Sentiment towards gold continues to be supported by fears over U.S. government debt, the anticipated arrival of rate cuts, elevated geopolitical tensions, and economic uncertainties.
After the Bank of Canada (BoC) became the first G7 central bank to cut interest rates on Wednesday, the European Central Bank (ECB) cut rates on Thursday for the first time in 5 years. The ECB became the first major central bank to do so ahead of the next FOMC meeting next week.
The ECB lowered its record-high deposit rate by 25 basis points to 3.75%, joining the central banks of Canada, Sweden, and Switzerland in starting to unwind some of the steepest rate hikes used to tame a post-pandemic inflation surge.
The easing moves by banks around the globe will put pressure on the Fed, which holds a two-day rate-setting meeting starting next week on June 11. The world's most powerful central bank is not expected to make a rate-cut move at that meeting.
Yet, what the other banks are doing now may force a Fed move sooner rather than later, perhaps even at its September meeting. Although the pace of rate cuts is slower than once expected, they are still coming and their impact on real rates will be amplified by inflation staying higher-for-longer.
Tuesday's U.S. job opening numbers (JOLTS) data showed the lowest number since February 2021, followed by Wednesday's ADP reading that significantly missed the forecast and Thursday's increased unemployment benefit claims.
Heading into what promises to be an eventful week, with U.S. inflation data on tap to be announced just ahead of the Federal Reserve FOMC meeting, a G7 gathering, plus the Bank of Japan meeting and E.U. election results, volatility in precious metals already increased significantly this morning.
Gold Futures sold off nearly 3% towards the main important support zone at $2300 and silver lost over 5% to move below $30 on the headline that China halted reserves buying after an 18-month stretch, followed by a better-than-expected U.S. May Non-Farms Payroll (NFP) report.
Although the headline employment number beat economist expectations, the unemployment rate rose again last month, increasing to 4.0%, up from 3.9% in April. Economists were expecting the unemployment rate to remain unchanged.
One thing that analysts fail to explain is that Americans have begun working multiple jobs since the Covid pandemic wrecked the global economy. Non-Farm payrolls increased 272,000 in May. But there are millions of Americans holding multiple jobs who can still not keep up with the rising cost of living, even with wages up over 4% in the past year.
The number of people working two jobs remained at December’s all-time highs, while full-time jobs declined sharply last month with part-time jobs increasing. One additional aspect—not a single manufacturing job was added to the U.S. economy in last month.
Moreover, only 62.7% of abled Americans are participating in the workforce. This does not include the 7+ million illegal migrants who cannot obtain working permits but rely on government aid. The BLS also “revises” the jobs report every month, with March and April revisions combined, employment is 15K lower than previously reported.
The higher unemployment rate this week came days after reports of a slowdown in U.S. manufacturing activity for a second straight month and an unexpected decline in construction spending, which is telling the market that the economy is slowing much faster than most people expected, including the Fed.
Not to mention the out-of-control U.S. national debt having surpassed $34.8 trillion at the time of this writing, which continues to grow exponentially. America has never been in a deeper deficit, while record interest payments on U.S. public debt and a dire fiscal outlook have also gained greater attention.
The Committee for a Responsible Federal Budget (CRFB) has reported that the U.S. was forced to pay $514 billion in the first seven months of FY2024 on interest costs alone.
To put this staggering amount for interest payments that contribute nothing to GDP into perspective, the U.S. shelled out $498 billion on national defense, funding 2.5 wars during this time. Around $465 billion was spent on Medicare, with an additional $355 billion spent on Medicaid, and neither surpassed the amount paid on simply holding onto debt.
On a positive note, the Fed’s balance sheet has shrunk from roughly $9 trillion to around $7.3 trillion today. But in 2008, before the 2008 financial crisis, it was only around $910 billion. Federal debt that was $5.7 trillion in 2000, sits at over $34.8 trillion today and is projected to reach $47 trillion by 2028.
Federal debt to GDP that was 54% in 2000 is now 122% and could hit 150% by 2028. This level of debt to GDP is what one expects in some developing countries, not the world’s largest and leading economy. Perpetually issuing new debt to pay for the old is equivalent to a Ponzi scheme that will eventually fail.
Meanwhile, credit card delinquencies (missing a payment by over 30 days) have also been steadily rising across the U.S. With interest rates on credit card borrowings topping 20%, increased defaults are inevitable. The poorest Americans experienced the hardship first, and recently those in higher tax brackets are also falling behind on bills.
Delinquencies have increased for the last 8 to 11 quarters, as indicated by a recent report from the St. Louis Fed. Among the poorest zip codes in the U.S., delinquency rose from 11% in Q2 of 2021 to 17.4% in Q1 of 2024 or 58%. Every region in America has experienced an increase in delinquencies by at least 32.2% in relative terms.
These delinquencies will fall on the banks eventually. Currently, upwards of 282 banks out of roughly 4,000 face threats, primarily due to commercial real estate loans and the risks of "higher-for-longer" interest rates. Most have $10 billion or less in assets, but there is little mention of any money center banks in trouble.
Judging by the actions of U.S. policy makers, government does not realize that reckless spending and raising taxes has an impact on absolutely everyone. Politicians who push for more taxes and social programs fail to realize the larger implications.
Along with these catalysts keeping the gold price well bid above support at $2300, central bank buying has been robust on concerns about the West, EU, and U.S. seizing Russian reserves to be used by Ukraine.
Central banks have been long-term strategic accumulators since 2022. Gold demand from central banks remains significantly higher than pre-2022 when they sped up purchases to diversify foreign currency reserves, providing further support to the price.
Moreover, gold buying by institutions in emerging markets still has significant room to run, even if China has stopped its purchases at current elevated levels in the gold price for now.
Given the political uncertainty that the U.S. election in November is sure to generate, the numerous reasons to hold gold remain. Geopolitical uncertainty continues in Russia/Ukraine/NATO, Israel/Gaza/Lebanon/Syria/Iran, and U.S./China as well.
In the meantime, gold stocks remain very cheap compared to the price of gold, while junior developer/explorers remain even cheaper as most continue to be under-owned, unloved, and unrecognized by general investors.
Stepping back to look at the big picture in the mining space, this long-term monthly chart highlights a massive 13-year triangle pattern that has developed in GDX. As you can see, the major miner ETF has rallied up to the top of the triangle.
The downtrend line has been major resistance and should be followed closely. While the recent overbought pullback is normal, it will be very bullish going forward if/when GDX breaks out from this monster pennant pattern with a monthly basis close above $36.
After more consolidation in the mining space this week, quality silver juniors continue to lead both gold and its miners as many individual issues remain in bullish uptrends with the silver price.
With the market cap of the entire silver mining sector being just $15 billion, we could see significant upside in the long-forgotten silver space this summer after the current consolidation of recent outsized gains is completed.
In anticipation of the incredible gains the junior sector will begin to experience now that both gold and silver have entered into a new bull market, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality silver and gold juniors with 3x-10x upside potential into 2025-26.
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