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If you're interested in gold trading or silver trading and would like to see how we apply our gold trading tips in practice, you've come to the right place. The Gold & Silver Trading Alerts are the daily alert service provided by Przemyslaw Radomski, CFA that deals directly with the latest developments on the precious metals market. The situation is analyzed from long-, medium-, and short-term perspectives and topics covered go well beyond the world of precious metals themselves, ranging from the analysis of currencies, stocks, ratios, as well as using proprietary trading tools. Subscribers also receive intra-day follow-ups in case the market situation requires it. 1-2 alerts per week are posted also in our Articles section, so you can review these real-time samples before you subscribe.

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

  • If You Held a Short Position in Silver, You Hit the Bull’s-Eye

    May 11, 2022, 9:05 AM

    In short, practically everything that I wrote in Monday’s analysis and yesterday’s analysis remains up-to-date. The profit-take levels in silver were hit, so those of you who chose to hold a short position in silver have likely reaped nice profits yesterday. Congratulations!

    In yesterday’s analysis, I commented on silver in the following way:

    The white metal moved lower, and its intraday low was just 2 cents above our profit-take price.

    Since gold is likely to move lower, and the general stock market is likely to move lower, I’m moving the downside target lower – slightly above the 50% Fibonacci retracement level based on the entire 2020-2021 decline. That’s the next strong support that’s below the 2021 lows, and that would more or less correspond to the size of the above-mentioned short-term decline in gold (at least that seems realistic to me).

    The downside target that I featured was $21.23 (for silver futures, which some might choose to call a form of “paper silver”, by the way), and it was reached yesterday – the intraday low was $21.16. The downside targets for related ETFs were reached too. Will silver soar immediately? This might or might not be the case, as the general stock market might decline some more in the near future. Since silver (and mining stocks) are quite correlated with the former, they could move even lower.

    Still, it doesn’t mean that it’s worthwhile to stay in position at all times. Since silver moved so close to its 50% Fibonacci retracement level yesterday, it could be a situation where the downside is very limited and the upside (for the short term) is bigger. For now, I’m not suggesting going long (to profit not only on the decline but also on the rebound), but this might change very soon.

    Please note that despite all the “peak silver”, “silver is manipulated so it has to rally”, and “silver shortage” theories, the white metal is now much lower than it was when it got really popular – in early 2021. Don’t get me wrong: I think that the silver price will move into the three digits, but I would like to emphasize that just because something is likely to happen eventually doesn’t mean that it has to happen right away. Silver’s purchasing power can decline before soaring, and that’s exactly what it's been doing for more than a year now. It doesn’t seem that the medium-term decline in silver is already over.

    Speaking of the general stock market, it moved slightly higher yesterday (in terms of closing prices), but the move was not significant enough to invalidate the breakdown below the neck level of the head-and-shoulders formation. Therefore, the breakdown is now almost confirmed, and the situation is already more bearish than it was yesterday.

    At the moment of writing these words, stocks are once again trying to rally, but so far the rally is not as big as yesterday’s pre-market rally that was just erased. Thus, I doubt that stocks will be able to avoid falling in the near term.

    The S&P 500 is currently confirming a breakdown below its head and shoulders pattern. Once confirmed (just one more close below the neck level is required), the formation will be complete, and the next target will be below 3,500. So, yes, I expect the S&P 500 to decline below its 2021 lows in the near future.

    On May 6, I wrote:

    Still, it doesn’t mean that we can’t get another brief rally in the meantime. In fact, the head and shoulders formations are often immediately followed by a brief corrective upswing – one that takes the market close to or right back to the previously broken neck level of the H&S pattern. Seeing this kind of rally would perfectly correspond to the scenario in which S&P rallies when the RSI indicator reaches 30, and it would perfectly match other potential price moves that I mentioned earlier today.

    In other words, if stocks decline somewhat and then correct, it could translate into the same thing in gold, silver, and mining stocks. Given the stronger link between stocks and silver and miners’ duo, the latter could correct more visibly.

    On Friday (May 6), the S&P 500 had its lowest daily close of the year. While investors might not see many technical patterns, they’ll definitely notice something like that. That’s bearish – it could trigger some panic selling among investors, and today’s pre-market decline indicates that it might already be taking place.

