Yellen admitted today that the FED may have overstated the strength of the labor market and the rate of inflation. This suggests that we may see a shift to easier than expected monetary policy in the months and years ahead. In other words, the FED will not be raising rates as aggressively as anticipated and will be more dovish when it comes to removing aggressive policy accommodation.
“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” Yellen said, according to prepared remarks.
These comments came in a speech delivered to the National Association for Business Economics in Cleveland. They are particularly interesting considering that the FED just approved the first steps in unwinding their balance sheet last week.
She said that a “regular pace of rate hikes ahead is likely still warranted,” but concluded that the FED may need to slow the removal of accommodation. She also said that “moving too quickly risks overadjusting policy.”
It was also interesting to note that FED officials worry that keeping rates lower allows little room for stimulus when another economic slowdown hits. I view this as a tacit admission that the FED is worried about another financial crisis ahead and may actually view equity markets as overvalued, despite public comments to the contrary.
“Sustained low inflation such as this is undesirable because, among other things, it generally leads to low settings of the federal funds rate in normal times, thereby providing less scope to ease monetary policy to fight recessions,” Yellen said.
At Gold Stock Bull, we have long been predicting that the FED would not be able to raise rates or remove accommodation at nearly the pace that was being projected. In turn, this means that the weakness in gold and silver prices over the past few years is largely unjustified. The sharp drop in the U.S. dollar index supports this view, as it appears that currency speculators also called the FED’s bluff in 2017.
Yellen’s comments today are bearish for the dollar and bullish for gold and silver. However, precious metals have yet to react too favorably to Yellen’s comments today. Gold and silver were both down sharply prior to her speech and while they have bounced a bit off lows, gold is still down $13 to $1,297 today and silver is off 33 cents to $16.83. Those are significant daily declines of 1% for gold and 2% for silver thus far.
I believe this is providing an excellent buying opportunity for investors, as the market will eventually wake up to the fact that the FED can’t remove accommodation without crashing multiple markets. When this realization hits a larger percentage of investors, we should see a continuation of the dollar decline and major rally in gold and silver.
The gold price has been establishing higher lows and higher highs this year. It recently bounced off support at the 50-day moving average and now needs to take out the 2016 high at $1,375 in order to confirm the breakout. I expect a quick move back above $1,500 if gold is able to break above $1,375 by year end.
We are particularly bullish on junior and mid-tier mining stocks that remain significantly undervalued, both in absolute terms and relative the metals they mine. We have been adding several of these best-in-breed juniors to the GSB portfolio over the past few months and will continue to do so in expectation of leveraged gains ahead.