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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.

  • Inflation, the USDX, Real Yields: The Doom Trio Hangs Over Gold

    April 27, 2022, 10:10 AM

    Despite the reality check, investors keep up their buying spree. Meanwhile, problematic events are starting to gain on gold, silver, and mining stocks.

    With reality rearing its ugly head recently, the S&P 500 and the GDXJ ETF have suffered mightily. Moreover, while I’ve been warning for months that investors underestimated the implications of rampant inflation, the chickens have come home to roost. To explain, I wrote on Oct. 26:

    Originally, the Fed forecasted that it wouldn’t have to taper its asset purchases until well into 2022. However, surging inflation pulled that forecast forward. Now, the Fed forecasts that it won’t have to raise interest rates until well into 2023. However, surging inflation will likely pull that forecast forward as well.

    Moreover, I added 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.”

    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).

    Thus, while Powell has shifted his stance materially and Fed officials now expect seven to 12 rate hikes in 2022, the financial markets initially ignored the repercussions. However, always late to the party, the consensus now fears that the medium-term outlook has lost its luster.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    Likewise, while the fundamental implications have been loud and clear for months, sentiment doesn’t die easily. However, since reality is undefeated, the impact of evaporating liquidity is becoming too much to bear. To explain, I wrote on Feb. 2:

    If you analyze the right side of the chart, you can see that the FCI has surpassed its pre-COVID-19 high (January 2020). Moreover, the FCI bottomed in January 2021 and has been seeking higher ground ever since. In the process, it's no coincidence that the PMs have suffered mightily since January 2021. Furthermore, with the Fed poised to raise interest rates at its March monetary policy meeting, the FCI should continue its ascent. As a result, the PMs' relief rallies should fall flat, like in 2021. 

    Likewise, while the USD Index has come down from its recent high, it's no coincidence that the dollar basket bottomed with the FCI in January 2021 and hit a new high with the FCI in January 2022. Thus, while the recent consolidation may seem troubling, the medium-term fundamentals supporting the greenback remain robust.

    I provided an update on Apr. 13:

    While the USD Index has surpassed 100 and reflects the fundamental reality of a higher FCI and higher real yields, the PMs do not. However, the PMs are in la la land since the FCI is now at its highest level since the global financial crisis (GFC).

    Please see below:

    Also noteworthy, the FCI made quick work of the March 2020 high from the first chart above. Again, Fed officials know that higher real yields and tighter financial conditions are needed to curb inflation. That’s why they keep amplifying their hawkish message and warning investors of what lies ahead. However, with commodities refusing to accept this reality, they’ll likely be the hardest-hit once the Fed’s rate hike cycle truly unfolds.

    Surprise, surprise: after surpassing its March 2020 highs, the FCI has continued its ascent.

    Please see below:

    Who Could’ve Seen This Coming?

    As a result, while the Russia-Ukraine conflict and misguided optimism disrupted our bearish timeline, the important point is that investors can only ignore technical and fundamental realities for so long. With a resurgent USD Index and rising real yields, which are profoundly bearish for the PMs, the latter have come down from their recent highs.

    Moreover, with the general stock market's suffering adding to the GDXJ ETF's ills, the junior miners have underperformed their precious metals counterparts, which has been very beneficial for our short position. 

    However, the bearish medium-term thesis remains unchanged: inflation is problematic, the Fed is hawked up, and a higher USD Index and higher real yields should materialize in the coming months.

    Case in point: while February's lagging data may not reflect the impact of rising mortgage rates, the S&P/Case-Shiller U.S. National Home Price Index surged by more than 20% year-over-year (YoY) on Apr. 26 and outperformed expectations (19%). As a result, the data is profoundly bullish for shelter inflation, which accounts for more than 30% of the headline Consumer Price Index's (CPI) movement.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Investing.com

    Also noteworthy, Whirlpool released its first-quarter earnings on Apr. 25. For context, the company manufacturers home and kitchen appliances like washing machines, dryers, refrigerators, and stand mixers. CEO Marc Bitzer said during the Q1 earnings call:

    “As our industry and most other industries face historical levels of cost inflation, we observed over $400 million in the fourth quarter, or approximately a 10% increase on cost of goods sold. Despite this, we delivered over 9% ongoing EBIT margins and over 16% EBIT margins in our North America business, again demonstrating the earnings strength of the region and the actions we took, transforming margins over the years.”

