Following a major breakout with a Q1 basis close above former 13-year resistance at $2000, a blistering 9-week $450 move saw Gold Futures become extreme overbought into blue-sky territory at $2450.
As we head into the last week of Q1, gold has seen a healthy 10-week $150 consolidation of these outsized gains thus far with a higher low at $2300 becoming strong support.
U.S. markets were shut on Wednesday for the Juneteenth holiday. When trading resumed Thursday, both gold and silver rose sharply despite gains in the dollar and rising bond yields.
Switzerland’s central bank Thursday unexpectedly cut its main interest rates for a second consecutive time to 1.25%, taking the gold price above recent resistance on its 50-day moving average now at $2358 and silver back above the key $30 level.
After the Swiss National Bank cut interest rates for the second time running this week, rate cuts have overtaken sticky inflation heading into Q2.
This shift in narrative overseas comes after the European Central Bank (ECB) also started cutting interest rates earlier this month and in the process, reversed a 25-year precedent. Since its founding in 1999, the ECB has never cut interest rates before the Federal Reserve.
In the meantime, the Fed remains on pause and four voting Federal Open Market Committee (FOMC) members do not believe the central bank should raise rates at all this year.
Last week, the Fed's median dot-plot projection showed policymakers forecast making only one quarter-point cut in 2024. This is a significant change from the FOMC’s last “dot plot” in March, when officials signaled three cuts in 2024.
However, Fed Chairman Jerome Powell used his post-FOMC press conference to try reassuring markets that even though the central bank’s latest data showed inflation projections rising and the number of expected rate cuts falling, the committee’s policy bias was still tilted toward easing.
Powell also suggested people were getting used to the idea that interest rates would not return to pre-pandemic levels, signaling the Fed may be preparing markets for a higher neutral rate as inflation remains well above the central bank's illusive 2% target.
Inflation has remained sticky despite the Fed continuing to exclude food and energy, two of the primary drivers of inflation, when creating their summaries and dot plots.
If the Fed were to lower rates without being convinced that inflation is under control, the U.S. may plunge into stagflation as in the 1970s, taking the gold price much higher.
Powell has repeatedly said that government spending is completely unsustainable as the Biden Administration continues to borrow against future generations. Raising interest rates can have no impact on demand as the government continues to borrow and spend more, while the Fed simply has no say in the matter.
“In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government is on an unsustainable fiscal path. And that just means the debt is growing faster than the economy,” Powell said in a December 2023 interview with “60 Minutes.”
There is not much that the Fed can do, besides hope and pray for a miracle before a whopping $7.6 trillion in interest-bearing U.S. public debt matures ahead of the Nov 5 presidential election.
With potentially the most divisive election in U.S. history since the Civil War a century and half ago, not even the prospect of former president and GOP candidate Donald Trump being sentenced to prison on July 11 has unsettled voters.
Divisions are also steepening in Canada and the EU countries. There has been a distinct shift to the hard right in the EU, based on the recent EU elections.
Gold is also remaining well bid above $2300 as ongoing wars are showing signs of deteriorating further, despite lofty expectations of cease fires.
On Wednesday, Russian President Vladimir Putin signed a pact with North Korean leader Kim Jong Un that ensures either country will support the other in the case they are attacked.
Meanwhile, the U.S. economy has lost around a million full time workers over the last 12 months. Full-time jobs are falling (good paying jobs) while part-time jobs (poor paying jobs) are rising. Government, leisure and hospitality, and health care jobs dominate the recent increase in employment.
Small businesses are also feeling the pressure of tighter financial conditions and higher wages. 10% of small business owners said labor costs were their "single most important problem," according to the latest Small Business Optimism Index.
Although many economists and the Fed are predicting that there either will not be recession, or that the U.S. economy is heading into a soft-landing, negative bond yield spreads have a 100% accuracy record in predicting a coming recession.
Economist David Rosenberg spoke with Kitco this week to highlight the delayed but not derailed approach of a looming recession, emphasizing that current economic signals suggest a tipping point similar to past cycles.
This chart shows the current negative bond yield spread being the largest ever and it has gone on for the longest time ever. The chart suggests that when the recession comes, it will be steeper and last longer than most expect. An overreaction one way (larger negative spreads) often begets an overreaction in the opposite direction (steeper recession).
Turning to another market-based indicator, the Conference Board’s Leading Economic Index, or LEI, combines 10 statistical series that usually turn downward before recessions and rise prior to recoveries. This index has a strong 73% correlation with Bloomberg-surveyed forecasters’ median estimate of the probability of recession within 12 months.
There are usually long lags, however, between the two series’ peaks and troughs and the business cycle’s tops and bottoms. Indeed, the LEI reached its low in April 2023, as did the yield curve one month later, yet there still is no recession.
There is also the fear of new bankruptcy filings and a resulting banking crisis. In May, S&P Global recorded 62 new bankruptcy filings. The 275 bankruptcy filings in just the first half of 2024 almost match last year's 277.
Moody's recently warned that it could downgrade six U.S. banks due to problems in the commercial real estate sector. The main risk is that this will trigger a chain reaction, as happened with Silicon Valley Bank a year ago. Nine companies worth $50 million or more have failed so far this year, the fastest pace of large bankruptcy filings since the pandemic.
As the high interest rate environment continues, there is concern that some small lenders and regional banks will dip below their minimum capital requirements set by the Federal Reserve.
One-fifth, or $929 billion, of the $4.7 trillion of outstanding commercial mortgages held by U.S. lenders and investors was set to come due in 2024, according to the Mortgage Bankers Association (MBA)’s 2023 Commercial Real Estate (CRE) Survey of Loan Maturity Volumes.
On Tuesday the MBA reported commercial and multifamily debt outstanding increased by $40.1 billion in the first quarter of 2024.
Maybe it is no surprise then that we are seeing a slowing as demonstrated recently with industrial production, business confidence and the leading economic index all declining. Consumer spending has been rising even as personal savings are falling and household debt is rising.
None of this bodes well going forward if the U.S. were to fall into a recession, while gold has risen 20% on average during previous recessions.
Western retail investment into precious metals has been a lacking key ingredient for more speculative capital coming into the mining space. But the fact remains that majors and mid-tier miners need new product and many of the juniors are potential takeover targets, but at much higher prices.
Although both gold and silver recently entered into a new bull market after a technical breakout, most juniors continue to be overwhelmed by preferred speculation in cryptos as funds pour into the Bitcoin ETF.
Once the cyclical bull market in gold mining stocks becomes more obvious to generalist investors, the desire to speculate in gold mining stocks will start to ramp up. Recent price action suggests that the start of this speculative ramp-up by generalists may require the gold price moving above $2500, and silver maintaining a strong $30 floor.
A weekly/monthly/quarterly close above the recent all-time high at $2450 in Gold Futures next Friday would bring a wave of momentum traders and speculative generalist capital into the under-owned mining complex.
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