With Gold Futures heading towards a weekly close back above $2050 to end the Comex trading week, gold bulls have turned the more bearish momentum to start the year into a more bullish one instead. Both gold and silver moved higher even as 10-year Treasury yields and the U.S. dollar remained strong after mixed inflation data.
While bullish retail sentiment reached levels of historic tops in equities coming into 2024, gold is attempting to quietly create a new floor at formerly strong multi-year resistance at $2000 with little fanfare.
Despite being wildly overvalued and overbought heading into the new year, the S&P 500 on Thursday briefly traded intraday above its prior closing record set roughly two years ago. After big gains in the fourth quarter, the Dow Jones Industrial Average also rose to a series of record closes.
Meanwhile, the gold price continues to waffle between paying attention to the Fed, mixed U.S. economic numbers, and the ongoing crisis in the Red Sea.
Gold Futures eased lower into Thursday to a one-month low as the U.S. dollar ticked higher after hotter-than-expected CPI inflation data, while hawkish remarks from Federal Reserve officials fueled worries that higher interest rates could stay unchanged beyond March.
Just after the data was released, Cleveland Fed President Loretta Mester said it would likely be too soon for the central bank to cut its policy rate in March, while Richmond Fed chief Tom Barkin said gains on inflation have been too narrowly focused on goods. The hawkish Fed-speak, combined with the hotter-than-expected CPI report, moved Gold Futures down to test support at the $2010-$2020 region.
Then on Friday morning, the gold price whipsawed traders while bouncing sharply from $2020 support as an escalation in the Middle East crisis ramped up safe-haven demand, along with cooler-than-expected U.S. PPI inflation data.
U.S. and British forces launched a series of strikes against the Iran-aligned, Houthi group in Yemen, in response to the group’s attacks on ships in the Red Sea. The move also marked a widening in the Israel-Hamas war, which was seen as a key motivator of recent Houthi aggression.
Furthermore, the Producer Price Index (PPI) fell 0.1% last month after November’s revised decline of 0.1%, the Labor Department said on Thursday. The latest inflation data was slightly cooler than expected as economists were looking for another unchanged reading.
In the meantime, investors ponder whether the will Fed cut rates in its March meeting, or keep the Fed Funds Rate at 5.25-5.50% heading into a 3-day weekend. Traders now see a 78% probability of a rate cut in March, according to the CME Fedwatch tool, compared with a 71% chance seen before the mixed U.S. inflation data released this week.
There are two more CPI/PPI inflation and Non-Farm Payroll (NFP) report releases until that meeting. In between, the world's largest central bank has another rate decision in late January, and plenty of opportunities to jawbone hawkish until something breaks.
The reality for the Fed is they remain between a proverbial rock and a hard place. The central bank can ease interest rates down, risking a resurgence of price inflation, or it can hold its ground and risk crashing the economy. Either scenario would benefit the gold price.
Just ahead of the last FOMC meeting in mid-December, when a surprise rate-cut timeline was announced, Fed Chair Jerome Powell boldly criticized the Biden Administration, saying that government spending is “unsustainable.”
Central banks rarely criticize governments in public. The last time the Fed openly defied the U.S. government was in 1951, when the central bank refused to purchase debt to prevent rate hikes amid the Korean War.
While Powell's remarks were carefully chosen and not a direct criticism of government, the Fed Chair issued a stark warning that highlights the most significant issues facing our economy which are simply out of the Fed’s control: war, taxation, and government spending.
The Fed knows we are in an untenable environment with debt bubbles as far as the eye can see straining under the pressure of higher interest rates. Emergency lending by U.S. federal authorities has bathed America’s struggling regional banks in short-term liquidity, disguising the slow-burn damage of a U.S. commercial property slump.
A sobering analysis by a recent paper published by the National Bureau of Economic Research (NBER) says this comfort blanket has created a beguiling illusion of stability. The underlying crisis in the banking system continues to deepen under the weight of “higher for longer” interest rates, as $5 trillion of commercial real estate debt taken out during the zero-rate era comes due in tranches.
There has been no repeat of the lightning-fast bank runs that brought down Silicon Valley Bank, First Republic, and two smaller lenders last March, with contagion toppling Credit Suisse in Europe. But this is due to Fed liquidity support allowing lenders to “extend and pretend.”
Over the last two months, the balance in the Fed’s Bank Term Funding Program (BTFP) has surged, and the pace of borrowing appears to be increasing. Since Nov. 19, the amount of outstanding loans in the BTFP has increased by $27.3 billion. As of Jan. 3, the balance in the BTFP stood at just over $141.2 billion, which is the largest balance since the program was created in the wake of the regional banking crisis last March.
The NBER paper said banks have $2.7 trillion of total exposure to commercial property. Almost 70% is concentrated among small and mid-sized regional lenders, with most having already burned through their safety buffers. Moody’s says exposure among regional banks with assets below $250bn is 180% of their capital.
The full threat to the financial system, however, is larger as some 2,000 banks are already facing “negative capitalization” due to the broader interest rate shock and paper losses on bonds. Any further stress in commercial property could push another tier of lenders over the edge.
The bottom line is interest payments will continue to quickly climb much higher unless rates fall, which is most likely why the Fed is so eager to cut interest rates in 2024 despite price inflation being nowhere near their 2% target. Once a multi-year speculative bubble has ran its course, the Fed has a history of being reactive when it comes to rate-cuts as opposed to proactive.
After the dot-com bubble popped at the turn of the century, then Fed Chair Alan Greenspan held an emergency FOMC meeting on the first trading day of 2001 to cut the Fed Funds Rate by 50 basis points. This reactive Fed announcement, in response to a sinking stock market, sparked a decade long gold bull market which saw the gold price move from $250 per ounce at the time to $1925 by late 2011.
Whether the mainstream realizes it or not, the Federal Reserve is already breaking things in the economy with its higher interest rates.
The banking crisis last spring was the first sign of trouble but likely will not be the last.
With everyone from corporations, consumers, and the federal government consumed with untenable debt burdens, the global economy and the financial system cannot function long-term within a high interest rate environment. As a result of the most aggressive Fed rate-hike campaign in 22-years, the banking crisis earlier this year was the first thing to break. Other things will follow.
The gold price also remains susceptible to further upside risks on growing global dysfunction with the wars between Russia/Ukraine, Israel/Hamas, the rising tensions in the Middle East, particularly lately in the Red Sea, and the political dysfunction in the U.S.
With the gold price continuing its consolidation of recent out-sized gains above the key $2000 round number, both the macro and geopolitical climate bodes well for this previously elusive level to become a solid floor in the not-too-distant future.
Once gold breaks out to new all-time highs, the mainstream media will start paying attention to gold stocks, while momentum traders and fund managers will begin moving into the under-owned junior space. With most generalists still on the sidelines, it is best to position oneself before the herd comes into this tiny sector.
In anticipation of the incredible gains the junior sector will begin to experience once the gold price prints a technical breakout above $2100 on a monthly closing basis, 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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