold, not sell it off. The reason for higher rates is because inflation refuses to cease, with increased inflation being one of the main reasons citizens hold precious metals in the first place. The question then becomes: do you think the Fed will win their inflation fight?
Rather than aimlessly guessing if the Fed will be successful or not, lets use Jerome Powell’s testimony to add a little more colour to his initial comments above. First off before bringing Powell back in, it should be noted that when speaking toward the health of a country and its ability to pay back debts, the World Bank suggests that healthy countries should have a debt to GDP ratio no higher than 77%. The United States currently sits just under 125%, nearly 50% higher than the World Bank benchmark. On top of that, prior to the 2008 Great Financial Crisis, the interest payments on the U.S. National Debt was $253 billion, and declined to as low as $197 billion in 2010. When considering that over $800 billion was printed to bail out banks in 2008, one could surmise that adding $800 billion to the national debt would have increased payment totals due back to the Fed. However, due to interest rates being slammed down to zero, the increase in national debt did not equate to a higher interest payment on that debt. Furthermore, rates being held down artificially due to the 2008 crash, caused interest payments to stay below $250 billion until 2015. This has all changed now that interest rates have began to take off at record pace, but is this sustainable?
According to the Congressional Budget Office the United States government paid nearly $400 billion in interest to the Federal Reserve in 2022. Based on projected rate hikes, that number is set to swell to well over $1 trillion per year within this decade, totalling $8.1 trillion by 2032, and by 2052 interest payments would total $66 trillion equal to 40% of all federal spending. If these projections are even remotely close, how does the United States plan to afford these payments? The only answer is to increase their ability to borrow, as in a debt-based system every dollar created has interest attached, meaning to pay off debt you must go deeper into debt. However, this leads into why this latest drop in silver and gold present such an incredible buying opportunity. The reason for that is simply due to the pesky debt-ceiling cap the United States is currently dealing with. On one hand, Fed Chair Jerome Powell states that interest rates need to go higher, however, with the United States at its debt limit, they are unable to borrow more money to pay back the debt they currently owe. The only solution, raise the debt ceiling and print more currency so debts can be paid, and with ever increasing payments due to high rates, they will need to print ever increasing amounts of currency to cover those payments. Jerome Powell even said it himself in the same testimony he called for higher rates stating, “congress really needs to raise the debt ceiling…if we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse and could do long-standing harm.” In plain English, if the United States Congress does not approve more currency creation, the U.S. would default on its debt, calling into question the value of every dollar printed that was supposed to be backed by confidence in the United States. If this happens, silver and gold immediately are propelled into the spotlight as the only true forms of money, which may explain why central banks continued to add to their gold reserves through January.
In either scenario, silver and gold will see immense value increases as the United States can either raise the debt ceiling giving them the ability to service their debts, but creating massive amounts of currency (and inflation) in the process OR they can default on their debt, calling into question the value of all U.S Dollars currently in circulation; again, highly bullish for the price of gold and silver.
Those that understand the principles of money, as well as investing understand that it is advantageous to accumulate during the dips in price. 99% chase price rather than digging deeper, and will only recognize the superior value of silver and gold once it reaches new highs. When you are aware of the situation the United States is in, you quickly realize they are stuck between a rock and a hard place with no way out other than a devaluation of their currency which puts massive upward pressure on silver and gold. If you want to take advantage of the recent dip in price, and are looking to secure an asset that will preserve value long into the future, look toward our appropriately named Au Bullion ‘Real Wealth’ 1oz Silver Round that is sure to hold your purchasing power firm through any financial uncertainty that may come.