Fed Chairman Admits Unsustainability Of Federal Deficits, Yet Claims No Risk

As unsustainable government spending and debt raised alarms in Washington this week, precious metals markets showed some signs of firming up.

After last week’s price drubbing, gold and silver were at risk of breaching major support levels. And while they aren’t out of danger just yet, the metals markets appear to be attracting buyers at these levels.

Gold prices currently come in at $1,788 an ounce, up 1.0% since last Friday’s close. Silver, meanwhile, shows a weekly gain of 1.1% to trade at $26.17 an ounce.

The platinum group metals are significantly outperforming, with platinum prices up 5.4% for the week to trade at $1,114. And palladium is now putting in a weekly advance of 5.9% to command $2,653 per ounce as of this Friday morning recording.

Palladium has seen a surge in demand in recent years from the automotive industry, which uses the metal in pollution-scrubbing catalytic converters. Platinum could soon see a surge in demand from hydrogen fuel cell technology which serves as a viable alternative to gasoline and battery-powered vehicles.

In the rush to roll out electric vehicles, problems have emerged such as a lack of grid capacity for battery charging. California officials recently asked EV owners to refrain from charging during peak hours as the state copes with a heat wave.

A full-size car’s batteries can take hours to charge depending on the source and will deliver degraded performance during extreme temperatures. Batteries also generate a large amount of toxic waste during their production and eventual disposal.

Hydrogen, by contrast, is a zero-emission fuel that can be pumped into vehicles as quickly as a fill up at a gasoline station. Hydrogen-powered cars have longer ranges and lighter weight loads than battery-heavy cars.

The main problem, of course, is the current lack of hydrogen fuel stations.

This necessary infrastructure is sorely lacking in most places. The automotive industry along with politicians and “green” activists have bet everything on promoting a transition to electric vehicles – even though they’re powered by an outmoded, overburdened, and in many ways inferior technology.

The World Platinum Investment Council forecasts increasing adoption of fuel cells in the years ahead. It notes that Korean automaker Hyundai is developing hydrogen systems for cars and trucks as well as investing in refueling stations. Importantly, these technologies currently use platinum as a catalyst to release hydrogen electrons.

According to the World Platinum Investment Council, platinum demand will rise by 5% in 2021, generating an annual supply deficit. The tiny platinum mining industry will be unable to raise production to pre-pandemic levels this year and will struggle to keep pace with any future demand growth.

Although the outlook for demand is highly dependent on dynamics within the automotive industry, the potential exists for platinum to outperform other metals. Bulls are eyeing a return to a historical premium over gold and possibly a run past the current palladium price.

Platinum and other metals that are inherently scarce all stand to move higher over time in dollar terms as the supply of U.S. currency inflates. Inflation is the last resort and only way out for a government with an otherwise unpayable debt load.

In testimony before Congress this week, Federal Reserve Chairman Jerome Powell admitted the U.S. is on an unsustainable fiscal path in response to questioning by Iowa Republican Mariannette Miller-Meeks.

Rep Miller-Meeks: The financial report of the United States government, published annually by the Treasury Department says unambiguously, the current fiscal path is unsustainable. On our current path, debt is projected to exceed six times GDP by the end of the century and annual government spending will exceed 50% of GDP. Do you agree with the conclusions of this report? And if so, isn't this an additional, and one of our greatest avoidable crises that our country currently faces?

Jerome Powell: I think unsustainable just means that the debt is growing faster than the economy. That's been the case for a long time. I have no question that the U.S. government will be able to pay its bills for the foreseeable future. There's no case in which that would not be the case. We have the strongest and largest and most flexible economy in the world. It's also true though, that we're on an unsustainable path.

Left unsaid by Powell is why the government can be counted on to pay all its bills, to sustain itself financially, while simultaneously running up unsustainable deficits.

The answer is that the Fed stands ready to buy the Treasury Department’s debt in unlimited quantities. The central bank has the power to create new currency in perpetuity – effectively giving it the ability to sustain the unsustainable.

But there is a cost to averting a debt default in this manner. It will be paid by everyone who earns and holds U.S. dollars as inflation erodes their purchasing power.

Investors who want to build a portfolio that can sustain them through the inflationary times ahead need to think outside the box of conventional asset allocation. Stocks, bonds, and cash savings are all at risk of losing real value when measured against rising costs of living.

The risks in financial assets are especially acute now with the stock market trading near record highs and dollar-denominated income instruments sporting historically low yields.

That makes diversifying into alternative asset classes including physical precious metals crucial for surviving an onslaught of inflation.

Diversifying within the precious metals space is important as well. Gold-only bugs will miss out on silver’s potential to outperform, which it has during past precious metals bull markets. Beyond gold and silver, platinum and palladium can show more of a positive correlation to economic growth and help balance out a hard assets portfolio.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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