    “We now expect higher levels of inflation to persist throughout the year and have increased our full year cost inflation expectations by $600 million to $1.8 billion.”

    However, is Whirlpool waiting for the Fed to solve the problem?

    “Our first quarter results demonstrate that we are a different Whirlpool, delivering structurally improved EBIT margins no matter the operating environment. We have the right actions in place to deliver a solid 2022, including our previously announced cost-based price increases of 5% to 18%, addressing inflation across the globe.

    To that point, due to the time lag between incurring costs and implementing price hikes, Bitzer said that more increases are scheduled for the back half of 2022.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Whirlpool/Seeking Alpha

    On top of that, Indeed released its latest State of the Labor Market report on Apr. 21. An excerpt read:

    “Employer demand for seasonal work is growing in line with pre-pandemic trends, with summer job postings on Indeed soaring 40.1% above their February 1, 2022 baseline as of April 10 (…).”

    “Seasonal postings on Indeed for spring and summer jobs comprise a variety of positions. Some of these jobs, like camp counselor and lifeguard, fit the traditional summer mold. But more general roles, like retail sales associate and cashier, make strong showings too.”

    However:

    “Domestic job seeker interest in seasonal jobs lags prior year trends. As of April 10, the 2022 share of domestic job seeker searches for seasonal work was respectively 27.6% and 16.9% below the comparable periods in 2019 and 2021.”

    Please see below:

    To explain, the blue and green lines above track U.S. citizens’ interest in seasonal work in 2019 and 2021 (before/after the height of the pandemic), while the pink line above tracks their current interest. As you can see, there is a clear underperformance.

    More importantly, the combination of normalized demand and insufficient supply is extremely inflationaryWith demand “growing in line with pre-pandemic trends,” while supply is roughly 17% to 28% below comparable periods, it should put upward pressure on wage inflation. Moreover, remember what I wrote on Apr. 22?

    Powell said on Apr. 21 that the U.S. labor market is "too hot" and that the Fed needs to cool it down. "It is a very, very good labor market for workers," he said. "It is our job to get it into a better place where supply and demand are closer together."

    As a result, he understands the problem. However, reducing 8.6% annualized inflation without impairing the U.S. labor market is like trying to hit a hole in one on the golf course.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    Finally, The Conference Board released its Consumer Confidence Index on Apr. 26. The headline index decreased from 107.6 in March to 107.3 in April, and Lynn Franco, Senior Director of Economic Indicators at The Conference Board, said:

    “The Present Situation Index declined, but remains quite high, suggesting the economy continued to expand in early Q2. Expectations, while still weak, did not deteriorate further amid high prices, especially at the gas pump, and the war in Ukraine. Vacation intentions cooled but intentions to buy big-ticket items like automobiles and many appliances rose somewhat.”

    All in all, the data is largely inconclusive, as there are some good and some bad results. However, since “concerns about inflation retreated from an all-time high in March but remained elevated,” more QE is far from the right medicine.

    The bottom line? While I warned on Apr. 8 that when sentiment shifts, the PMs will confront one of the worst domestic fundamental environments since late 2018, the troublesome developments are catching up to gold, silver, and mining stocks. However, despite their recent drawdowns, the PMs are still trading well above their medium-term-trend-based fair values. Therefore, more pain should materialize over the medium term. It seems that we might see a sharp rebound in the near future, though (after PMs decline some more).

    In conclusion, 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 the PMs over the next few months. As a result, the medium-term outlook for the GDXJ ETF is profoundly bearish.

    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

  • Shop Til You Drop – Investors Continue Their Buying Frenzy

    April 26, 2022, 9:16 AM

    While investors’ optimism suffers a death by a thousand cuts, I’ve warned on numerous occasions that old habits die hard. As a result, while the financial markets teetered near a breaking point on Apr. 25, the ‘buy the dip’ crowd swooped in and pushed the S&P 500 higher. In the process, the GDXJ ETF also closed off its lows.