    Interestingly, last Friday’s session was a daily reversal, so it seems that stocks should be rallying today, but… they are not. Technically, it’s the futures market that shows declines, not the index itself, but futures can be used as the index’s proxy here.

    That’s where the situation gets really interesting. There were very few cases when a daily reversal was followed by a decline below the reversal’s low. In fact, in the recent past, there were just two such cases, and I marked them with red rectangles. In both cases, short-term declines followed. What’s notable is that this was the way in which the January decline started, and the decline that followed was sizable.

    If stocks are about to decline (continuing their recent decline), then they would do so after a consolidation that took the form of a flag. Thus, the price would be likely to fall by about the same amount as it had fallen before the pattern. One could argue when the previous short-term decline started (at the recent top or at the very recent top before the decline accelerated), but overall, it seems that stocks would be likely to decline below the neck level of their head and shoulders formation, and then decline some more.

    Is there any nearby support level that would be strong enough to stop this short-term decline? Yes: it’s the 38.2% Fibonacci retracement level based on the 2020-2022 rally.

    Back in 2020, the very first decline erased 50% of the preceding rally, but back then the market was much more volatile than it is right now, so it’s understandable.

    If we see a decline to the 38.2% Fibonacci retracement and then a comeback to the previously broken neck level of the head and shoulders pattern, it would fit practically everything that I wrote above and in the previous days / weeks.

    It would trigger another immediate-term decline in silver and mining stocks in the near term that would be followed by a (quite likely tradable) rebound.

    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 targets for gold and mining stocks 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

  • The Future of the Dollar Seems So Bright It’s Blinding Gold

    May 10, 2022, 8:56 AM

    While the USDX rushes up without looking back, gold is running... out of power. What could the next dollar highs mean for the precious metals market?

    In short, practically everything that I wrote in yesterday’s analysis remains up-to-date. Based on the relative valuations and pre-market price movement, I wrote that junior miners were likely to decline below their rising support line, and I moved the exit price for the current short position in the GDXJ lower (it seems that it will gain even more shortly).

    Indeed, the GDXJ fell like a stone in the water, and it pierced through the above-mentioned support line without looking back. Thanks to remaining in the short position, we were able to benefit from the breakdown below the support line.

    What’s next? Well, what was likely yesterday remains likely today. Markets appear to be approaching, but not yet at, their short-term corrections. Let’s take a closer look, starting with the USD Index.

    As you can see above, the USD Index just moved above its 2020 high and above its recent highs, but it failed to close in the green. Actually, the USDX declined slightly during yesterday’s session. So, while gold was initially strong relative to the USDX, it ended up being very weak. This tells us that if the USD Index moved a bit higher here, gold might launch another quick decline.

    Given how the USD Index performed after a similar breakout (in 2014), it seems that we might see a corrective move soon (perhaps after an additional rally). I previously described it in the following way:

    I would like to add one important detail. Back in 2014, the USD Index didn’t correct after reaching its previous high. It corrected after moving above it. The higher of the highs was the March 2009 high, at 89.11.

    The higher of the recent highs is at 103.96 right now, so if the analogy to 2014 is to remain intact, the USD Index could now top at close to 104.5 or even 105.

    Yesterday’s high was 104.2, so the USDX could still move higher before correcting.

    Gold moved lower – to its previous lows – but didn’t reach its downside target area (marked with green), where we have a few support levels:

    • rising support line,
    • declining support line,
    • early-2022 high,
    • the 61.8% Fibonacci retracement based on the 2021-2022 rally at about $1,829,
    • 200- and 300-day moving averages (back in March 2020, gold bottomed between both averages).

    Also, the RSI indicator is close to 30 but not yet at it.

    Consequently, if gold declines some more here, it will have very good reasons to rally in the short term, but it doesn’t have those reasons yet.

    The situation in silver is also very interesting.

    The white metal moved lower, and its intraday low was just 2 cents above our profit-take price.

