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More rate hikes mixed with collapsing commodity prices to trigger 'severe economic reset': Bloomberg Intelligence

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(Kitco News) The Fed that keeps raising rates in the face of falling commodity prices could spell out a severe economic reset, Bloomberg Intelligence warned in its June metals outlook.

"The fact that the Federal Reserve and most central banks remain focused on tightening despite collapsing commodities, producer prices and bank deposits may portend a severe economic reset," Bloomberg Intelligence senior macro strategist Mike McGlone said in the June outlook. "Our base case for a severe economic reset is gaining fuel as China data disappoint and liquidity by most measures continues to contract."

McGlone pointed out that gold is a vital asset to watch as this develops, noting that the recent selloff below $2,000 an ounce is not the end of the bullish trend.

"Gold at the end of May is exhibiting parallels to 2008-09, just before it breached $1,000-an-ounce resistance," he said. "Constrained by $2,000 now, the metal appears as a caged bull awaiting a catalyst, and a Fed pivot is a top candidate."

McGlone wrote that the Producer Price Index had not fallen as fast as it has since 1948.

"It appears as a tree in the forest of metrics such as plunging money supply and commercial bank deposits," he described. "Gold is the best-performing major constituent in the Bloomberg Commodity Index on a year-over-year basis to May 25, and it may make sense in this environment for that to continue -- it's a question of duration."

In the last two weeks, market expectations shifted towards a rate hike at the June 13-14 monetary policy meeting. The CME FedWatch Tool now sees the market pricing in a 65% chance of another 25-basis-point hike next month.

And according to McGlone, until the Federal funds futures start indicating lower rates, gold won't rally to see the $2,000 level acting as support.

And a sign to watch that the Fed is about to pivot will be a weakness in the stock market. Until that happens, gold will face stiff competition from other assets, including stocks and Bitcoin.

"If U.S. equity prices continue to march higher, the metal known as a boomer rock by crypto enthusiasts will face rising competition from risk assets and Bitcoin. Our bias is tilted toward a severe deflationary recession," McGlone said.

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