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Gold Investment Updates are weekly gold investment newsletter provided by Przemyslaw Radomski, CFA. They are based on the flagship Gold & Silver Trading Alerts that focus on all the key factors that govern long- and medium-term outlooks for gold, silver, and mining stocks. These comprehensive reports (usually size of a small ebook) ensure that you’re kept up-to-date on important developments that 99%+ of investors are likely to miss.

  • Gold Investment Update: Russian Invasion and the Hawkish Fed - A Killer Combo for Gold?

    April 7, 2022, 10:23 AM

    This week belonged to the Fed, as officials finally knocked some sense into overzealous investors. For example, it began with Brainard, George, Daly, and Williams sounding the hawkish alarm, and ended with the FOMC minutes that shook the financial markets. Moreover, while the bearish fundamental implications of the Fed’s rate hike cycle are slowly being grasped by investors, I’ve been warning for weeks that a reality check would unfold. To explain, I wrote on Mar. 22:

    While the PMs seem to think that the Fed’s inflation fight won’t impact their medium-term prospects, the reality is that higher real interest rates are needed to reduce inflation. And with commodity investors failing to comply, the merry-go-round of higher input prices leading to higher output prices will continue. As a result, the downside risk confronting the PMs is enormous at this point.

    Remember, the Fed can only slow inflation by slowing the U.S. economy. That's why Powell keeps referencing a "soft landing" when describing the tradeoff between calming inflation and maintaining growth. However, with continued inflation of 8%+ likely to push the U.S. into recession, Powell knows that doing nothing is as bad as doing too much. As a result, investors should eventually learn that Powell's dovish days are over.

    To that point, while the S&P 500 and the NASDAQ Composite have gotten the memo in recent days, the PMs still remain relatively elevated. However, while the Russia-Ukraine conflict keeps the PMs’ hopes alive for now, their medium-term fundamentals are growing more bearish by the day.

    For example, the Fed released the minutes from its Mar. 15/16 policy meeting on Apr. 6. The report revealed:

    “Many participants noted that – with inflation well above the Committee's objective, inflationary risks to the upside, and the federal funds rate well below participants' estimates of its longer-run level – they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting.

    “A number of these participants indicated, however, that, in light of greater near-term uncertainty associated with Russia's invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting.”

    However, while the Fed initially balked at a 50 basis point rate hike, the policy initiatives that should materialize over the next several months are even more bearish. For example, the report added:

    “Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified. A number of participants noted that the Committee's previous communications had already contributed to a tightening of financial conditions, as evident in the notable increase in longer-term interest rates over recent months.”

    If that wasn’t enough, the FOMC made it clear that selling assets on the balance sheet will occur at “a more rapid pace” than in 2017-2019, with a combined ~$95 billion of U.S. Treasuries and agency mortgage-backed securities (MBS) set to hit the open market each month.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: U.S. Fed

    In addition:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: U.S. Fed

    The Mid-Week Fundamental Roundup

    As a result, there are those buzzwords again. With Fed officials repeating the terms “rapid” and “expeditiously” recently, investors ignored the warnings at their own peril. However, while the minutes moved markets on Apr. 6, the release didn’t include anything materially different from what Fed officials have already said over the last few weeks.

    Moreover, remember what I wrote on Dec. 16 about Chairman Jerome Powell’s press conference?

    As one of the most important quotes of the press conference, he admitted:

    “My colleagues were out talking about a faster taper, and that doesn’t happen by accident. They were out talking about a faster taper before the president made his decision. So it’s a decision that effectively was more than entrained.”

    While Powell sounded a little rattled during the exchange, his slip highlights the importance of Fed officials’ hawkish rhetoric. Essentially, when Clarida, Waller, Bostic, Bullard, etc., are making the hawkish rounds, “that doesn’t happen by accident.” As such, it’s an admission that his understudies serve as messengers for pre-determined policy decisions.

    However, while investors were in la la land, the dynamic was on full display. With more than 10 Fed officials making the hawkish rounds recently, they made it clear that inflation was Public Enemy No. 1. Furthermore, Philadelphia Fed President Patrick Harker reiterated the message on Apr. 6. He said:

    “Inflation is running far too high, and I am acutely concerned about this. Russia’s invasion of Ukraine will add to inflation pressure, not only hiking oil and gas prices but other commodities, like wheat and fertilizer, as well.”