    Since gold is likely to move lower, and the general stock market is likely to move lower, I’m moving the downside target lower – slightly above the 50% Fibonacci retracement level based on the entire 2020-2021 decline. That’s the next strong support that’s below the 2021 lows, and that would more or less correspond to the size of the above-mentioned short-term decline in gold (at least that seems realistic to me).

    It seems that mining stocks are likely to slide in the very near term too – and then they are likely to correct (probably providing an opportunity for a quick long position), quite possibly sharply.

    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 targets for gold and mining stocks 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

  • Short-Term Strength: Gold Holds Up Despite New Highs in the USDX

    May 9, 2022, 8:18 AM

    Friday’s analysis took a rather extensive form, so now I’ll briefly introduce today’s technical part.

    Practically everything that I wrote about the medium-term (bearish) outlook for the precious metals sector remains up-to-date. Only the short-term situation was somewhat unclear.

    Given Friday’s movement and today’s pre-market trading, the situation has been clarified. Of course, it doesn’t mean that what I’m going to describe is bound to happen, but it does mean that a certain near-term outcome just became more likely.

    Let’s take a closer look at the charts for details.

    As you can see above, the USD Index just moved above its 2020 high and above its recent highs. This is a major breakout. However, given how the USD Index performed after a similar breakout (in 2014), it seems that we might see a corrective move soon (perhaps after an additional rally). I previously described it in the following way:

    I would like to add one important detail. Back in 2014, the USD Index didn’t correct after reaching its previous high. It corrected after moving above it. The higher of the highs was the March 2009 high, at 89.11.

    The higher of the recent highs is at 103.96 right now, so if the analogy to 2014 is to remain intact, the USD Index could now top at close to 104.5 or even 105.

    So far, today’s pre-market high is 104.2, so the USDX could still move higher before correcting.

    The important detail about today’s early trading is that while the USD Index moved above its recent highs, gold didn’t move below its recent lows.

    It remains above the recent highs and not that far from its downside target area, provided by the rising and declining support lines, as well as by the very recent lows.

    From gold’s perspective, the short-term (!) downside appears limited.

    From USD’s perspective, the short-term (!) upside appears limited.

    We see that gold is acting relatively strong today given what’s happening in the USDX. This is a bullish combination for the short term and suggests that a short-term bottom in gold is near. Of course, the medium-term trend remains bearish nonetheless.

    Interestingly, while gold didn’t move to new short-term lows, silver and junior mining stocks did.

    Silver moved just slightly lower, but that was enough for it to move below the previous local lows.

    The support provided by the recent lows is quite close (marked with a blue ellipse), but silver is not there yet.

    Here’s what the GDXJ ETF is doing in today’s London trading.

    It declined sharply and moved to the rising support line based on the 2020 and 2022 lows. This level is what I described (on the analogous version of the above chart, based on the prices from the U.S.) as something that could stop the current short-term decline.

    So, will the GDXJ bottom today or is it bottoming (from the European point of view) right now?

    To better answer that question, let’s take a look at the likely reason for today’s silver and miners’ weakness – the general stock market.

    Before moving to the overnight changes, let’s recall what I wrote about stocks on Friday:

    After the immediate “phew-its-not-a-0.75-rate-hike rally”, we saw a “hold-up-rates-are-still-soaring-aaah-decline”. Is the relief rally already over?

    That, ladies and gentlemen, is the key question right now.

    It could be the case that one rally is over, but it doesn’t mean that another one couldn’t start from just slightly lower levels.

    The S&P 500 is currently forming a (potential so far) head and shoulders pattern, and once it moves below its neck level (slightly above 4,000), the formation will be complete, and the next target will be below 3,500. So, yes, I expect the S&P 500 to decline below its 2021 lows in the near future.

    Still, it doesn’t mean that we can’t get another brief rally in the meantime. In fact, the head and shoulders formations are often immediately followed by a brief corrective upswing – one that takes the market close to or right back to the previously broken neck level of the H&S pattern. Seeing this kind of rally would perfectly correspond to the scenario in which S&P rallies when the RSI indicator moves to 30, and it would perfectly match other potential price moves that I mentioned earlier today.

