Gold Awaits Autumn Fireworks

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I will keep this brief this week given the lack of action in the past few days and what I believe is driving the price of precious metals and miners going forward, namely monetary policy.

The Fed has decided it will hike rates into a slowing economy in order to curtail soaring inflation. This virtually guarantees a recession. As of yet, it has not made any decision with regard to cutting the balance sheet. Any action in that regard would be like pushing a boulder downhill. While a recession will likely slow the rise in inflation and possibly cause it to decline somewhat, the impact to the economy and stock markets is probably going to be a lot worse. It’s just a question of time. This depends on how many rate hikes we get, their magnitude, and when they occur. I don’t know the precise timing of the pending recession and the concurrent renewed downturn in stocks, but the September to October timeframe seems like a good bet as this is typically the worst period for stocks. Between now and then, there are several headwinds for Gold, etc.

Gold dumped following the end of fiscal and monetary policy stimulus in August 2020. It fell in line with stocks in February and March 2020 when the repo crisis occurred. It dropped from March to October 2008 as the Great Financial Crisis was underway. When stocks fall again, one would expect Gold to do the same. However, the bond market, which is bigger than the stock market and a better leading indicator, is already pricing in a recession as well as a policy error. By policy error, I mean the bond market expects that the Fed will be forced to reverse any rate hikes sooner rather than later and return to QE on steroids. Short-term rates may be rising, but bond yields at the long end are falling in relative terms. The spread between the 2-Year yield and the 10-Year yield below says it all:

The bond market is pricing in rate “cuts” later this year, possibly early next.

Said simply, the Fed is raising rates now and slowing the economy, which is bearish for stocks and perhaps precious metals in the short-term. But beyond that, when the Fed is forced to reverse course as the recession takes hold and stocks turn down again, the only way is up for Gold at that point, much like post-March 2020 and October 2008.

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In the meantime, Gold continues to hold support at 1900 despite the Bullion Banks being record short. Perhaps it is behaving as it did in 2008, anticipating the Fed’s return to stimulus later this year, as the bond market is forecasting. Hence its resilience despite the Fed’s hawkish stance. While I don’t rule out a sharp drop at some point due to the Banks’ positioning, if it does happen, it will just be a temporary setback before going much higher, imho.

In the very short-term, there’s a perfect set-up for a negatively divergent higher high next now that the extreme overbought condition has corrected. As long as 1900 holds on a closing basis, this is my preferred expectation. Should we close below 1900, then a deeper dive is likely underway. Silver and the miners will follow suit, just to a greater extent as always.

In conclusion, expect some volatility in the short-term in both metals and miners, but know that if and when the Fed reverses course, you’ll wish you had more Gold, Silver, and miners in your portfolio.