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Gold bracing for a coming major shift in central bank policy

Commentaries & Views

With Middle East worries, chaos in U.S. government, and rising bond yields creating uncertainty in the marketplace, the gold price rose nearly $200 in October to close just below the key $2000 level on Tuesday.

After almost two years of aggressive monetary tightening, the world's largest central banks have also collectively paused interest rate-hikes as the gold price consolidates its biggest monthly gain since November last year.

The U.S. dollar fell broadly on Thursday as investors grew more convinced that a peak in U.S. interest rates has been reached after the Federal Reserve kept them on hold the previous day. Fed Chair Jerome Powell left the door open to another hike, but with the funds rate target ceiling at a 22-year high of 5.5% he said the risks of doing too much or too little were now balanced.

The Fed Chairman did all he could to keep his options open during the press conference following the latest FOMC meeting, while doing his best not to raise expectations of a December rate hike either. "We haven't made any decisions at all about December—we didn't even talk about making a decision in December today," Powell said. Instead, he reiterated again that future rate decisions will be made meeting by meeting, dependent on the data available.

British bond yields were on track for their biggest fall in months on Thursday, after the Bank of England (BOE) held interest rates steady and painted a gloomy picture of the UK economy. The BOE left rates unchanged at 5.25%, as expected, while the central bank published forecasts showing the British economy was likely to skirt close to a recession and flat-line in the coming years.

In total, nine major global central banks have raised rates by a combined 3,965 basis points in a cycle that started in September 2021. Japan is the holdout dove. The recent collective pause has the focus in financial markets shifting to when central banks will start easing policy, resulting in gold priced in foreign currencies breaking out to all-time highs.

Gold priced in currencies such as British Pounds, Euros, Australian Dollars, Japanese Yen and Chinese Yuan have skyrocketed to all-time record highs, while USD gold has been capped at $2000 for 7 of the past 8 monthly closings. Despite the short-term overbought situation in Gold Futures, every pullback over the last two weeks has been immediately bought and did not last very long.

Although fear of the Middle East war expanding has subsided, the potential to drag in the U.S remains after President Biden sent a letter to Congress to fulfill requirements of the War Powers Act late last week. In the letter, Biden named Iran's Islamic Revolutionary Guard Corps as being the mastermind behind attacks against U.S. military forces in Iraq and Syria.

This in turn could draw in other major powers such as China or Russia, especially if Iran were to be dragged into the war, sparking a sharp rise in oil prices. The Middle East war is driving a lot of fear in the marketplace and the Russia/Ukraine war could also deepen.

In addition to the sharp rise in geopolitical uncertainty, the imploding bond markets are causing more and more stress in financial markets. This is creating fear of defaults, especially in the commercial real estate market and a still overvalued housing market, while the bond market may be in its worst bear market since the late 1970s.

Recent U.S. bond auctions have been decidedly sloppy and the 10-year U.S. treasury note recently jumped above 5% for the first time since 2007, but still there has been no major bond collapse—yet.

The U.S. Treasury Department on Wednesday said it plans to "gradually" increase the size of most of its debt auctions in the November 2023 to January 2024 quarter and expects it will need one more additional quarter of increases after this to meet its financing needs.

Fear of a stagflationary recession ala the 1970s, despite the decent GDP numbers, is also rising as recent data shows sticky inflation remaining twice as high as the Fed's 2% target, while we are seeing a steady decline in wages in the past 12 months.

Data released Wednesday showed U.S. manufacturing contracting sharply in October and was the 12th consecutive month that the PMI remained below 50, which indicates contraction in manufacturing. That is the longest such stretch since the 2007-2009 Great Recession.

Meanwhile, Partisan politics in Washington, D.C. are hindering the government’s ability to function effectively. The investigations into former President Donald Trump and President Joe Biden are causing serious division and tearing the U.S. apart.

A Reuters/Ipsos opinion poll found that roughly half of Americans believe the investigations into Donald Trump are politically motivated, while 41% of respondents in a separate Reuters/Ipsos poll said they supported the idea of Congress opening an impeachment investigation into President Biden related to allegations involving his son Hunter.

Republican lawmakers argue that these investigations are necessary to root out corruption, while Democrats make similar claims about Trump, who is also the leading GOP candidate for the 2024 Presidential Election.

With both macroeconomic and geopolitical tailwinds now working in gold's favor, the safe-haven metal continues to build momentum to take on key overhead resistance at the $2100 level. Gold is typically strongest during the November to February timeframe, while a strong 3-year base is being constructed below $2000.

There is a plethora of catalysts to take the USD gold price into all-time highs along with gold priced in foreign currencies. Massive federal deficits, inflation and early signs of coming stagflation, labor strikes, giant holes growing in the banking system, a central bank that is insolvent and illiquid, credit rating agencies scrutinizing ratings on the biggest U.S. banks, focus in financial markets shifting to when the Fed will start easing policy, a lost war in Ukraine and now a second war in the Middle East, the fraying of the petrodollar system, loss of confidence in government, and, most importantly, a rout in Treasury bonds, the asset that underlies the banking system of the world's largest economy and its central bank.

In the meantime, Gold Futures being capped at $2000 at a monthly basis close for the past eight months has delayed momentum traders and generalists from coming into a beaten down and left for dead mining sector.

With bullion making brief moves above this major psychological level and failing to follow-through with a breakout multiple times over the past three years, precious metals related equities remain under-owned and out of favor while disgusted investors sell for tax-loss.

This confluence of events has created a generational opportunity to accumulate historically undervalued quality precious metals related juniors ahead of the most important gold breakout in over 50 years.

In anticipation of the incredible gains the junior sector should begin to experience once the gold price prints a technical breakout above $2100, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality juniors with 3x-10x upside potential into 2025-26.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.