    In other words, if stocks decline somewhat and then correct, it could translate into the same thing in gold, silver, and mining stocks. Given the stronger link between stocks and silver and miners duo, the latter could correct more visibly.

    The chart below features the S&P 500 futures chart.

    On Friday, the S&P 500 had its lowest daily close of the year. While investors might not see many technical patterns, they’ll definitely notice something like that. That’s bearish – it could trigger some panic selling among investors, and today’s pre-market decline indicates that it might already be taking place.

    Interestingly, Friday’s session was a daily reversal, so it seems that stocks should be rallying today, but… they are not. Technically, it’s the futures market that shows declines, not the index itself, but futures can be used as the index’s proxy here.

    That’s where the situation gets really interesting. There were very few cases when a daily reversal was followed by a decline below the reversal’s low. In fact, in the recent past, there were just two such cases, and I marked them with red rectangles. In both cases, short-term declines followed. What’s notable is that this was the way in which the January decline started, and the decline that followed was sizable.

    if stocks are about to decline (continuing their pre-market decline), then they would do so after a consolidation that took the form of a flag. Thus, the price would be likely to fall by about the same amount as it had fallen before the pattern. One could argue when the previous short-term decline started (at the recent top or at the very recent top before the decline accelerated), but overall, it seems that stocks would be likely to decline below the neck level of their head and shoulders formation, and then decline some more.

    Is there any nearby support level that would be strong enough to stop this short-term decline? Yes: it’s the 38.2% Fibonacci retracement level based on the 2020-2022 rally.

    Back in 2020, the very first decline erased 50% of the preceding rally, but back then the market was much more volatile than it is right now, so it’s understandable.

    If we see a decline to the 38.2% Fibonacci retracement and then a comeback to the previously broken neck level of the head and shoulders pattern, it would fit practically everything that I wrote above.

    It would trigger a sizable decline in junior mining stocks in the near term.

    If so, then it’s unlikely that junior miners are bottoming right now, as one might expect based on the chart that I featured earlier today. Instead, it seems that the GDXJ might indeed have managed to decline to its previous 2022 lows and then correct sharply from there.

    In order for gold to reach its target, it only needs to decline by as much as it has already declined today.

    However, in order for the general stock market to reach its downside target, it would need to decline several times as much as it has already declined today.

    In today’s pre-market trading, junior miners are taking the stock market’s bearish lead. Consequently, they could decline much more than just as much as they already have today.

    Therefore, the scenario in which junior miners move to their previous lows before bouncing is currently the most important one, in my opinion. Consequently, I’m lowering the exit prices for the current short position, in order to capitalize on a bigger move lower.

    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 targets for gold and mining stocks 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

  • Will Higher Interest Rates Shake the Gold Market?

    May 6, 2022, 10:08 AM

    With the Fed the focus of investors’ attention this week, the central bank raised interest rates by 50 basis points. However, while market participants initially put on brave faces, optimism turned to pessimism as reality re-emerged. To explain, I wrote on May 5:

    With investors hitching their wagons to the Fed’s horse on May 4, they still believe that Chairman Jerome Powell can accomplish the impossible. Therefore, it’s all about following the man who will lead you to prosperity.

    To explain, the red line above tracks the one-minute movement of the S&P 500, while the gold line above tracks the one-minute movement of the GDXJ ETF. If you analyze the relationship, you can see that both sunk at the outset of Powell’s presser and then rallied into the close. As a result, a little bullish sentiment combined with some short-covering were the perfect ingredients for a sharp daily rally. 

    However, not only did the pair’s medium-term fundamentals not follow suit, they actually worsened. Therefore, while sentiment rules the day in the short term, their medium-term outlooks couldn’t be more treacherous.

    Well, with investors’ panic attack turning the medium-term into one day, the S&P 500 and the GDXJ ETF gave back all of their misguided gains and then some.

    Please see below:

    However, the medium-term outlook remains unchanged and what I wrote on Apr. 27 still stands: while investors will likely remain in ‘buy the dip’ mode until the very end, lower highs and lower lows should confront the S&P 500 and the PMs over the next few months.

