Manufacturers have taken the brunt of rising inflation in 2021. The worst for consumers could be yet to come as manufacturers pass on their costs to wholesalers and retailers.
Some politicians, whose political preferences are largely responsible for the inflation problem, have now turned to inflationary demagoguery - opposing manufacturers for raising prices and spreading conspiracy theories of "overpricing" and collusion. Other supporters of President Joe Biden, worried about his downgrade, are trying to downplay the inflation problem.
The Republicans, of course, are trying to use "bidenflation" as a trump card ahead of the fall elections. They note that American families will have to spend an average of $3,500 more in 2022 to maintain their standard of living.
However, almost no one in Washington wants to talk about the real "elephant in the room." The Fed's easy-money policy, coupled with massive handouts and tax spending - the main drivers of inflation - is supported by both Republicans and Democrats. Fed Chairman Jerome Powell was nominated and confirmed by the Republicans. Now he has been reappointed by a Democrat. It is likely that he will soon be confirmed for another term with bipartisan support in the Senate.
Therefore, consumers and investors should expect the story to continue. Although the Fed intends to raise interest rates, probably starting in March with a small step of a quarter point, it is far behind schedule. The central bank will have to immediately start a massive series of rate hikes to have any hope of preventing prices from rising this year.
It will not happen. Those in power in Washington and Wall Street will not tolerate this. The currency will continue to lose value. The only question is how fast. Over the past year, US fiat currency has lost more purchasing power than at any time in the past 40 years. However, over the same period, the US Dollar Index, which measures the value of a currency against a basket of foreign currencies, has risen. This anomalous “strength” of the dollar was due to competitors like the euro losing value even faster.
Although gold is not a component of the Dollar Index, it often behaves like a currency. After all, it is hard money that individuals seek to protect their assets and even Central Banks as collateral for their reserves. In paper markets, traders can rush to hit the sell button for gold and silver when they see the dollar index rise.
This is one of the main reasons why precious metals failed last year. However, for the same reason, gold and silver could see a rebound in 2022 if the Dollar Index starts to fall along with the value of the currency itself.
More importantly, it appears to have broken the uptrend line that has been in place since last June. Dollar shorts will be waiting for confirmation of a breakout in this week's trading if it continues to decline. This could be the catalyst that the gold and silver markets need to break through higher.