It would be prudent for long-term investors to maintain their core positions regardless of market conditions (and replenish them if possible). However, there are both technical and fundamental signs that an important and decisive market event will occur in the very near future.
One such signal came last Wednesday after the US Federal Reserve made its last statement. As expected, officials said they plan to remove some of the "emergency stimulus" amid inflationary pressures in the economy. They will stimulate already overheated markets, simply at a more "muted" pace. Prices have risen so rapidly in recent months that Fed Chairman Jerome Powell has essentially had to abandon his often-used "temporary" reassurances by rethinking the meaning of the term.
“Inflation was higher than expected,” he admitted. "The inflation rate we currently have is not consistent with price stability." - i.e. does not fit the Fed's own legal mandate! Powell blamed shortages for fueling inflation and denied that he had driven "higher than expected" spending through monetary policy decisions.
“I don’t think we are behind the times,” he stressed. "It would be too early to raise rates today." Powell takes a stance here that is surprising for a central banker - namely, that he is unwilling, at this stage, to establish the price stability that the Fed's dual mandate implies. Instead, he predicts (hopes) that inflation will decline on its own in the second or third quarter of 2022.
Never before has the Fed chairman so neglected his duty to fight inflation. Powell no longer even denies that inflation is out of control. He simply refuses to do anything meaningful in this direction!
And next year there may be new excuses. The Fed may even begin to describe the benefits of high inflation to absolve itself of responsibility for its reluctance to stop inflation. It is dangerous to buy risky assets like stocks at artificially high valuations. It is especially dangerous to own fake safe-haven assets such as bonds when their yields are so low that they are almost guaranteed to generate negative real returns.
“Don't fight the Fed” is perhaps the common sense mantra. But the smart investor is not looking only at asset classes that will get a direct boost from the Fed. The rational investor also foresees unexpected, unforeseen and potentially unpleasant consequences of the Fed stimulus, which could destroy the investment portfolios of untrained people.
The last thing central bankers and their beneficiaries want to watch on Wall Street is a massive exodus from financial assets to gold and silver. But market history shows that an asset boom driven by the Fed always ends up crashing - be it in nominal or real terms.
Despite sluggish price action, precious metals investors have made significant purchases this year. In fact, investment coin prices remain high. As in other areas of the economy, where scarcity is fueling massive price increases, we may soon see the same phenomenon in the precious metals markets. How soon? This remains to be seen ... A new wave of speculative buyers chasing hype is likely to be attracted to breakouts in gold and silver whenever they occur, further reinforcing bullish supply and demand fundamentals.