    As a result, he used two sentences to sum up the Fed minutes and what every other Fed official has said over the last month.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Bloomberg

    In addition, while the S&P 500 and the NASDAQ Composite suffered on Apr. 6, they still remain materially overvalued. Moreover, the PMs have somewhat side-stepped the volatility and also remain in denial of what’s likely to unfold over the medium term. However, I warned on Apr. 6 that Fed officials should continue to pound away at the financial markets until investors finally fulfill their hawkish wishes. I wrote:

    Please remember that the Fed needs to slow the U.S. economy to calm inflation, and rising asset prices are mutually exclusive to this goal. Therefore, officials should keep hammering the financial markets until investors finally get the message.

    Moreover, with the Fed in inflation-fighting mode and reformed doves warning that the U.S. economy “could teeter” as the drama unfolds, the reality is that there is no easy solution to the Fed’s problem. To calm inflation, it has to kill demand. As that occurs, investors should suffer a severe crisis of confidence.

    Thus, while negativity reigned supreme on Apr. 6, we’re likely in the early innings of this thesis. For more context, I wrote on Apr. 5:

    To explain, the orange line above tracks the number of rate hikes priced in by the futures market, while the blue line above tracks Goldman Sachs’ Financial Conditions Index (FCI). If you analyze the movement of the former, futures traders expect roughly nine rate hikes by the Fed in 2022.

    However, if you focus your attention on the right side of the chart, you can see that the FCI has declined materially from its highs. Therefore, financial conditions are easier now than they were before the March FOMC meeting.

    Please remember that loose financial conditions impair the Fed’s ability to achieve its inflation goal. As such, we should expect tighter financial conditions over the medium term, and the FOMC made that point clear in the minutes.

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: U.S. Fed

    Therefore, please remember that loose financial conditions are bullish for the PMs, while tighter financial conditions are bearish. With Fed officials actively trying to push the blue line above higher, several asset classes should suffer from the Fed’s hawkish disposition. In a nutshell: lower stock and commodity prices and a stronger U.S. dollar help the Fed achieve its inflation goal. The opposite does not.

    Also noteworthy, with inflation a political liability for the Biden Administration (which I’ve noted on several occasions), the chances of a dovish pivot are slim to none. Thus, is it wise to fight the Fed?

    Please see below:

    To explain, the Kaiser Family Foundation’s (KFF) poll released on Mar. 31 stated that “more than half of the public (55%) say inflation and rising prices is the biggest problem facing the U.S. right now, more than three times the share who say the same about any other issue included in the survey.”

    As a result, the Fed has the political authority to reduce inflation by any means necessary. If history is any indication, the power struggle should light plenty of fireworks over the medium term. To explain, I wrote on Mar. 23:

    When Fed officials dial up the hawkish rhetoric, their “messaging” is supposed to shift investors’ expectations. As such, the threat of raising interest rates is often as impactful as actually doing it. However, when investors don’t listen, the Fed has to turn the hawkish dial up even more. If history is any indication, a calamity will eventually unfold. 

    Please see below:

    To explain, the blue line above tracks the U.S. federal funds rate, while the various circles and notations above track the global crises that erupted during the Fed’s rate hike cycles. As a result, standard tightening periods often result in immense volatility. 

    However, with investors refusing to let asset prices fall, they’re forcing the Fed to accelerate its rate hikes to achieve its desired outcome (calm inflation). As such, the next several months could be a rate hike cycle on steroids. 

    In addition, while I noted that we’re likely in the early innings of this thesis, a slow shift is already unfolding. Moreover, once the PMs realize that they are as vulnerable as the S&P 500, investors’ sentiment should follow.

    Please see below:

    Source: Bloomberg/Zero Hedge

    To explain, the four charts above depict various shifts in financial conditions. Whether its inflation expectation spreads, the Chicago Fed’s National Financial Conditions Index, or bond market volatility, the Fed’s message is slowly seeping in. However, with equity volatility (the purple line) quite muted relative to bond volatility (the blue line), the former should crack as the Fed continues its hawkish stampede. 

    Finally, please note that the PMs often move inversely to U.S. real yields, and with the U.S. 10-Year real yield hitting another 2022 high of -0.30%, the Fed’s “rapid” liquidity drain should lift the metric toward 0% over the medium term.

    The bottom line? While the Fed’s hawkish disposition aligns perfectly with my expectations, investors’ denial of the fundamental ramifications has delayed the PMs’ likely drawdowns. However, as the financial market impact of the Russia-Ukraine conflict subsides and the Fed’s rate hike cycle takes its toll on the U.S. economy, commodities’ fervor should dissipate. Moreover, the fundamental constraints confronting the PMs now are even worse than they were at the end of 2021.