    However, the lessons investors learned after the global financial crisis (GFC) should be their undoing this time around. To explain, investors buy the dip in hopes that the Fed will come to their rescue. With the strategy making money more often than not since the GFC, why not continue the charade? 

    Well, the reality is that optimism is contagious. Therefore, when the S&P 500 refuses to die, other areas of the financial markets showcase similar resiliency. However, with higher asset prices antithetical to the Fed’s goal of taming inflation, buying dips should result in even more pain over the medium term. For context, 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. As that occurs, investors should suffer a severe crisis of confidence.

    Thus, with the optimistic close on Apr. 25 only reinforcing the thesis, investors don’t realize that they’re digging their own graves.

    Please see below:

    To explain, the red line above tracks the one-minute movement of the S&P 500, while the green line above tracks the one-minute movement of the S&P Goldman Sachs Commodity Index (S&P GSCI). If you analyze the relationship, you can see that both sank at the open, bottomed mid-day, then rallied off of the lows.

    However, the important point is that the Fed needs the S&P GSCI to decline to curb inflation. Therefore, when the index says to the S&P 500, “I go where you go,” buying the dip only encourages more hawkish actions from the Fed.

    Remember, post-GFC was a period of relatively low inflation and outperformance by technology stocks. As a result, the Fed would be happy to replicate that environment once again. However, with commodities unwilling to decline materially unless the S&P 500 and the NASDAQ Composite follow suit, the more the latter rally, the more inflation remains. As such, investors’ inability to see the forest through the trees should cause them plenty of pain over the next few months.

    To that point, I warned previously that Canada is the hawkish canary in the coal mine. With more than 76% of Canadian exports sent to the U.S. in February, the two economies are increasingly intertwined. Moreover, I noted on Apr. 14 and updated on Apr. 22 how the Bank of Canada (BoC) announced a jumbo rate hike and that Canadian inflation is still raging. I wrote:

    The BoC announced a 50 basis point rate hike on Apr. 13, and with the Fed likely to follow suit in May, the domestic fundamental environment confronting the PMs couldn’t be more bearish.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: BoC

    Moreover, BoC Governor Tiff Macklem (Canada's Jerome Powell) said: "We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed."

    Furthermore, while he added that the BoC could "pause our tightening" if inflation subsides, he cautioned that "we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target."

    However, with the latter much more likely than the former, the BoC's decision is likely a preview of what the Fed should deliver in the months ahead.

    To that point, Canadian inflation data was released on Apr. 20, and, surprise, surprise, the scorching results came in hotter than expected. For context, the figures in the middle column represent economists’ consensus estimates.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Investing.com

    Furthermore, after admitting that the first 50 basis point rate hike in 20 years was an “unusual step,” Macklem said on Apr. 25 that investors should expect more of the same in the coming months.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Bloomberg

    Again, the Canadian economy is highly leveraged to U.S. economic growth. Therefore, with Macklem increasingly willing to fire a second 50 basis point bullet, the Fed shouldn’t be far behind. 

    Likewise, Canadian headline inflation hit 6.7% year-over-year (YoY) in March, while the U.S. stands at 8.6%. Thus, with the buy the dippers making Macklem and Fed Chairman Jerome Powel’s jobs even more difficult, don’t be surprised if they drop the hawkish hammer over the medium term.

    In addition, while Bank of America notes that the “Hike Brigade” has already staged an offensive, the ramifications of evaporating liquidity are far from priced in.

    Please see below:

    You Can’t Run From Reality

    To explain, the blue bars above track the net percentage of global central banks tightening monetary policy. If you analyze the two red circles above, you can see that the current state of play rivals the lead-up to the GFC. Moreover, the Fed has barely even started its hiking cycle, and if investors keep buying the dip, the BoC may be talking about a third 50 basis point rate hike. As a result, the domestic fundamental environment is profoundly bearish for the PMs.

    Furthermore, while Fed officials have warned about the potential “collateral damage” from their war with inflation, I warned on Apr. 6 that recessionary winds should gain steam in the coming months. I wrote:

    Does a U.S. economy that “could teeter” sound bullish for the S&P 500 or the PMs? Moreover, while [Daly’s] relatively optimistic assessment assumes that a recession is unlikely, the data suggests otherwise. With annualized inflation at ~8% and the latest PMI and rental market data signaling even more price increases in March, plenty of demand destruction needs to unfold to reduce inflation to normalized levels.