    Remember, investors are always looking for the bottom. They speculate, hoping that every morsel of bullish news will turn the tide. On May 4, that optimism was underwritten by the relief that the Fed didn’t hike rates by 75 basis points.

    However, it’s not about how much the Fed hikes at a given meeting; it’s about how long the rate hike cycle lasts and whether or not the Fed turns dovish. Therefore, with officials stuck between a rock (growth) and a hard place (inflation), bad news should continue to hammer the financial markets for the foreseeable future.

    To explain, when analyzing Chairman Jerome Powell’s prediction of a soft landing, I wrote that this statement should go down as one of the most important quotes of 2022:

    “I do expect that this will be very challenging; it’s not going to be easy; and it may well depend on events that are not in our control. But our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do.”

    As such, with Powell noting that a soft landing "may well depend on events that are not in our control," he's essentially telling you that the Fed is past the point of managing this outbreak. In reality, inflation is like cancer. Once it spreads, it reaches a point where too much damage has been done to save the patient.  

    Thus, this is where we are now. With the Fed's "blunt tools" poised to inflict serious damage on the U.S. economy, the undesirable trade-off of supporting growth versus curbing inflation has the Fed in a material bind. As a result, investors severely underestimate the challenges that will confront them over the next several months.

    Therefore, what should Powell do? On the one hand, he could hammer home rate hikes, kill demand, eviscerate inflation, and push the U.S. economy into recession. On the other hand, he could stop hiking, support growth and let inflation rage.  

    However, investors don’t realize that both roads lead to the same destination. If Powell is serious about fighting inflation, the end result is pretty clear. If he performs a dovish 180, the S&P 500 and the PMs could bask in the short-term glory. Yet, the medium-term implications are even more bearish (for the stock market) if the second scenario unfolds. 

    Letting inflation rage will cripple long-term economic growth and push the U.S. economy into an even deeper recession (with a lag) than if Powell hikes the federal funds rate to 3.5%. As a result, investors don’t understand that what they cheered for on May 4 (the hope of a dovish Fed) will actually lead to the worst possible long-term outcome. Thus, whether it’s one day, one week, or one month of bullish optimism, the ghost of stimulus past should haunt investors for much of 2022.

    To that point, there is a third scenario; and with the bulls desperately searching for a medium-term catalyst, the new narrative from CNBC’s oracle looks like this:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    He said:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    Therefore, when inflation is too high to expect a dovish pivot and the Fed’s “blunt tools” are too harsh to avoid collateral damage, the only bullish narrative left is to predict that inflation will subside on its own. However, while I’ve been warning since 2021 that the concept is laughable, desperate times call for desperate measures. Furthermore, even if inflation peaks on a year-over-year (YoY) basis, it’s still increasing month-over-month (MoM). As such, “the fool wonders; the wise man asks.”

    So, let’s dig a little deeper than Cramer. On May 5, the U.S. Bureau of Labor Statistics (BLS) released its nonfarm business sector labor productivity report. An excerpt read:

    Source: BLS

    Now, this is lagged data, so the future implications are less relevant than PMIs or business surveys. However, the results are still profound. For example, labor productivity measures output produced per hour. When productivity increases, employees produce more goods in the same amount of time, or the same amount of goods in less time. In a nutshell: they are more ‘productive.’

    However, the important point is that productivity offsets wage inflation. When productivity increases, the number of goods one person creates increases, and even if that individual receives a wage increase, the labor cost per unit can remain constant or decline. As such, the company doesn’t need to pass the wage increase on to the consumer. 

    With productivity declining by 7.5% in Q1, U.S. employees are producing fewer goods in the same amount of time, or the same amount of goods in more time. As a result, unit labor costs have increased materially, which is extremely inflationary. 

    Second, the CNBC article stated: “Cramer said rising mortgage rates should cool the housing market,” and therefore, help reduce inflation. Now, I agree with the long-term implications of his thinking. 

    However, his uninformed analysis assumes that housing prices are reflected in the Consumer Price Index (CPI). In reality, shelter (rent inflation+) accounts for more than 30% of the headline CPI’s movement. Therefore, higher mortgage rates won’t impact rent inflation until several months down the road.