    In conclusion, the PMs declined on Apr. 6, as a sea of red flooded Wall Street. However, with rising real yields and a stronger USD Index akin to fundamental Kryptonite, gold, silver, and mining stocks face many economic headwinds. As such, while the short term remains uncertain, the bearish medium-term thesis is becoming clearer by the day.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Gold Investment Update: Let’s Talk Inflation, Is a “Soft Landing” Still Possible?

    April 1, 2022, 7:49 AM

    While the general stock market tumbled on Mar. 31, the PMs still remain relatively elevated. However, this week brought about several developments that impair the PM's medium-term fundamental outlooks. 

    For example, inflation remains red-hot, as the latest corporate earnings calls show executives fretting about input and wage pressures. Moreover, when the only choices are raising prices or eroding their profit margins, it's a lose-lose situation for the financial markets. 

    On the one hand, absorbing the costs results in weak quarterly earnings, and investors often punish companies that underperform. On the other hand, raising prices further stokes inflation and increases the chance that the Fed's swift rate hike cycle will push the U.S. economy into recession. As a result, long-only investors face an extremely uncertain future, and the Fed's margin for error is extremely low.

    Furthermore, the U.S. labor market remains on fire. With near all-time high JOLTS job openings hitting the wire this week, The Confidence Board's jobs are "plentiful" metric hitting an all-time high, and ADP's private payrolls also outperforming consensus expectations, the U.S. employment picture remains rosy. As a result, the Fed should light plenty of hawkish fireworks over the next few months.

    Speaking of which, more Fed officials made the rounds this week. And with their hawkish rhetoric still steadfast, the S&P 500 and the PMs remain in fundamental denial.

    For example, Philadelphia Fed President Patrick Harker said on Mar. 29 that "I am open to sending a strong signal with a 50 basis point increase at the next meeting." Moreover, while he added that "I have penciled in seven… 25 basis point increases for this year," and more or less will depend on the path of inflation, a neutral rate of ~2.5% implies roughly 10 rate hikes over the next several months.

    Please see below:

    TextDescription automatically generatedSource: Reuters

    Likewise, Kansas City Fed President Esther George said on Mar. 30 that “The balance sheet will need to decline significantly,” as she cited the “distortive effects” the Fed’s nearly $9 trillion in holdings have on the financial markets. “The interaction of higher policy rates with a large balance sheet will need to be considered.”

    Moreover, channeling her inner Jerome Powell, she also used the term “expeditiously” when describing the future path of interest rates.

    Please see below:

    TextDescription automatically generatedSource: Bloomberg

    Making three of a kind, Richmond Fed President Thomas Barkin said on Mar. 30 that he’s “open to” a 50 basis point rate hike in May. Moreover, with his perception of neutral at 2.4% (roughly 10 rate hikes), he sounded quite committed to the path ahead.

    Please see below:

    TextDescription automatically generatedSource: Bloomberg

    As a result, with Barkin’s assessment of “as we get closer to neutral we can make that call,” it’s important to remember that there is a considerable distance from 0.25% (one rate hike where we are now) to 2.4%. As such, while Fed officials make their points loud and clear, the fundamental ramifications of getting to neutral will likely have profound impacts on the S&P 500 and the PMs.

    To that point, with Wall Street now aligned with our expectations for future Fed policy, investment banks have increased their rate hike estimates for the coming months.

    Please see below:

    TextDescription automatically generatedSource: Bloomberg

    Moreover, while Bank of America has been in the hawkish camp for some time, Chief Global Economist Ethan Harris wrote that “The Fed has accepted that it’s behind the curve and will be emboldened by the resilience of the economy and the financial markets. The remaining question is whether it will be willing to impose serious pain on the economy to rein in inflation.”

    Furthermore, while he added that the Fed could engineer a growth recession next year that brings inflation down to 2.6% and modestly pushes up unemployment, he cautioned, “that is at the optimistic end of outcomes. The main risks are to the downside.”

    To that point, with U.S. Treasury yields already screaming at the Fed to tighten, inversions are popping up everywhere. And with the inflationary quagmire creating a lose-lose situation, the bond market highlights the anxiety that should be confronting the Fed.

    Please see below:

    TableDescription automatically generatedSource: Investing.com

    To explain, the red box above highlights how the U.S. 3-Year, 5-Year and 7-Year Treasury yields ended the Mar. 31 session higher than the U.S. 10-Year Treasury yield. As a result, those curves have inverted, which is the opposite of what the Fed wants.

    Conversely, an upward sloping yield curve results in longer-dated maturities having higher interest rates. And this occurs because longer maturities have more duration risk, and therefore, investors should be compensated with higher yields.