    Expecting just that, 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 reads:

    “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 of 8.6%.

    On top of that, with the Fed letting the U.S. labor market run too hot for too long – as evidenced by the nearly five million more job openings than unemployed – the Fed needs to increase the unemployment rate to curb wage inflation. Moreover, with the blue line below (unemployment) near an all-time low and the brown line below (wage inflation) at/near an all-time high, does a reversal of fortunes sound like fun for the U.S. economy?

    Fannie Mae analysts stated:

    “The unemployment rate is below the ‘full employment’ level, inflation is accelerating as growth slows, and the Federal Reserve is beginning to tighten policy. These conditions typically mark the beginning of the end of an economic expansion.”

    Source: Fannie Mae

    The bottom line? While investors remain all-in on the post-GFC playbook, the reality is that this time is different. Before, the Fed could bow down to the financial markets without impacting the real economy. Now, inflation is raging, and the Fed can’t run from this reality. Not only will the economic consequences worsen the longer the Fed waits, but I’ve noted the political ramifications on numerous occasions. As a result, plenty of hawkish fireworks should erupt over the medium term.

    In conclusion, the PMs declined on Apr. 25, as fundamental realities stifled sentiment. Unless the Fed performs the most reckless dovish pivot of all-time (highly unlikely), the PMs should suffer profound drawdowns over the next few months.

    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

  • Gold Stocks: Are We Witnessing the Onset of a Major Collapse?

    April 25, 2022, 6:53 AM

    After gold ran out of steam, the market was flooded by a wave of invalidated breakouts. Can anything keep the precious metals from nosediving?

    Remember when gold tried to rally above $2,000? It was just a week ago. Now, it’s likely about to drop below $1,900, silver and mining stocks are sliding too. While the white metal has been weak for a while now, mining stocks finally woke up to the reality and appear to be catching up with gold’s and stocks’ declines.

    Boy, they sure have some catching up to do! Even though last week’s ~10% decline might appear terrific, let’s keep in mind that this is most likely just the beginning of a huge slide, probably quite similar to what we saw in 2012, 2013, and in 2008.

    Let’s start today’s analysis with a quick look at changes in the long-term HUI Index chart – the flagship proxy for gold stocks.

    We saw a powerful weekly reversal, a decline in the RSI indicator from about 70, which confirmed the previous sell signal, and a fresh medium-term sell signal from the stochastic indicator.

    In particular, the weekly reversal and the sell signal from stochastic are important, as they closely link last week with what we saw right after the final top in 2008 and 2012.

    History is likely about to rhyme, and the implications are extremely bearish for mining stocks for the next few months.

    Let’s zoom in.

    While senior gold stocks declined by a bit less than 10%, junior miners fell by a bit more than 10% last week.

    However, that’s the least important fact about this sector.

    The key thing is that practically all the seemingly bullish breakouts that we saw recently were just invalidated.

    The breakout above the declining red resistance line was invalidated.

    The breakout above the late-2021 high was invalidated.

    The breakout above the 50% Fibonacci retracement level based on the 2020-2022 decline had been (earlier) invalidated.

    The breakout above the upper border of the previous triangle pattern was invalidated.

    The breakout above the lower border of the previous triangle pattern was invalidated.

    That’s a sell signal on top of a sell signal, on top of a sell signal, on top of a sell signal, on top of a sell signal.

    We saw sell signals from the GDXJ-based MACD indicator too.

    Speaking of the triangle on the above chart, its vertex is at the end of April, so we might see some kind of turnaround then – perhaps a volatile comeback, which is then followed by another – even bigger – slide.

    This would fit the gold chart too.

    Gold has a triangle-vertex-based reversal point nearby, so they both confirm each other.

    In the case of gold, please note how it followed its self-similarity to the post-2020 top trading patterns. The yellow metal moved slightly above its initial post-top bottom, and then it immediately turned south.

    The support lines cross at about $1,845, so that’s where we might see the next short-term rebound, but let’s keep in mind that it’s not likely to be anything more than that – a corrective rebound that is then followed by another move lower.

