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From The Maven letter: 22 March 2023

Commentaries & Views

The Craziness Continues

If you had been on vacation and not seen the news for the last month and then you returned to see this gold chart, you would know you'd missed some major things. Because it takes major uncertainty to move gold like that.

And yet here's the S&P 500 for the same timeframe.

Yes, there's a 4.8% drop over four days. But then it rebounds over the next week to make up

most of that ground.

So which chart is telling the truth?!

The hilarity is that no one knows. That's exactly why gold is moving – because of uncertainty. Meanwhile, the hope and wish that things aren't actually that bad keeps the market rebounding.

But things certainly are crazy.

In less than two weeks we've gone from certainty of a 50-basis-point rate hike because

inflation just won't come down to a coordinated announcement from the world's biggest central banks to strengthen US Swap Lines because of a liquidity crunch. Those are opposites if ever I saw.

The failed bank saga continues. In the last few days we've seen FDIC take over Silicon Valley Bank, UBS acquire Credit Suisse, and NY Community Bank assume Signature Deposits. And while these moves managed each specific issue, they did not resolve the underlying problems of people pulling deposits above $250,000 from small banks (FDIC insurance maxes out at

$250,000), depositors generally pulling money in search of better returns now that bonds are yielding again, 425 basis points of rate hikes in 15 months setting the stage for households and companies to struggle when debts gets rolled over, lots of indicators flashing Recession Ahead including inverted yield curves, and worsening bank lending standards making conditions tighter still.

Underlining the craziness, the Fed is now effectively tightening while easing. Paying banks in need par for collateral that's actually well underwater is stimulus, yet the Fed is doing it while still raising rates. Banks borrowed $152 billion from the Fed's discount window this week, an amount that exceeded both the Global Financial Crisis and the COVID-19 panic.

So it's crazy.

What are metals doing amidst it all? Copper came down from its January high of US$4.22 per lb to bottom at $3.85 per lb last week before bouncing back to $4.04 today. Nickel has been in a sustained downward trend since February and hasn't enjoyed a bounce like copper, though it is still within its 52-week range. Zinc shows the same pattern as nickel: decline since February but not to surprising depths.

Gold, by contrast, is now up more than 20% from its September 2022 low, putting it in official bull market territory. That means it's time to share a table of past gold bull markets.

Gold bull markets are here defined as the metal gaining at least 20% to start and ending when the metal falls 20%. Using this definition, there have been 8 gold bull markets since 1987, including the current one, and in those bull markets the metal price has gained 86% on average, which has caused gold equities to gain 136% on average.

Will that happen? I have no idea. This gold bull market started at $1,627 per oz. An 86% gain from there would put the price at $3,026 per oz. It's possible, of course, but I'm not sure I want to handle everything else that might come with a gold run of that scale (all the other risk and uncertainty), so I'm not really gunning for that much gain.

But I did include the table because I do think forces are aligned in gold's favour, more strongly than they have been for a long time. Think of all the places risk could show up and cause mayhem next: commercial real estate, pension funds, insurance companies, more small banks, mortgage players. I doubt the storm will be limited to just a few bank failures. So these past examples are relevant.

That said, it's also fair and expected that gold slid the last two days. Nothing goes straight up and gold had gained a remarkable $166 per oz. or 9% in the previous eight days, so a step back makes sense.

I am getting more confident in this gold market with each passing day. I think the only way

gold doesn't attract attention over the next year is if somehow we don't end up in a recession

despite the most aggressive rate hike cycle in history, in a market that had operated on zero

rates for a decade. As you all know, I think that's very unlikely.

I'll throw in another big table for thought before wrapping this up, also courtesy of Canaccord. This shows gold performance in US recessions. The top bunch is gold from the official start of the recession till the broad markets bottom. The second bunch is gold from a month before the official start to the trough; the third is gold three months before the official start to the trough.

I include it to show that investors use gold to prepare for a recession: gold rises 16% on average as a recession takes hold but that gain starts before the recession begins, with gold gaining 18% on average starting one month before and 22% on average starting three months before.

I show this now because everyone is wondering what gold will do when the recession hits. It will see selling, to be sure, but I think a few forces will buffer that.

  • Investors have seen gold reliably hedge recessions several times of late. In both 2008 and 2020 gold rose out of the ashes with abandon, shining so bright that investors are likely to remember as this recession hits.
  • Gold is already showing everyone why it works in uncertain times, which is reinforcing the point above.

This setup has me pretty excited about gold.

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