    However, with the three-year at ~2.51% and the 10-year at ~2.35%, the short-end of the curve is pricing in rampant rate hikes, while the medium to long-end of the curve is pricing in a material slowdown in growth. As a result, long-end bond investors are correctly (likely) predicting that the Fed’s expeditious rate hike cycle will scar the U.S. economy. Thus, the lose-lose situation should have drastic implications for risk assets over the medium term.

    For your reference, the 10-2 spread is also close to inverting as well, with the U.S. 2-Year Treasury yield ending the Mar. 31 session at ~2.33%. However, please note that the ramifications don’t imply lower interest rates. In fact, the U.S. 10-Year Treasury yield often climbs when the Fed hikes interest rates. However, short-term interest rates may increase at a faster pace. To explain, I wrote on Jan. 19:

    If the U.S. 10-Year Treasury yield declines in 2022, it will defy nearly 40 years of historical precedent.

    Please see below:

    ChartDescription automatically generated

    To explain, the dark blue line above tracks the U.S. 10-Year Treasury yield, while the light blue line above tracks the U.S. Federal Funds Rate. If you analyze the latter's ascents starting in 1987, 1993, 1999, 2004 and 2017, you can see that the U.S. 10-Year Treasury yield always rallies when the Fed increases the U.S. Federal Funds Rate.

    Moreover, the U.S. 10-Year Treasury yield doesn't usually peak until after the Fed finishes its rate hike cycles. For example, if you focus your attention on the light blue line's highs, notice how the U.S. 10-Year Treasury yield keeps rising until the Fed stops hiking? And with a rate hike in March likely a done deal and Fed officials projecting anywhere from two to four rate hikes in 2022, is this time really different? 

    To that point, with the U.S. 2-Year Treasury yield rallying hard in 2022, history implies the Fed will play catch-up over the medium term.

    Please see below:

    Chart, line chart, histogramDescription automatically generated

    To explain, the gold line above tracks the U.S. 2-Year Treasury yield, while the blue line above tracks the U.S. federal funds rate. If you analyze the right side of the chart, you can see that the former has materially outperformed the latter.

    However, Morgan Stanley found that the U.S. 2-Year Treasury yield often leads the U.S. federal funds rate by 20 weeks. As such, with the former already moving sharply higher, a dovish pivot by the Fed would also defy nearly 40 years of historical precedent. 

    Likewise, with U.S. economic data still on solid ground, the Fed should remain on autopilot for the foreseeable future. For example, while it’s a lagging indicator, and therefore less relevant, the U.S. Bureau of Economic Analysis (BEA) revealed on Mar. 30 that U.S. real GDP “increased at an annual rate of 6.9 percent in the fourth quarter of 2021.” For context, U.S. real GDP was running at roughly 2% pre-COVID-19.

    Please see below:

    Chart, waterfall chartDescription automatically generated

    On top of that, the BEA revealed on Mar. 31 that the Personal Consumption Expenditures (PCE) Index (the Fed’s main inflation gauge) increased by a new 2022 high of 6.4% year-over-year (YoY). For context, the values at the top represent month-over-month (MoM) percentage changes, while the values at the bottom represent YoY percentage changes.

    Please see below:

    Graphical user interface, text, application, tableDescription automatically generatedSource: BEA

    Finally, Challenger, Gray, and Christmas released their jobs cuts data on Mar. 31. In a nutshell: it tallies how many employees were fired in March. And while cuts increased by 40.3% MoM, they still declined by 30% YoY. As a result, the data does little to cool the red-hot U.S. labor market. For context, the report also stated:

    “In the first quarter of 2022, employers announced 55,696 cuts, down 62% from the 144,686 cuts announced through the same period in 2021. It is the lowest quarterly total since the third quarter of 2021, when 52,560 cuts were recorded.”

    Please see below:

    Chart, line chartDescription automatically generated

    The bottom line? While some investors think the Fed can engineer a “soft landing,” the data suggests otherwise. Moreover, with job openings, retail sales, and input and wage inflation tracking well ahead of their pre-pandemic trends, normalizing these metrics requires sharp declines. Thus, reducing annualized inflation from ~8% to 2% requires much more demand destruction than reducing it from 4% to 2%. As a result, investors underestimate the medium-term economic slowdown that will likely unfold during the Fed’s accelerated rate hike cycle. 

    What to Watch for Next Week

    With another full slate of U.S. economic data releases next week, the most important are as follows:

    • Apr. 4: The Confidence Board Employment Trends Index (ETI)

    With the Fed still fixated on employment, the ETI is a leading indicator of the health of the U.S. labor market.

