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Miners flag recent gains as gold heads for a strong monthly close

Commentaries & Views

As I type this missive, gold futures are attempting to pierce the $1900 level after the U.S. annual core Personal Consumption Expenditure price index (PCE) came in above expectations in April, advancing 3.1% versus the expected 1.4%. The report also showed that real personal consumption was down 0.1% in April. March data was upwardly revised to an increase of 4.1%, with personal income being down 13.1% last month. Economists were expecting to see a drop of 14.1%.

The PCE is the Federal Reserve’s favored inflation tracker, effectively making it more important than the more ubiquitous Consumer Price Index (CPI). The CPI figures released last week, which includes food and energy components, registered a 4.2% growth in April, scaring economists into believing that inflation growth in 2021 could be the highest in 35 years.

Moreover, another $92 billion was added to the Federal Reserve balance sheet last week, which is on pace to reach the $8 trillion level by early June. With the increasingly overt actions of the Federal Open Market Committee (FOMC) in the market for short-term funding, the world’s largest central bank is slowly destroying the private money markets in the U.S.

Reuters reported yesterday that the amount of cash flowing into the U.S. Federal Reserve’s reverse repurchase (RRP) facility hit an all-time high of $485 billion on Thursday, further pressuring key short-term interest rates, which could fall below zero. The record amount accepted by the New York Fed for Thursday’s RRP operation was up from Wednesday’s $450 billion and exceeded a previous high of $474.6 billion on Dec. 31, 2015, according to data from TD Securities.

Starting on February 23rd, the Federal Reserve discontinued updating the M1 and M2 weekly money supply series and is instead now updating the series monthly. This action reflected a profound change in economics after Fed Chair Jerome Powell stated that he no longer regards the quantity of money being relevant, while the practice of measuring money no longer matters because it is unrelated to inflation.

The Fed changing the publishing frequency on M1 and M2 money supply from weekly to monthly is a direct result of the world’s largest central bank diving head first into the ocean of Modern Monetary Theory (MMT) in an attempt to solve all our financial problems, while destroying the purchasing power of the world’s reserve currency.

Later today, U.S. President Joe Biden is expected to raise federal spending to $6 trillion in the coming fiscal year and to over $8 trillion in the next fiscal year, reports say. U.S. Treasury Secretary Janet Yellen said on Thursday that President Joe Biden's fiscal 2022 budget request will increase the U.S. federal debt-to-GDP ratio above its current level of 100% over the next decade.

But Yellen told a U.S. House of Representatives Appropriations subcommittee that Biden's budget plans were fiscally responsible, partly because the real interest burden to finance the federal debt is currently negative because long-term Treasury yields of 1.6% are below a 2% inflation rate. "We'll have a temporary period of spending too and some of these increases, will - beyond the budget window - will result in lower deficits and more tax revenue to support those expenditures. I believe it is a fiscally responsible program," Yellen said.

Although global central banks and politicians continue to insist the current rise of inflation is temporary, talk of rising inflation has progressively turned into the prevailing narrative in the marketplace. Everyone I speak with sees inflation no longer being transitory when expectations for rising prices have become imbedded in their consumer and business spending, along with investment decisions.

The gold price has been rallying from an early-year slump, aided by central bankers’ continued reassurances on the outlook for monetary policy and increasing holdings in exchange-traded products backed by the safe-haven metal.

Inflation jitters have kept the gold price short-term overbought heading into the month-end Comex close later today. With bullion headed for its best month close since July, the GDX has printed a bullish flagging pattern on its daily chart. Bull flags are a consolidation of recent gains and typically begin to surface in conjunction with a new market rally.

Meanwhile, the high-risk GDXJ has recently begun to show relative strength to the GDX, as precious metals investors are taking profits in senior mining firms and rotating them into smaller producers and developers. Although the gold price is due for a consolidation of its recent gains, junior valuations remain attractive and liquidity has increased in these higher-risk/reward vehicles.

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