    Case in point: Apartment List released its National Rent Report on Apr. 27. An excerpt read:

    “Rent growth is continuing to pick up steam again, after a brief winter cooldown, with our national index up by 0.9 percent over the course of April. So far this year, rents are growing more slowly than they did in 2021, but faster than the growth we observed in the years immediately preceding the pandemic.”

    Please see below:

    Furthermore, please consider that with median rents up by 2.5% YoY in four months, that annualizes to nearly 7.7% YoY for 2022. Likewise, a continuation of the current trend would result in 2022 YoY median rent inflation that’s 2.3x 2018 and 3.3x 2019’s figures. In addition, the spring and summer months are when peak pricing occurs. As a result, the data is extremely bullish for Fed policy.

    The report added:

    “In December 2021, rents fell in 61 of the nation’s 100 largest cities, the only month last year in which more than half of these cities saw a decline. This month, however, rents were up in 93 of the nation’s 100 largest cities (…).”

    “As we enter the spring and summer months, rental activity is likely to pick up, and rent growth is likely to accelerate. Despite a recent cool-down, many American renters are likely to remain burdened throughout 2022 by historically high housing costs.”

    Finally, S&P Global released its U.S. Services PMI on May 4. The report revealed:

    “U.S. service providers recorded a steep expansion in business activity during April, according to the latest PMI™ data. The rate of output growth eased to the slowest for three months but was sharp overall…. Demand conditions remained strong and sparked the fastest rise in employment for a year as backlogs mounted at a near-record pace.”

    More importantly, though:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: S&P Global

    Moreover, the data mirrors the results from S&P Global’s U.S. Manufacturing PMI released on May 2:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: S&P Global

    Also noteworthy, I wrote on May 4 that the U.S. 10-Year Treasury yield has continued its ascent, [and] while the Treasury benchmark eclipsed 3% intraday on May 3, a close above the key psychological level should occur sooner rather than later.

    Well, sooner has arrived:

    The bottom line? While it's surprising how CNBC personalities will say things without doing their homework, the Fed's reality check still has room to run. Moreover, I warned on Mar. 28 that investors' confidence would eventually cower. I wrote:

    The PMs and the general stock market remain in la-la land. Despite repeated warnings from Fed officials and a rout in the bond market, both asset classes continue to ignore the potential ramifications. However, with the medium term likely to elicit a profound shift in sentiment, the Fed’s war on inflation should send shockwaves across the financial markets.

    As a result, while investors slowly realize the implications of the Fed’s catch-22, plenty of downside is needed before the medium-term effects are accurately priced in.

    In conclusion, the PMs were mixed on May 5, as mining stocks suffered the brunt of the damage. However, with the Fed on a hawkish warpath and the medium-term outlooks bullish for the USD Index and real yields, the PMs should confront more selling pressure before long-term buying opportunities emerge. Please note that a short-term buying opportunity may present itself if certain technical developments materialize in the coming days.

    What to Watch for Next Week

    With more U.S. economic data releases next week, the most important are as follows:

    • May 9: The Conference Board Employment Trends Index (ETI)

    With employment making up one-half of the Fed’s dual mandate, continued strength in the U.S. labor market could add more fuel to the hawkish fire.

    • May 10: NFIB Small Business Optimism Index

    With small businesses having a material impact on U.S. employment and inflation, it will be interesting to see if employers continue to increase staff and raise prices.

    • May 11: Consumer Price Index (CPI)

    Although it’s lagged data, outperformance and underperformance often move markets. As a result, the CPI will likely be the most watched data point next week.

    • May 12: Producer Price Index (PPI)

    With the PPI often leading the CPI, the former is an important component of the inflation story.

    • May 13: University of Michigan Consumer Sentiment Index

    With consumers dealing with rising mortgage rates and unrelenting inflation, it will be interesting to see how sentiment is holding up.

    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 targets for gold and mining stocks 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

  • Is It Worth Going Through Fire and Water for the Central Bank?

