After a sharp two week rise into blue-sky territory above $2200, which saw gold move up $150 during 8 consecutive positive trading sessions, short-term extreme overbought Gold Futures were due for a rest coming into a heavy U.S. data schedule this week.
With higher U.S. inflation data coming in a bit hotter than expected on Tuesday, the safe-haven metal began a healthy consolidation of outsized gains on que. Consumer inflation data (CPI) showed prices increasing strongly for a second straight month in February, taking the gold price down towards support at $2150.
Yet, the weakness was quickly bought the following Wednesday as the market awaited producer inflation data (PPI) on Thursday. Also, technically overbought gold did not see a significant rise in selling pressure after Thursday’s PPI showed prices rising considerably more than expected in February amid a surge in the cost of goods like gasoline and food.
The imminent gold price correction has been muted this week despite a rising U.S. dollar as we head into the FOMC meeting next week. While the Federal Reserve remains on blackout heading into the meeting decision on March 20, recent statements from Fed officials have suggested that interest rates are unlikely to increase from current levels and that cuts could be coming soon but are not imminent.
With several catalysts possibly being responsible for the recent gold breakout into all-time high territory, it has been difficult for analysts to pinpoint why bullion prices have remained firm in the face of higher-for-longer interest rates likely to continue into the summer.
As mentioned in this space last week, it has been my contention that gold is breaking out as the marketplace fears the return of a regional banking crisis.
Banks are dealing with major challenges such as the plunge in demand for office space because of home working while interest rates rose from less than 1% in March 2022 to over 5% in just 16 months. This has brought the medium-sized New York Community Bank (NYCB) to the brink in recent weeks.
Following NYCB announcing last week that former Trump Treasury Secretary Steven Mnuchin bailed it out with a $1 billion injection from his company Liberty Strategic, the Fed’s Bank Term Funding Program (BTFD) ended on Monday.
The emergency lending facility was shut down a year after it began in response to the failures of regional banks Signature, Silvergate and Silicon Valley.
There has been no repeat of the lightning-fast bank runs that brought down three of the four largest-ever U.S. bank failures last March, along with contagion toppling Credit Suisse in Europe. But this is due to Fed liquidity support from this lending program allowing lenders to “extend and pretend.”
A recent report from the Social Science Research Network noted there were 186 banks in the U.S. at risk of failure or collapse because of high interest rates, high uninsured deposits, and badly mismatched assets and liabilities. And now there is no Fed safety net in place.
According to the report, if half of the uninsured depositors quickly withdrew their funds from these 186 banks, even insured depositors may face impairments as the banks would not have enough assets to make all depositors whole. This could potentially force the Federal Deposit Insurance Corporation (FDIC) to step in.
Another reason the gold price is in the process of its most important breakout in over 50 years is heightened concern expressed about the exponentially rising U.S. federal debt that now stands at over $34.5 trillion, up 24.5% since 2020 and up over 600% since 2000.
Globally, the world has hit $313 trillion in debt, which is nearly triple global GDP estimated at $105 trillion in 2023. Global debt to GDP stands at a whopping 298%, with governments intentions of paying off rising Sovereign debt way past the point of ever being paid.
Western countries, G7, and OECD countries have some of the highest debt in the world and the highest debt/GDP, with the U.S. alone representing over 30% of all global debt.
The bottom line is a Sovereign debt crisis looms as interest payments will continue to quickly climb much higher unless rates fall, which is why the Fed has maintained its desire to cut interest rates in 2024 despite price inflation being nowhere near their 2% fantasy target.
Once a multi-year speculative bubble has ran its course, the Fed has a history of being reactive when it comes to interest rate policy as opposed to proactive. Just as the world’s largest central bank waited far too long to raise interest rates while calling soaring inflation transitory, the Fed may also be forced to cut interest rates much sooner than they would like.
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.
Although the safe-haven metal ran up over 675% during this period, the HUI Gold Bug miner index went up over 1,800%, while many junior gold stocks went up even more.
I mentioned in this space on March 1st that A.I. stocks could be nearing a similar significant top to the dot-com bubble peak in March 2000. By the end of last Friday’s trading, Nvidia (NVDA) had printed a nasty daily reversal candle after losing US$250 billion of its market cap in one day.
To put this into perspective of how small the gold mining complex has become after retail left the sector over a decade ago, Nvidia’s loss last Friday is nearly equal to the entire market cap of the precious metals mining sector.
Meanwhile, the gold stock mean-reversion which began from an historic low on the HUI:Gold ratio at the beginning of the month is on tap to move higher. While an extreme overbought gold price has begun to consolidate its recent outsized gains at a high level, both silver and precious metals stocks started to show relative strength to the metal this week.
At a time of both historic global debt-to-GDP imbalances as higher-for-longer interest rates are threatening to spark another banking crisis, gold is anticipating the next Fed policy error. The nearly 4-year de-coupling of both silver and the precious metals mining complex has gold equities presenting one of the best value propositions seen since January 2016.
With overvalued tech stocks coming under pressure recently, retail investors are on the verge of rotating historically overpriced tech stock profits into historically underpriced mining shares as the gold price is breaking out of a massive cup & handle pattern.
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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