Big News This Week On The Fed, Debt Ceiling And Physical Silver Premiums

Gold and silver spot prices lost ground to a strengthening US dollar last week. The dollar enjoyed its best week in 5 months, as other major world currencies weakened. European central bankers are once again hinting at more stimulus, and the Chinese government cut interest rates for the 6th time in the past year.

Federal Reserve officials meet on Wednesday, and almost no one expects them to change interest rates. Because of the overwhelming build-up of government and private debt, the economy appears totally unable to withstand higher interest rates.

But expect the usual parsing of officials’ every utterance for clues. It’s already been over nine years since the Fed has raised rates even a quarter point, so don’t hold your breath.

Meanwhile, the Treasury Department declared a debt ceiling deadline of November 3rd. Outgoing House Speaker John Boehner will try to push through a debt increase before his scheduled departure on Friday (when he’ll likely hand over the gavel to Paul Ryan). If Congress can’t come to an agreement this week, markets could get rattled on the looming possibility of a U.S. default.

It’s a remote possibility, though. Insiders say the Treasury and Federal Reserve could take additional emergency actions to pay the government’s bills well past the Obama administration’s arbitrary cut-off date.

As former Federal Reserve chairman Alan Greenspan said:

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default. We can guarantee cash benefits as far out and whatever size you like but we cannot guarantee their purchasing power.”

In other words, the real threat to investors is inflation, not default.

Meanwhile, stock investors must think better looking economic data is coming, as they have been buying. We’ll see if the latest data matches expectations.

Silver Premiums Have Fallen, but the Short-Term Outlook Is Uncertain

With silver prices rising almost 10%, retail buying of physical silver has lessened over the past three weeks – down from the frenetic pace over the past 4 months. That’s allowed premiums on many products to fall toward normal levels. Production backlogs and delivery delays have also been dissipating.

Ask premiums for the Maple Leaf, American Eagle, and Pre-1965 90% silver U.S. coins – the products that saw the sharpest hikes through the summer – are now leading the way down. The respite will help mints and refiners catch up. Dealers are taking the opportunity to replenish inventories.

One fly in the ointment is the upcoming annual halt in deliveries of silver American Eagles. The U.S. Mint is expected to stop production of 2015 dated coins sometime between early and mid-December and change out the dies for the 2016 date. (While private mints only require a few hours to make a switch, the U.S. government requires a few weeks.) So the market can expect a month of no deliveries until a resumption in mid January.

If dealers cannot build adequate inventory to supply the market during the Mint’s hiatus, we will see upward pressure on premiums once again. January demand for the New Year’s coin is also traditionally among the strongest months of the year. That may also push premiums higher.

This adds up to an uncertain outlook for premiums in the short term. Much will depend on what happens to retail demand in the coming months. The extraordinary demand from June through September was based largely on safe-haven buying.

The crisis in Greece has shuffled out of the headlines. Meanwhile, the combination of additional stimulus and the threat of draconian punishment for anyone selling Chinese stocks seems to have stayed the collapse of share prices there.

U.S. stock markets are also recovering from their late September lows. These signals indicate that complacency and the narrative of economic recovery is creeping back into markets. There is no one better at pushing a narrative than officials in Washington, unless it is Wall Street. Their problem, as always, is supporting it with actual facts.

Spot prices will also be a significant factor in bullion demand, of course. Prices have risen well above the recent lows, tempering some interest among bargain hunters. The markets also have some convincing to do before investors trust that the recent recovery actually represents a reversal and the start of a new uptrend.