    May 5, 2022, 9:03 AM

    With investors hitching their wagons to the Fed’s horse on May 4, they still believe that Chairman Jerome Powell can accomplish the impossible. Therefore, it’s all about following the man who will lead you to prosperity. However, while market participants’ faith in the Fed is profoundly short-sighted, I noted on Apr. 27 that pledging allegiance is how investors operate. I wrote:

    “The PMs were mixed on Apr. 26, as mining stocks continued their material underperformance. Moreover, while investors will likely remain in ‘buy the dip’ mode until the very end, lower highs and lower lows should confront the S&P 500 and gold over the next few months. As a result, the medium-term outlook for the GDXJ ETF is profoundly bearish.”

    Thus, while hope is not a strategy, it was clearly a popular opinion on May 4.

    Please see below:

    To explain, the red line above tracks the one-minute movement of the S&P 500, while the gold line above tracks the one-minute movement of the GDXJ ETF. If you analyze the relationship, you can see that both sank at the outset of Powell’s presser and then rallied into the close. As a result, a little bullish sentiment combined with some short-covering were the perfect ingredients for a sharp daily rally. 

    However, not only did the pair’s medium-term fundamentals not follow suit, they actually worsened. Therefore, while sentiment rules the day in the short term, their medium-term outlooks couldn’t be more treacherous.

    To explain, the FOMC hiked interest rates by 50 basis points on May 4. Moreover, like I have been warning throughout the technical sections of the daily Gold & Silver Trading Alerts, we witnessed a ‘sell the rumor, buy the fact’ event. However, with the Fed increasingly hawked up, investors’ misguided optimism should evaporate over the next few months. An excerpt from the FOMC statement read:

    “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.”

    “In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1.”

    As a result, while investors hear what they want to hear, the reality is that hawkish fireworks should light up the financial markets this summer.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    In addition, Powell said: “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”

    What are these “tools” he speaks of?

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    Thus, with Powell admitting that “blunt tools” are the only mechanism to curb inflation, the Fed’s pathway to lower prices should result in plenty of collateral damage. As a result, while the price action on May 4 suggests that normalization will be easy, the sentiment shift should be profound when reality sets in. To that point, I wrote on Apr. 6:

    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. And as that occurs, investors should suffer a severe crisis of confidence.

    Furthermore, Powell made the point for me on May 4:

    Obraz zawierający tekst, wewnątrz, zrzut ekranuOpis wygenerowany automatycznieSource: CNBC

    Also noteworthy, when asked about curbing inflation without impairing the U.S. economy, Powell responded: “I would say I think we have a good chance to have a soft or softish landing, or outcome if you will. It doesn’t seem to be anywhere close to a downturn. The economy is strong and is well-positioned to handle tighter monetary policy.”

    For context, referencing a “softish landing” completely lacks confidence, but it’s Powell’s way of recognizing reality without spooking the financial markets. Moreover, as one of the most important quotes of the press conference, he added:

    “I do expect that this will be very challenging; it’s not going to be easy; and it may well depend on events that are not in our control. But our job is to use our tools to try to achieve that outcome, and that’s what we’re going to do.”

    As such, with Powell noting that a soft landing "may well depend on events that are not in [their] control," he's essentially telling you that the Fed is past the point of managing this outbreak. In reality, inflation is like cancer. Once it spreads, it reaches a point where too much damage has been done to save the patient.  

    Thus, this is where we are now. With the Fed's "blunt tools" poised to inflict serious damage on the U.S. economy, the undesirable trade-off of supporting growth versus curbing inflation has the Fed in a material bind. As a result, investors severely underestimate the challenges that will confront them over the next several months.

    To that point, remember what I wrote on Apr. 26?

    The Federal National Mortgage Association (Fannie Mae) – a U.S. government-sponsored enterprise – released its Economic and Housing Outlook report on Apr. 19. An excerpt read:

    “Our updated forecast includes an expectation of a modest recession in the latter half of 2023 (…).”

    “While a ‘soft landing’ for the economy is possible, which is where inflation subsides without economic contraction, historically such an outcome is an exception, not the norm. With the most recent inflation readings at levels not seen since the early 1980s and wage growth exceeding that which is consistent with a 2-percent inflation objective, we believe the odds of a soft landing are even lower.