    • Apr. 5: The Institute for Supply Management (ISM) and S&P Global services PMIs.

    As a leading indicator of service sector activity, data from the ISM and S&P Global provides a window into the performance of the businesses hardest hit by the pandemic. Moreover, with the service sector poised to grab the inflation baton from manufacturing, it will be interesting to see how these companies respond to the pricing pressures.

    All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see higher employment and inflation, the Fed should keep its foot on the hawkish accelerator. And if that occurs, the outcome is profoundly bearish for the PMs.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Gold Investment Update: Never Underestimate a Hawk. Fed’s Moves May Strike Gold

    March 25, 2022, 11:07 AM

    While the PMs remain elevated and optimism echoes, momentum investors have little use for medium-term technicals or fundamentals. However, with the Fed's hawkish agenda poised to collide with investors' over-positioning, the PMs should suffer mightily when the next bout of volatility erupts.

    To explain, this week was filled with Fed officials urging investors to slow their roll. Whether it's Kashkari, Barkin, Waller, Bullard, Bostic, Daly or Powell, they all warned about substantial interest rate increases over the next several months. 

    Furthermore, with the chorus expanding later in the week, Cleveland Fed President Loretta Mester said on Mar. 23 that investors should prepare for several rate hikes and quantitative tightening (QT) in the coming months.

    “We have told the markets that we would let them know what the balance sheet process would look like,” said Mester. “I think given the situation we’re in and the communications that Chair Powell has already made about the balance-sheet process, I don’t have concerns that that would be destabilizing.”

    Moreover, Mester expects 10 rate hikes by the end of 2022 (2.5% = 10 hikes of 0.25%).

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Bloomberg

    Singing a similar tune, Chicago Fed President Charles Evans said on Mar. 24: “We want to be careful, we want to be humble and nimble, and get to neutral before too long – maybe 50 helps, I’m open to that.”

    Either way, he added: “I would be comfortable with each meeting increasing by a quarter point,” which implies six more rate hikes (seven in total) by the end of 2022.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Bloomberg

    As a result, we’ve had nine Fed officials tell investors this week that seven to 12 rate hikes are coming over the next nine months. While the financial markets have taken the hawkish rhetoric in stride, history implies that the fundamental implications contrast with the sanguine sentiment. To explain, I wrote on Mar. 23:

    When Fed officials dial up the hawkish rhetoric, their “messaging” is supposed to shift investors’ expectations. As such, the threat of raising interest rates is often as impactful as actually doing it. However, when investors don’t listen, the Fed has to turn the hawkish dial up even more. If history is any indication, a calamity eventually unfolds. 

    Please see below:

    To explain, the blue line above tracks the U.S. federal funds rate, while the various circles and notations above track the global crises that erupted during the Fed’s rate hike cycles. As a result, standard tightening periods often result in immense volatility. 

    However, with investors refusing to let asset prices fall, they’re forcing the Fed to accelerate its rate hikes to achieve its desired outcome (calm inflation). As such, the next several months could be a rate hike cycle on steroids. 

    To that point, investors may take solace in the belief that the Fed won’t follow through on its hawkish promises. As such, why not buy the PMs and front-run the Fed’s dovish pivot? However, I’ve warned for months that the U.S. economy remains in solid health. As a result, the probability of a dovish 180 continues to dwindle. For context, new U.S. home sales dipped on Mar. 23, as higher interest rates reduced demand.

    Please see below:

    However, the average selling price of a U.S. home increased to an all-time high of $511,000 in February. As a result, shelter has never been more unfordable in the U.S., and lower-for-longer interest rates have been the primary driver of housing inflation.

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: U.S. Census Bureau

    Likewise, U.S. durable goods orders also slipped on Mar. 24. However, the decline followed four-consecutive months of gains.

    Please see below:

    More importantly, though, IHS Markit’s U.S. Composite PMI was the data point we waited for all week. For context, IHS Markit completed its merger with S&P Global, so the data goes by the latter’s name now. However, with the data acting as a leading indicator of U.S. economic activity, the results often predict the direction of future U.S. government data.

    What was the verdict? Well, aligning with what I’ve been warning about for many months, S&P Global’s U.S. Composite PMI increased from 55.9 in February to 58.5 in March, as “manufacturers and service providers registered stronger upturns in activity, largely supported by pent-up demand and the easing of COVID-19 restrictions.”

