June 19, 2019
While predicting the future is always difficult, particularly when it comes to the behavior of central bankers, we thought we'd give it a try today as precious metals prices are set to enter a period of significant volatility at the conclusion of the June FOMC meeting on Wednesday.
Since late last year, we've been predicting a rapid reversal of Fed policy in 2019. This will lead to rate cuts, a resumption of QE, negative interest rates, and ultimately a loss of confidence in central bankers. This will prompt a significant rally in precious metal prices, leading to the best annual returns since 2010. You can read all about it here: https://www.sprottmoney.com/Blog/gold-and-silver-2...
So now here we are in June, and the investment world is finally waking up to these realities. Global economic growth is slowing to a crawl, and this is prompting a massive buying surge for sovereign debt, particularly in the U.S. and the Euro zone.
And now, with cash flowing into bonds, the total dollar volume of negative-yielding global debt has reached a new all-time high of over $12T. See the chart below from Charlie Bilello and note that it's not just the German 10-year bund that has a record negative yield. Instead, yields are negative all across Europe.
Negative yields in Europe are driving a massive bid for U.S. bonds too. Note that the U.S. 2-year note has seen its rate fall from 2.40% to 1.80% since mid-April. If you average that out, that's an amazing 60 basis points in sixty days... or about one basis point per day. Simply incredible!
This has now put Chairman Powell in a very difficult situation. Yield curve inversion is historically one of— if not THE—best predictor of a coming economic recession. And all of this bond buying has fully inverted the U.S. yield curve all of the way out past ten years!
• Fed Funds (overnight): 2.40%
• 90-day T-bill: 2.21%
• 2-year T-note: 1.85%
• 10-year T-note: 2.05%
Come Wednesday, the traditional Keynesian in Chairman Powell will know that he should immediately cut the Fed Funds rate by 75 basis points in order to simply bring a positive slope back to the yield curve and stave off the pending recession. However, logic (and our best guess) suggests that he will do nothing of the sort.
Instead, expect Powell and his FOMC to stand pat and do nothing. Oh sure, they'll shuffle some words around in their statement and Powell will attempt to skate through his "press conference" without incident. But by dithering, Powell will dig his grave even deeper, thereby ensuring a more protracted recession and making the eventual rate cuts even deeper and a foregone conclusion.
And this is precisely the situation that will drive COMEX gold out of its six-year trading range and propel it toward an eventual goal of $1500 by later this year. Why?
Let's get back to why the global bond market is rallying in the first place. Global bond investors know what's coming: a recession and associated deflation. Therefore bonds, even those with a negative yield, look attractive at these levels. So what will bond investors think when Powell fails to act on Wednesday? They'll view the coming recession as even more of a given, with the length and breadth of it assured to be even worse due to the indecisiveness of the Fed.
In the days that follow later this week and next, global bond markets will soar further. European rates will move even deeper into negative territory, as the U.S. 2-year yield drops toward 1.70% and the 10-year breaks 2.0%. This next phase of the bond market rally will only serve to place Chairman Powell even further "behind the curve", and by the next FOMC at the end of July, he'll no longer need a 75 basis point Fed funds cut... he'll need to cut the Fed Funds rate by 100 basis points just to catch up!
As this unfolds, gold and silver prices will rally. At present, COMEX gold is being forcibly restrained below the key breakout level of $1360. Gold has not finished a calendar week above $1360 since March of 2013, but once this level is achieved in the weeks ahead, the next stop will be $1400. Then, after a brief pullback and consolidation the move toward $1500 will begin later this summer, as seasonal factors begin to assist price as well. (Chart credit IGWT2019)
COMEX silver is currently being tightly capped at its 200-day moving average. This was expected, but the coming breakout should be expected too. Once clear of the area around $15.10, price will accelerate to the upside as the current Large Speculator short position gets covered. However, even as COMEX gold rallies further, you must expect stiff resistance at the 200-week moving average and trendline shown below. Resistance at these levels has been enforced on nearly twenty occasions over the past three years. Expect more stout, Bank-created resistance when price encroaches on these levels again in a few weeks.
So there you go. A simple roadmap for what to expect in the days ahead following Wednesday's FOMC. If we're mostly correct, we'll be sure to update this post next week. If not, and Powell cuts the fed funds rate, leading to a short-term reversal and downward pressure in gold, we'll completely disavow this post and use the Yogi Berra excuse: "It's tough to make predictions, especially about the future".