Make Kitco Your Homepage

Fed will pivot policy, lower rates by Q1 2023, spark new bull run for gold, silver

Kitco News

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

Speaking to Michelle Makori, Editor-in-Chief and Lead Anchor of Kitco News at the Prospectors & Developers Association of Canada conference in Toronto, Neumeyer said that the Fed's monetary policy pivot will likely occur by Q4 of 2022 and spur another bull rally in the precious metals.

"Once we see the Fed back up its current policy, it's going to raise rates by probably two or three more times this year…once the market really does crack is when I'm expecting it to happen, then I think you'll see the Fed turn around and start reducing rates. That's going to be the beginning of the next big cycle in gold and silver," he said.

Higher interest rates would not only spell trouble for economic growth domestically, but would also bring a stronger U.S. dollar, which would be costly for countries whose debt is denominated in dollars, Neumeyer noted. 

"The U.S. dollar, going up as much as it has been going up, is not good for the world, because you've got a lot of U.S. debt out there denominated in dollars and a lot of this debt is owned by foreign countries and foreign corporations, and their costs are going up. The world needs to see a lower U.S. dollar and one of the ways that could be accomplished is by lowering rates again," he said.

Neumeyer said that the first rate cut in Q4 2022 would likely be a "small one, just to get the process going."

"They won't be cutting rates by half a point at a time, and if they did that, chaos would occur," he said.

Financial World War Three has begun; Global reset, Bretton Woods 3.0 are next

A Fed pivot does not imply that inflation would be successfully tamed by the time the central bank reverses its hawkish stance, Neumeyer noted. On the contrary, given that it is not possible for the Fed to raise rates sufficiently to combat inflation, like they did in the 1980s when the Fed Funds rate was raised to double-digits, the Fed's likely course of action this year is simply to give up 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 it by raising rates to 20%, I remember that as a much younger person, we're not going to see 20% rates. We might see 5%, and we already see 5% mortgage rates in housing and turnover has dropped substantially over the last couple of months. So, how much can the U.S. consumer afford? 6%, 7%, what's that going to do? Housing is going to grind to a halt and with food prices and energy prices at all-time 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 Chair Jerome Powell hinting that another 75 basis point hike could happen at their next meeting.

On silver's relatively poor performance this year, Neumeyer said that investors should not view silver as a safe haven asset like gold and expect it to outperform during times of market distress.

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

Neumeyer said that part of silver's underperformance relative to gold can be attributed to silver's industrial component.

"There's a view that there's a recession coming. Gold's held up, oil's held up, but all the other metals, including silver, have come down quite a lot," he said.

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

"You can't tell me for a second that the deficits on silver will be reduced in any way. Silver consumption in 2022 is going to be somewhere 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 at a minimum. We can't have these deficits year after year," he said.

Electric vehicle demand, in particular, is going to put pressure on this silver deficit to widen even further, especially now with governments all over the world mandating cars to be fully electric by 2030.

"We're probably five years away from getting up to the 20, 30 million [electric] cars a year that need to be produced to fit that requirement that governments are pushing. You do the math, you multiply 65 million ounces by 10 million cars, and you look at the mining supply of only 850 million ounces a year, and it doesn't take too long to burn through all the ounces that we're producing," he said.

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

Follow Michelle Makori on Twitter: @MichelleMakori

Follow Kitco News on Twitter: @KitcoNewsNOW

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.