    Please see below:

    On top of that, the report revealed:

    "March data showed a marked rise in new orders at businesses, as an upturn in client demand strengthened for the second month running to reach a nine-month high…. Alongside more favorable domestic demand conditions, new export orders rose at a quicker pace at the end of the first quarter."

    In addition:

    "The rate of overall job creation was the sharpest since April 2021, as manufacturers and service providers alike recorded steeper upturns in employment."

    Moreover, with resilient demand colliding with rising commodity prices, the inflationary results still contrast with the Fed's goals.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: S&P Global

    In addition, while the U.S. service sector has lagged manufacturing due to the restrictions imposed during the spread of the Delta and Omicron variants, many U.S. states have abandoned their COVID-19 policies. As a result, services are gaining momentum and have grabbed the inflationary baton.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznie Source: S&P Global

    As a result, does this seem like an economic environment where the Fed will refrain from raising interest rates? As further evidence, the Kanas City Fed released its Tenth District Manufacturing Activity Survey on Mar. 24., and with the headline index increasing from 29 in February to 37 in March, the report revealed that “Tenth District manufacturing activity reported record high growth and expectations for future activity remained solid.”

    Please see below:

    Source: KC Fed

    Moreover, the KC Fed’s prices paid index increased from 64 in February to 81 in March, while its prices received index increased from 47 to 51. As a result, inflation trends are not moving in the Fed’s desired direction.

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: KC Fed

    On top of that, not only did current inflationary pressures increase month-over-month (MoM) in March, but the KC Fed’s index of manufacturers’ six-month expectations for prices received increased to an all-time high of 75.

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: KC Fed

    Finally, the U.S. Department of Labor (DOL) released its weekly unemployment data on Mar. 24. With initial unemployment claims hitting a new post-pandemic low of 187,000, the U.S. labor market also meets the Fed’s threshold to raise interest rates.

    Source: DOL

    The bottom line? While some investors think that the Fed is all bark and no bite, the data suggests otherwise. With demand resilient, inflation abundant, unemployment falling, and Fed officials warning of coming rate hikes, the next several months should elicit plenty of hawkish fireworks.

    Likewise, the data we received this week shows that inflation is still increasing MoM. Moreover, the PMI report from S&P Global shows that U.S. economic activity has also strengthened MoM. Furthermore, with the warm weather approaching, the summer months should increase consumer mobility and foster stronger economic growth relative to the winter periods. As such, the good news should continue to flow, and that’s bullish for hawkish Fed policy, the USD Index, and U.S. Treasury yields, and bearish for the PMs.

    What to Watch for Next Week

    With another full slate of U.S. economic data releases next week, the most important ones are as follows:

    • Mar. 28: Dallas Fed manufacturing index

    Like the data covered above, the Dallas Fed manufacturing index will let us know how output, employment, and inflation are behaving in Texas.

    • Mar. 29: The Confidence Board consumer confidence, JOLT job openings, Dallas Fed services index

    With interest rates on the rise and inflation still raging, it will be interesting to see how the dynamics have affected consumers' psyches as well as businesses' hiring expectations. Likewise, the data from the Dallas Fed will provide a window into the service sector recovery in Texas.

    • Mar. 30: ADP employment, Q4 GDP

    While ADP's data is often a poor predictor of U.S. nonfarm payrolls, it still provides valuable insights into private employers' hiring activity. In addition, Q4 GDP is a lagging indicator, and investors are forward-looking. As a result, the data isn't as impactful as the monthly surveys. However, it's still important to monitor. 

    • Mar. 31: PCE Index, Challenger job cuts, Chicago PMI

    The PCE Index is the Fed's primary inflation gauge, so more hot prints will only increase officials' hawkish dispositions. Likewise, Challenger job cuts will let us know how many U.S. citizens have lost their jobs, while the Chicago PMI will let us know how output, employment, and inflation are behaving in Illinois.

    • Apr. 1: U.S. nonfarm payrolls, ISM manufacturing PMI

    Like the PCE Index, continued outperformance of U.S. nonfarm payrolls will only increase Fed officials' hawkish estimates. In addition, it will be interesting to see if ISM's manufacturing PMI confirms or contrasts with S&P Global's data outlined above.

    All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see higher employment and inflation, the Fed should keep its foot on the hawkish accelerator. If that occurs, the outcome is profoundly bearish for the PMs.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Gold Investment Update: Gold and Silver Turn a Deaf Ear to Fed’s Hawkish Threats

    March 18, 2022, 11:24 AM

    While the week was full of drama, the Fed and the implications of its future monetary policy was the most important fundamental development to hit the newswire. 

