Constituent policy

Fed to pivot policy, cut rates by Q1 2023, spark new bull run for gold and silver

(Kitco News) – The Federal Reserve’s hawkish stance is not sustainable, and it’s likely that not only will the world’s largest central bank stop raising rates by the end of the year, but ‘it will reverse the trend and lower rates, according to Keith Neumeyer, CEO of First Majestic Silver.

Speaking to Michelle Makori, editor-in-chief and main anchor of Kitco News at the Prospectors and Developers Association of Canada conference in Toronto, Neumeyer said the Fed’s monetary policy pivot will likely come from by the fourth quarter of 2022 and will spur another bullish rally in the precious metals.

“Once we see the Fed reverse its current policy, it will probably raise rates two or three more times this year…once the market really cracks, that’s when I wonder. wait for that to happen, then I think you’ll see the Fed turn around and start cutting rates. This will be the start of the next great cycle in gold and silver,” he said. .

Higher interest rates would not only cause problems for national economic growth, but would also bring a stronger US dollar, which would be costly for countries with dollar-denominated debt, Neumeyer noted.

“The US dollar, which is going up as much as it has gone up, is not good for the world, because you have a lot of US debt denominated in dollars and a lot of that debt is owned by foreign countries and foreign companies, and their costs go up. The world needs to see a US dollar go down and one of the ways to do that is to lower rates again,” he said.

Neumeyer said the first rate cut in the fourth quarter of 2022 would likely be “small, just to get the process started.”

“They won’t cut rates half a point at a time, and if they did, chaos would ensue,” he said.

A Fed pivot does not imply that inflation will be successfully contained the moment the central bank reverses its hawkish stance, Neumeyer noted. On the contrary, since it is not possible for the Fed to raise its rates enough to fight inflation, as it did in the 1980s when the federal funds rate was raised to two figures, the Fed’s likely course of action this year is simply to give up on fighting inflation.

“I think they’re going to give up on inflation. I don’t think they can get inflation under control. [Paul] Volcker did that by raising the rates to 20%, I remember as a much younger person we’re not going to see 20% rates. We could see 5%, and we are already seeing 5% mortgage rates in housing and turnover has dropped significantly over the past two months. So how much can the American consumer afford? 6%, 7%, what’s it gonna do? Housing is going to come to a halt and with food prices and energy prices at record highs, [the Fed] will have no choice,” he said.

Neumeyer’s comments come as the Federal Open Market Committee (FOMC) raised interest rates by 75 basis points at their last meeting on June 15, with Fed Chairman Jerome Powell suggesting that a Another 75 basis point hike could take place at their next meeting.

Regarding silver’s relatively lackluster performance this year, Neumeyer said investors shouldn’t view silver as a safe-haven asset like gold and expect it to outperform in times of market distress.

As of June 20, silver last traded at $21.69 and was down 5.2% year-to-date. Meanwhile, gold has climbed 1.7% over the same period.

Neumeyer said some of silver’s underperformance against gold can be attributed to silver’s industrial component.

“There is an opinion that there is a recession coming. Gold held up, oil held up, but all other metals including silver were down a lot,” he said. .

However, that same industrial silver component that has arguably weighed on price this year will also be the metal’s biggest tailwind for years to come, as silver is poised to face a major shortfall. when it comes to industrial applications, including solar panels, electric vehicle batteries, and even X-rays, despite the prospect of slower global growth ahead.

“You can’t tell me for a second that silver deficits will be reduced in any way. Silver consumption in 2022 will be between 1.1 and 1.4 billion ounces of silver. We’ll see that number next year the minimum estimate is 1.1 billion ounces the miners are going to produce something in the order of 850 million ounces this year so that’s a deficit of 300 million ounces minimum. We can’t have these deficits year after year,” he said.

Demand for electric vehicles, in particular, will pressure that cash gap to widen even further, especially now that governments around the world are mandating that cars be fully electric by 2030.

“We are probably five years away from reaching 20, 30 million [electric] cars per year that must be produced to meet this requirement imposed by governments. You do the math, you multiply 65 million ounces by 10 million cars, and you look at mining supply of only 850 million ounces a year, and it doesn’t take too long to burn all the ounces we produce,” he said.

For Neumeyer’s year-end silver price target and his triple-digit silver price case, watch the video above.

Follow Michelle Makori on Twitter: @Michelle Makori

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