    Please see below:

    Source: Fannie Mae

    To explain, the green line above tracks the U.S. federal funds rate, while the dashed brown line above tracks the YoY percentage change in the headline Consumer Price Index (CPI). More importantly, the red arrows above depict hard landings, while the green arrows above depict soft landings. As such, the odds are not in the Fed’s favor.

    Even more revealing, if you analyze the green arrows near 67, 83, and 95, you can see that the YoY inflation (the dotted brown line) was no more than ~4.5%. As a result, all of the soft landings occurred alongside manageable inflation, not a headline CPI at 8.6%.

    Won’t Go Down Without a Fight

    Therefore, while history highlights the Fed’s ineptness at handling crises, history also highlights how investors follow the central bank off the cliff. Moreover, while Powell can convince the consensus that “a soft or softish landing” should materialize, please remember that “the fool wonders, the wise man asks.”

    To explain, remember what I wrote on Nov. 4 following the FOMC meeting?

    With Fed Chairman Jerome Powell still searching for his inflationary shooting star, the FOMC chief isn’t ready to label inflation as problematic. “I don’t think that we’re behind the curve,” he said. “I actually believe that policy is well-positioned to address the range of plausible outcomes, and that’s what we need to do.”

    And now?

    Obraz zawierający stółOpis wygenerowany automatycznieSource: CNBC

    Likewise, remember what he said about the U.S. labor market and wage inflation? I wrote on Nov. 4:

    The reality is: while Powell has taken the path of least resistance to help calm inflation (the taper), his inability to understand the realities on the ground leaves plenty of room for hawkish shifts in the coming months (interest rate hikes).

    For example, Powell said during his press conference that “the inflation that we’re seeing is really not due to a tight labor market. It’s due to bottlenecks and it’s due to shortages and it’s due to very strong demand meeting those (…). We don’t see troubling increases in wages, and we don’t expect those to emerge.”

    And now?

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    As such, investors are either unaware of how wrong Powell has been, or they simply don't care. However, the comments in italics were made only six months ago. Either way, Fed officials' inability to see the forest through the trees should have drastic implications over the next several months. As evidence, when the "transitory" camp was brimming with confidence, I wrote on Apr. 30, 2021:

    With Powell changing his tune from not seeing any “unwelcome” inflation on Jan. 14 to “we are likely to see upward pressure on prices, but [it] will be temporary” on Apr. 28, can you guess where this story is headed next?

    Thus, the situation is unchanged. With Powell predicting that the impossible is achievable, his assertion of “a soft or softish landing” is laughable. Therefore, can you guess where this story is headed next?

    Finally, it’s important to distinguish between where we are now and where we are likely headed. Regarding the latter, the “soft landing” crowd will likely be the 2023 version of the “transitory” crowd from 2021/2022. Regarding the former, the U.S. economy remains on solid footing RIGHT NOW. However, the dynamic only adds further fuel to the hawkish fire.

    For example, Statistics Canada released its latest international merchandise trade update on May. 4. Now, the data is important because more than 77% of Canadian exports were sent to the U.S. in March. Therefore, the two economies are increasingly intertwined. 

    To that point, with exports to the U.S. hitting an all-time high of CA $49.234 billion, the data highlights how demand conditions in the U.S. remain resilient. As a result, the Fed’s “blunt tools” still have plenty of work to do.

    Obraz zawierający stółOpis wygenerowany automatycznieSource: Statcan

    The bottom line? It’s interesting how investors can repeat the same mistakes over and over again. Despite being burned by the Fed during the dot-com bubble and the global financial crisis (GFC), investors remain loyal followers. Moreover, even though the central bank’s inflation and labor market forecasts have been way off, investors’ confidence in Powell remains unwavering. As a result, while ‘fool me twice’ should have been enough, a third rendition will likely emerge over the medium term.

    In conclusion, the PMs were mixed on May 4, as gold and silver didn’t participate in the bullish stampede. However, with investors severely underestimating the impact of seven to 12 rate hikes over nine months, the liquidity drain should materially depress the performances of the PMs and the S&P 500 as the drama unfolds.

    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 targets for gold and mining stocks 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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