    For example, the FOMC announced a 25 basis point rate hike on Mar. 16, and the median projection (the five dots below) is for six more rate hikes in 2022 (seven in total). Moreover, with six meetings left on the FOMC’s 2022 schedule, it implies consecutive rate hikes for the next several months. 

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: U.S. Fed

    Moreover, with FOMC officials’ median estimate increasing from three rate hikes in December to seven rate hikes in March, the hawkish ante has been upped with every new release of their Summary of Economic Projections (SEP).    

    However, while the developments are fundamentally bullish for the USD Index and U.S. Treasury yields, the PMs are behaving as if none of that matters. Moreover, with the Russia-Ukraine conflict distracting gold, silver, and mining stocks from domestic fundamental realities, their recent strength is a function of momentum, not medium-term technicals or fundamentals. 

    To explain, I spent a lot of time covering the S&P Goldman Sachs Commodity Index (S&P GSCI) this week and noted that it could act as the fundamental canary in the coal mine.

    For context, the S&P GSCI contains 24 commodities from all sectors: six energy products, five industrial metals, eight agricultural products, three livestock products, and two precious metals. However, energy accounts for roughly 54% of the index’s movement.

    Furthermore, with the index rising and falling sharply in a matter of days, the PMs have been along for the ride. However, with the International Energy Agency (IEA) lighting a fire under crude on Mar. 17, it released a report outlining the potential shortfall of Russian oil in April. It stated:

    “The prospect of large-scale disruptions to Russian oil production is threatening to create a global oil supply shock. We estimate that from April, 3 mb/d of Russian oil output could be shut in as sanctions take hold and buyers shun exports. OPEC+ is, for now, sticking to its agreement to increase supply by modest monthly amounts. Only Saudi Arabia and the UAE hold substantial spare capacity that could immediately help to offset a Russian shortfall.”

    With financial markets all about expectations, the potential for a shortfall sent WTI 6.95% higher on Mar. 17.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Reuters

    Moreover, since energy accounts for roughly 54% of the S&P GSCI’s movement and momentum begets momentum, the PMs are borrowing optimism and ignoring fundamentals. However, the short-term phenomena will likely result in sharp drawdowns over the medium term.

    Please see below:

    To explain, the red line above tracks the four-hour movement of the S&P GSCI, while the gold line above tracks the gold futures price. If you analyze their behavior before Russia invaded Ukraine, you can see little to no connection. 

    However, if you focus your attention on the price action since the Feb. 24 invasion, you can see that it’s become all one trade. Moreover, the weak fundamental outlook that caused gold to underperform the S&P GSCI in early 2022 has only intensified since the Fed meeting. However, despite that, momentum investors are following the trend and rallies in crude are sparking rallies in the metals. 

    As a result, the PMs’ rallies on Mar. 17 were more about momentum. However, with their medium-term fundamentals heading in the opposite directions, sharp drawdowns should materialize once the ‘all-for-one’ trade unwinds.

    To that point, while the PMs may assume that the Fed won’t follow through on its hawkish forecast, the reality is that the U.S. economic outlook is bullish for hawkish Fed policy.

    To explain, I wrote on Mar. 9:

    The blue line above tracks the S&P 500, while the orange line above tracks Citigroup’s Economic Surprise Index. For context, a surprise occurs when an economic data point outperforms economists’ consensus estimate.

    If you analyze the right side of the chart, you can see that the orange line bottomed in January and has been moving higher ever since. As a result, the U.S. economy remains in a healthy position, and as long as this is the case, it keeps the pressure on the Fed to raise interest rates at its next several monetary policy meetings.

    To that point, with more data released on Mar. 17, the outperformances continued.

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: Investing.com

    The U.S. Economy Condition

    To explain, building permits, housing starts, manufacturing production, initial and continuing jobless claims, and the Philadelphia Fed’s manufacturing index all outperformed expectations on Mar. 17. As a result, they add upward momentum to Citigroup’s Economic Surprise Index. Moreover, with the Fed’s hawkish disposition dependent on the health of the U.S. economy, Thursday’s data only enhances the prospects of more rate increases.

    For example, I wrote on Mar. 17: Powell noted during his press conference that there are ~1.7 job openings for every unemployed U.S. citizen. He added that “all signs are that this is a strong economy, one that will be able to flourish in the face of less accommodative monetary policy.”

    Moreover, with continuing jobless claims hitting a new post-pandemic low on Mar. 17, the Fed’s maximum employment mandate remains on the hawkish side of the spectrum.

