To begin what has been a volatile week in the marketplace, the tragic killing of three U.S. soldiers in Jordan over the weekend by an Iranian proxy group sparked a safe-haven rush into the U.S. dollar, T-bonds, and gold. The safe-haven metal rose above $2050 into the FOMC meeting conclusion on Wednesday, to close out January at $2067 per ounce despite recent hawkish Fed-speak.
After a failed breakout attempt in late 2023, the gold price has been quietly building a new floor at the key $2000 level. Heading into the highly anticipated first Federal Reserve Open Market (FOMC) meeting of 2024, held on the last two days of January, Gold Futures closed above this important level for a third consecutive month.
An hour after the Comex closed out January trading in Gold Futures, Federal Reserve chair Jerome Powell on Wednesday afternoon delivered a sweeping endorsement of the U.S. economy's strength and said the next rate move would be lower. Powell’s comments came after the FOMC meeting, where the central bank left its benchmark interest rate unchanged as expected.
Overall, Powell’s statements and the FOMC’s policy stance indicate a cautious approach to rate cuts, with a focus on data-dependent decision-making and a lack of immediate urgency to reduce rates. These statements made a March pivot less likely, taking away earlier geopolitically influenced price gains in gold.
While the market was hoping for further hints of a March pivot, the Fed chairman also did not fully close the door on a rate cut next month. It’s just “not the most likely” or “base case” scenario right now, he said. Powell also stated there were two things that could make the Fed cut faster and sooner - a weakening in the labor market or “very, very persuasive” lower inflation.
After better-than-expected U.S. jobs data was announced this morning, Gold Futures have sold down to support at the $2040-$2050 region as the USDX moves towards overhead resistance at 104. Skepticism of further upside to the "external" high in the USDX from November 2022 at 107 remains, since the U.S. dollar must weather Treasury borrowing over the next eleven months that will dwarf anything ever attempted before. The Treasury auction calendar for 2024 will require $8.6 trillion of borrowing to finance rollovers and U.S. budget outlays.
Traders are now pricing in just a 17% chance of a cut in March, down from around 50% last week and 89% a month ago, according to the CME FedWatch Tool. Yet, the world's most powerful central bank is running out of good excuses to stay hawkish.
Powell understands that the debt-based U.S. economy is dependent on easy money. Although the Fed cannot control governments fiscal mis-management, the independent central bank knows this same economy loaded up with untenable debt is unable to keep plugging along in a high interest rate environment.
The recently released update on federal interest expense shows that the U.S. has now entered into a debt spiral, with over $1 trillion now being spent each year just to service the monumental, and parabolically rising, federal debt.
Before Fed-speak on Wednesday, the banking sector was spooked by the recent property-related losses reported by New York Community Bancorp (NYCB). The news sent a chill through markets, as NYCB announced a 70% cut to its dividend. The regional bank also posted a quarterly loss of -$260 million while a $250 million gain was expected.
The news sparked a drop in the KBW Regional Banking Index of 4.8%, marking its largest single-day loss since the collapse of Signature Bank in March of the previous year. This two-day decline is on track to be the most substantial since June 2020. New York Community Bancorp’s shares lost an additional 13.4% of their value on Thursday, with the stock experiencing a record single-day drop of 37.6% during the previous trading session.
According to a recent working paper published by the National Bureau of Economic Research, the troubled commercial real estate (CRE) market could be the needle which pops the bubble economy.
After a blog post last week by the International Monetary Fund (IMF) warned about stress in the CRE market, saying it is “under intense pressure globally” due to rising interest rates, the Fed may be forced to pivot much sooner than they would like.
As stated by the IMF, commercial real estate prices have fallen by 11% since the U.S. central bank started aggressively hiking rates in 2022. Due to the world's largest central bank moving its Fed Funds borrowing rate from zero to over 5% in just 16 months, the CRE sector has been facing a triple whammy of falling prices, falling demand, and rising interest rates.
In the meantime, emerging economies, which have been frontrunning both the Fed’s tightening and its easing cycle, have already started cutting rates. Positioning Interest rate cuts is one of the major macroeconomic drivers for gold prices in 2024, with rising geopolitical uncertainty being another.
Gold may also be sniffing escalating war fears as NATO began its largest war exercise in 36 years entitled "Steadfast Defender 2024" on January 26, which has not been given much media coverage. This major war games exercise is comprised of 90,000 soldiers, 50 ships, 1,100 combat vehicles, and aimed to practice defense against near-peer adversaries, like Russia. The event is the largest NATO exercise since 1988, when final maneuvers were dealt to the USSR in the Cold War era.
Taiwan also carried out a series of drills this week to simulate a Chinese invasion. With the elections now concluded in Taiwan and Democratic Progressive Party (DPP) candidate William Lai the expected victor, all eyes are on the ongoing transition, which will culminate in Lai’s inauguration on May 20.
Moreover, farmers throughout the world have been protesting the increasing regulations on agriculture. Heading into the new year, farmers have staged massive protests in the Netherlands, then Germany, and now in Portugal, Italy, France, and Brussels.
The media was barely covering the story until this week, when farmers descended on Paris and the EU Summit in Brussels. The farmers are protesting against over-regulation, taxes, and the climate change agenda that is making it increasingly difficult for them to make a successful living.
When considering all the above, it’s no wonder the World Gold Council's 2023 fourth quarter and full-year gold demand trends report released on Wednesday noted that central bank demand has nearly doubled the average in the last ten years. According to the final estimates, central banks bought 1,037 tonnes of gold last year, missing the 2022 record by only 45 tonnes.
With war fears and civil unrest heating up into a global election cycle that will see more than 2 billion people voting this year, combined with the dire fiscal condition of the U.S. government, and increased central bank safe-haven buying of bullion, this cocktail of events has Gold Futures creating a solid floor at $2000 per ounce.
Meanwhile, the silver-related junior mining sector was rocked by a major SILJ index asset allocation change to begin the week, which resulted in both up-weightings and down-weightings in 74 of the ETFs constituents.
Beginning this week, SILJ no longer follows the Prime Junior Silver Miners & Explorers Index and now tracks the Nasdaq Metals Focus Silver Miners. Amplify Prime Junior Silver Miners ETF prospectus can be accessed here.
With liquidity drying up in the sector, due mostly to black bearish sentiment and investor apathy, the so-called junior index funds continue to become less junior. Smaller-cap names are being divested, then replaced with mid-tier producers and large-cap royalty/streaming firms with more liquidity.
Within the big picture, both GDX and GDXJ gold miner ETFs have formed a nearly 4-year bullish ascending symmetrical triangle, with lower highs and higher lows from the covid induced spike low in March 2020.
A symmetrical triangle chart pattern represents a period of consolidation before the price is forced to breakout or breakdown. A breakdown from the lower trendline marks the start of a new bearish trend, while a breakout from the upper trendline indicates the start of a new bullish trend. Price action over the past four years has moved into a near term conclusion breakout taking place soon.
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.
If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
