Gold and Silver market dynamics: CPI and Fed policy analysis

Mike Maharrey interviews Greg Weldon, CEO of Weldon Financial, on the latest economic data and its implications for gold and silver investors.

Introduction

In this episode of the Money Metals Exchange podcast, host Mike Maharrey speaks with Greg Weldon, CEO of Weldon Financial.

Weldon is known for his in-depth financial analysis and publications, including the Global Macro Strategy report and the Gold Guru report. Greg Weldon's extensive experience, authoritative publications, and active involvement in market analysis and managed futures trading make him a respected figure in the financial industry. His insights are highly valued by those looking to understand and capitalize on market movements, particularly in the realms of macroeconomic strategy, commodities, and precious metals.

Together, Maharrey and Weldon dissect the recent economic data and Federal Reserve actions, offering insights for investors in precious metals.

Headline economic data

The discussion begins with two significant reports released the previous day: the Consumer Price Index (CPI) and the Federal Open Market Committee (FOMC) meeting.

Maharrey notes the seemingly conflicting nature of the reports—a dovish CPI report indicating cooler-than-expected inflation and a hawkish Fed report maintaining a restrictive stance.

Weldon emphasizes the polarized nature of economic data, which often provides fodder for both monetary hawks and doves.

Employment report analysis

Weldon critiques the recent employment report, highlighting discrepancies between the headline numbers and underlying data. While the headline suggested a strong job market, a deeper analysis reveals a rise in unemployment and a significant number of people dropping out of the labor force.

Weldon argues that these details indicate a softening labor market, contrary to the optimistic headline figures.

CPI report insights

The CPI report showed a zero monthly change, driven primarily by a drop in gasoline prices.

However, Weldon points out that energy prices are rebounding, which could lead to higher inflation in the future. He also notes that food prices are increasing again, with specific sectors showing signs of inflationary pressure.

This complexity underscores the challenge of interpreting economic data and predicting future trends.

Federal Reserve policy

Weldon discusses the Fed's current restrictive policy, noting that despite opportunities to ease rates, the Fed remains cautious.

He suggests that the Fed might be waiting for maximum impact before cutting rates, which could occur once inflation is firmly under control. He also highlights the potential impact of continued Fed tightening on the stock market and commodity prices.

Gold and Silver market dynamics

Turning to gold and silver, Weldon expresses a cautious yet optimistic outlook. He believes that gold's recent price movements reflect underlying economic uncertainties and Fed policy. Despite a strong dollar, gold has performed well, signaling robust demand, particularly from China. Silver, while underperforming relative to gold, shows potential for future gains due to its industrial demand and supply constraints.

China's role in the gold market

Weldon elaborates on China's significant gold purchases over the past 18 months and its strategic approach to accumulating the precious metal.

He dismisses concerns about a recent pause in Chinese buying, suggesting that it could be a tactic to lower prices and buy more gold at favorable rates.

Long-term perspectives

Weldon and Maharrey agree on the importance of taking a long-term view of financial markets. Short-term headlines can be misleading, and it's crucial to dig deeper into the data to understand the broader economic context.

They discuss the potential for a significant economic shift similar to the 2008 financial crisis, where underlying issues eventually surfaced, leading to major market corrections.

Silver's future prospects

Weldon sees silver as having strong potential, driven by both monetary and industrial demand. He notes that the gold/silver ratio is starting to break down, indicating a possible bullish phase for silver. The metal's supply constraints and increasing industrial use, particularly in solar energy, suggest that it could see significant price increases in the future.

Key questions and insights:

What’s your take on the conflicting news from the CPI report and the FOMC meeting, and how should Gold and Silver investors play this?

Weldon highlights the polarized nature of economic data, which often has elements supporting both monetary hawks and doves. He emphasizes the importance of separating Fed policy from economic data and notes discrepancies in employment reports, suggesting a softening labor market contrary to optimistic headlines.

He also points out that while the monthly CPI change was zero due to falling gasoline prices, rising food prices, and energy inflation are concerns.

According to Weldon, "It’s as polarized as ever, and every economic data report has something for everyone. I mean, it has something for the monetary hawks, it has something for the monetary doves. There is no doubt about that."

What is your analysis of the recent employment report?

Weldon criticizes the employment report, stating that despite a headline gain, the underlying data shows a rise in unemployment and a significant number of people leaving the labor force. This indicates a trend towards a weaker labor market, contrary to the strong report narrative.

Weldon stated, "This was not a strong report. And you have seen consistently now that the headline survey, whether it’s immigration or whether it’s outright data massaging, is totally different than the headline reports."

How do you interpret the recent CPI numbers?

Weldon explains that the positive monthly CPI change was driven by a drop in gasoline prices, but energy prices are rebounding, which could lead to higher inflation. He also mentions that food prices are rising again, adding to inflationary pressures.

Greg Weldon said, "The CPI number, yes, was positive in the sense that the monthly change in CPI was zero... The problem here is that that number monthly was because gasoline prices fell by 3.2%."

How do you view the Fed's current policy and its impact on the markets?

Weldon believes the Fed is more than sufficiently restrictive and might be waiting for maximum impact before easing rates. He discusses the potential effects of Fed tightening on the stock market and commodity prices, suggesting that the Fed might remain restrictive to declare victory over inflation.

When asked, Mr. Weldon replied, "They had an opportunity here, if you want to say at 5.5% of Fed funds, and at 3.3 CPI and below three PCE, they are more than just sufficiently restrictive. They might be punitively restrictive."

Do you think the "sell in May, come back Labor Day" adage applies to Gold and Silver this year?

Weldon feels the market is heavy due to restrictive Fed policy and economic realities yet to surface. He anticipates an economic reality check and suggests that while stocks might run, metals will present a significant buying opportunity, especially if the dollar remains strong.

What do you make of China's announcement that it didn’t buy any gold in May?

Weldon views this as a strategic move by China to lower gold prices for future purchases. He believes China's substantial gold buying over the past months signals a long-term accumulation strategy, not a cessation of interest.

Weldon replied, "No, it’s the reaction exactly China wanted. Are you kidding me? I mean, this is perfect... Why? Because gold’s at 2,400. They want to knock it down so they can buy more."

How do you see the longer-term outlook for the economy and precious metals?

Weldon emphasizes the need to look beyond short-term headlines and focus on deeper data analysis. He suggests the economy might face a significant shift similar to 2008, with underlying issues eventually leading to market corrections.

Why hasn't Silver responded more strongly given its supply and demand dynamics and the rally in Gold?

Weldon notes that the gold/silver ratio is breaking down, indicating potential for silver. He attributes silver's underperformance to a lack of dollar depreciation and accumulation. He remains optimistic about silver's future due to its industrial demand and supply constraints.

"The gold/silver ratio has just started breaking down in a big way. So I think that’s changing... It’s not being accumulated the way you might expect. And I think that part of that reason is you just don’t have the dollar in play."

Conclusion

Weldon wraps up by emphasizing the need for a nuanced understanding of economic indicators and market trends. He invites listeners to access his detailed reports and consider his managed futures account program for more in-depth analysis and investment opportunities.