    Please see below:

    To explain, the red line above tracks the civilian unemployment rate, while the blue line above tracks the insured unemployment rate. For context, the latter calculates the number of U.S. citizens collecting unemployment as a percentage of the U.S. labor force. Moreover, the metric dropping to 1% on Mar. 17 highlights how U.S. labor market strength should keep the Fed’s foot on the hawkish accelerator. 

    Second, I also noted on Mar. 17 that the critical development is Powell’s view of the U.S. economy. In a nutshell: if Powell believes the U.S. economy is in a healthy position, then he’ll raise interest rates until he no longer thinks that’s the case. With his remarks on Mar. 17 signaling more hawkish policy to come, the PMs should suffer the consequences over the medium term.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    In addition, I noted above that U.S. housing starts outperformed expectations on Mar. 17. With the metric hitting a new 2022 high of 1.769 million, the data supports Powell’s assertion that the U.S. economy is nowhere near a recession.

    Please see below:

    To explain, the red line above tracks U.S. housing starts, while the gray bars above track U.S. recessions. If you analyze the connection, notice how U.S. housing starts always peak and decline in advance of U.S. recessions. Moreover, the relationship has been present since before 1960. As a result, with U.S. housing starts hitting a new post-pandemic high on Mar. 17, it adds more fuel to the Fed’s hawkish fire.

    On top of that, while inflation remains extremely problematic, the latest survey data shows that pricing pressures are still headed in the wrong direction. For example, I noted above how the Philadelphia Fed’s manufacturing index outperformed expectations on Mar. 17. Well, the report also stated that “price increases become more widespread:”

    “The prices paid index climbed 12 points to 81.0, its highest reading since June 1979. More than 87 percent of the firms reported increases in input prices, while 6 percent reported decreases; 7 percent of the firms reported no change. The current prices received index increased 5 points to 54.4. Nearly 57 percent of the firms reported increases in prices received for their own goods this month, 2 percent reported decreases, and 38 percent reported no change.”

    Please see below:

    Source: Philadelphia Fed

    Similarly, the New York Fed’s Empire State Manufacturing Index was released on Mar. 15. The report revealed:

    “The prices paid index edged down three points to 73.8, while the prices received index rose two points to a record high of 56.1, signaling ongoing substantial increases in both input prices and selling prices.”

    Please see below:

    Source: New York Fed

    Finally, while the Russia-Ukraine conflict resulted in a safe-haven bid for U.S. Treasuries, that gambit has already unraveled. In the process, the sharp decline in the U.S. 10-Year real yield has also reversed, and with even higher real yields required to calm inflation, the PMs will likely regret dismissing all of these fundamental warning signs. 

    The bottom line? While it was an eventful week on the fundamental front, the realized data only strengthened the PMs' bearish thesis. For months I've been warning that surging inflation and a resilient U.S. economy would elicit a hawkish shift from the Fed. Moreover, with each monetary policy meeting and each SEP release, the Fed continues to increase its hawkish directives. As a result, while the PMs seem inclined to ignore these developments right now, history implies that the tranquility won't last.

    What to Watch for Next Week

    With another full slate of U.S. economic data releases next week, the most important ones are as follows:

    • Mar. 22: Richmond Fed manufacturing and services indexes

    With output and inflation metrics providing insight into the state of play in March, it will be interesting to see if the data mirrors the results from the New York and Philadelphia Fed’s manufacturing surveys. 

    • Mar. 23: New home sales

    With housing starts and building permits outperforming expectations on Mar. 17, new home sales will tell us how consumers are reacting to U.S. mortgage rates that have increased sharply amid the rise in U.S. Treasury yields. 

    • Mar. 24: Durable goods orders, ISM and IHS Markit PMIs, the KC Fed manufacturing index

    More comprehensive than the regional surveys (like New York, Richmond, Philadelphia, KC, etc.), the ISM and IHS Markit PMIs cover the entire U.S. As a result, the readings on output, employment, and inflation are the most important data points of the week.

    • Mar. 25: Michigan consumer sentiment, pending home sales

    Like in prior months, it will be interesting to see how consumers respond to higher oil prices, higher mortgage rates and the overall inflationary environment. In addition, pending home sales will piggyback on the implications of the other housing data.

    All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see outperformance alongside higher employment and inflation, the Fed will need to push up real yields to reduce demand and calm the pricing pressures. If that occurs, the outcome is profoundly bearish for the PMs.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Gold Investment Update: Collapse of Miners Ahead – What Else Can History Tell Us?

    March 11, 2022, 10:09 AM

    Available to premium subscribers only.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

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