Robust U.S. jobs report delays gold breakout
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Heading into the highly anticipated FOMC meeting results on Wednesday, the gold price had been trading in a tight $40 range around the key $2000 level for the past few weeks. But regional banking concerns became the focal point for investors to begin an expectedly volatile week, which also included European Central Bank (ECB) monetary policy results on Thursday, followed by U.S. jobs data on Friday.
Monday saw the largest banking failure in the U.S. since 2008 after First Republic went under, marking the third death of a major U.S. bank this year. Regulators took possession of the bank to begin the week and JPMorgan Chase will acquire the majority of the regional bank’s assets and remaining deposits worth around $92 billion.
JPMorgan Chase now controls a whopping $2.5 trillion in deposits, 14% of all deposits in the country. First Republic shareholders and bondholders were wiped out, while all customer deposits are being protected, whether insured or uninsured. However, the relief this deal offered in hopes that the crisis of confidence in First Republic would not spread to other regional lenders lasted less than 24 hours.
Regional bank stocks fell sharply on Tuesday, with PacWest Bancorp’s shares falling more than 39% and Western Alliance’s shares dropping 20% during midday trading. The Regional Banking ETF (KRE) sank sharply to fresh 52-week lows as deposit flight to mega-cap money center banks continues in the wake of the 2nd largest U.S. bank failure in history, First Republic Bank.
Reports say PacWest Bancorp, a California-based lender, is in trouble. Its stock price saw another 60% decline in after-hours trading Wednesday. The renewed banking fears pushed Gold Futures out of its recent $40 trading range above $2020 ahead of a Fed meeting conclusion later in the day.
With the crisis of confidence in the banking system rearing its ugly head into the highly anticipated FOMC policy meeting, an expected 25 basis point rate hike on Wednesday was initially met with a shrug from the market. That is until Fed Chair Jerome Powell re-iterated the important change of a key point in the May decision statement, when answering the first question during a subsequent press conference.
The statement included a "meaningful" change, said Powell, pointing to the decision to take out the reference to "some additional policy firming may be appropriate." The Fed, in its rate decision statement as well as Powell’s news conference, emphasized that the fight against inflation was ongoing and that monetary policy from June onwards will be guided by assessment of upcoming data.
Gold Futures follow through buying into overnight trading then came within $4 of mid-2020’s all-time high of $2089 per ounce, on bets that policy-makers would have no choice but to halt rate hikes from here to prevent further problems in the U.S. banking sector and economy, due to overly-tight credit conditions.
During the Fed press conference on Wednesday, Fed Chair Jerome Powell was also asked about the debt ceiling. While some participants had raised the debt limit situation as a risk to the outlook, the Fed Chairman simply underscored that the central bank cannot protect the economy from a default.
In a letter to House Speaker Kevin McCarthy on Monday, as well as other bipartisan leaders, Treasury Secretary Janet Yellen said that the United States could breach its debt ceiling as soon as June 1. In her letter, she said, "After reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government’s obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time."
With Congress, the Senate, and the administration currently miles apart regarding a compromise to pass legislation that will either raise or suspend the debt ceiling, the implications of a default next month are profound.
The economic effect of this unprecedented event could most certainly lead the world’s largest economy into a recession, or much worse, while being another catalyst for higher gold prices. The last real debt ceiling battle in Q3 2011 caused tumbling markets and a downgrade of U.S. debt, which fueled a Gold Futures blow-off rally to come within $75 of $2000 per ounce.
Next up, early Thursday morning, was the European Central Bank (ECB) monetary policy decision. Once the ECB meeting statement declared an also expected 25 basis point rate hike, the Euro went down initially. But then reversed after ECB President Christine Lagarde made explicit hawkish comments in her Q&A session when emphasizing that the ECB will bring interest rates to sufficiently restrictive levels.
The ex-French politician also said that the hiking process is a "journey" and we are not there yet. The ECB President also stated there is more ground to cover, and that this is not a pause. Lagarde’s comments were much more committal than Fed Chair Jerome Powell’s emphasized hint regarding a pause. Barring a similar EU banking disaster, the ECB will keep raising rates, probably more than once. At the same time, excepting an unlikely surge in inflation, the Fed is done hiking.
This news took the stock market, the U.S. dollar, and Treasury yields lower, bringing more safe-haven buying into gold. With the gold price threatening a technical breakout above $2100, the DXY is coming close to critical neckline support level at 100. A close below this key level of support in the U.S. dollar index may be enough to fuel a breakout in Gold Futures above $2100 in the not-too-distant future.
Volatility in the gold price ramped up this morning, after U.S. jobs data showing continued robust growth whipsawed Gold Futures down towards the key $2000 level. U.S. nonfarm payrolls rose by 253,000 last month, the Bureau of Labor Statistics said on Friday. The monthly figure was well above the market consensus estimate of 181,000. As stated previously in this column, a monthly close above $2100 in Gold Futures is required to signal a technical breakout.
Meanwhile, M&A activity came into the gold miner spotlight again this week. On Tuesday, the board of Australia's Newcrest Mining (NCMGY) has recommended the latest takeover offer of U.S. based giant gold miner Newmont (NEM), which last month valued the target company at $19.5 billion.
If the proposed deal goes through, the newly combined gold mining behemoth would produce nearly twice as much bullion as closest rival Barrick, placing Newmont mining into a league of its own. With many Newcrest shareholders holding NEM shares as well, I expect some would be rotating Newcrest profits into undervalued juniors.
With producers struggling with higher operating costs, declining output, and harder-to-mine resources while new deposits are more difficult to find, more M&A deals are expected to follow. In the meantime, after a 7-year gold stock cycle bottom was formed in September 2022, most are waiting for a technical breakout in the gold price before committing to higher-risk juniors.
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