    Silver declined profoundly recently, and just like miners, it invalidated multiple previous breakouts. Most interestingly, though, it now clearly invalidates the breakout above its January 2022 high.

    The next strong support is based on the previous lows, close to the $22 level. That’s where silver might correct before moving much lower.

    Why are mining stocks and silver declining so much nowadays?

    It is quite likely due to their connection with the general stock market.

    I’ve been writing about the stock market’s incoming demise for quite some time, and that’s what we’re finally seeing. Both silver and miners (especially junior miners) are responding accordingly.

    Provided that stocks continue to decline, silver and miners are likely to fall even more than gold.

    Let’s keep in mind what happened in the previous cases when stocks declined profoundly – in early 2020 and in 2008. Miners and silver declined in a truly epic manner, and yes, the same is likely to take place in the following months, as markets wake up to the reality, which is that the USD Index and real interest rates are going up.

    Speaking of the USD Index, after invalidating the breakout below the multi-year head-and-shoulders pattern, the USDX is poised to soar, just like I’ve been expecting it to do for more than a year ago.

    The RSI is above 70, but since the USDX is in a medium-term rally and is already after a visible correction, it can rally further. Please note that we saw the same thing in 2008 and in 2014. I marked the corrections with blue rectangles.

    The next strong resistance is at the previous highs – close to the 104 level.

    It doesn’t mean that the USD Index’s rally is likely to end there. It’s not – but the USDX could take a breather when it reaches 104. Then, after many investors think that the top has been reached as the USDX corrects, the big rally is likely to continue.

    All in all, the technical picture for mining stocks is extremely bearish for the following months, even though we might see a short-term correction close to the end of April.

    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

  • “It’s Too Hot in Here”: The Gold Market Expects a Cold Shower

    April 22, 2022, 8:12 AM

    While I have been warning about the “expeditiously” hawkish monetary policy actions that should commence over the next several months, the man at the top put a stop to investors’ games on Apr. 21. To explain, Fed Chairman Jerome Powell said:

    “It is appropriate in my view to be moving a little more quickly” to raise interest rates. He added: “I also think there is something to be said for front-end loading any accommodation one thinks is appropriate (…). I would say 50 basis points will be on the table for the May meeting.”

    “It’s absolutely essential to restore price stability. Economies don’t work without price stability.”

    Moreover, there is that word again:

    Source: CNBC

    As a result, while investors finally got the message, I warned on Apr. 21 that officials' guidance had been loud and clear for months. I wrote:

    It’s funny how obvious Fed officials’ messaging has become. In a nutshell: Powell sets the tone, and his deputies recite his message in hopes that investors will react accordingly. However, with investors in denial and/or unable to see the forest through the trees, they’re not heeding the warnings. 

    Well, suddenly, the wake-up call elicited a shift in sentiment. With the S&P 500 under pressure and the GDXJ ETF suffering mightily on Apr. 21, reality finally re-emerged. However, with plenty of downside still left for both assets, the medium term should elicit plenty of hawkish fireworks. To explain, 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.

    To that point, Powell said on Apr. 21 that the U.S. labor market is "too hot" and that the Fed needs to cool it down. "It is a very, very good labor market for workers," he said. "It is our job to get it into a better place where supply and demand are closer together."

    Moreover, while I've warned on numerous occasions that Fed officials have sounded the alarm on the economic challenges that lie ahead, Powell said that it won't be "straightforward or easy" to administer a soft landing.

    Please see below:

    Source: CNBC

    The Message Man

    However, while investors’ light bulbs went off on Apr. 21, the reality is that these medium-term ramifications have been hiding in plain sight. Moreover, while Powell said that a 50 basis point rate hike in May is “on the table,” it’s likely a done deal. Here is why: I noted on Apr. 14 that the Bank of Canada (BoC) announced a jumbo rate hike at its last monetary policy meeting. I wrote:

    The Bank of Canada (BoC) announced a 50 basis point rate hike on Apr. 13, and with the Fed likely to follow suit in May, the domestic fundamental environment confronting the PMs couldn’t be more bearish.

    Please see below:

    Source: BoC

    Moreover, BoC Governor Tiff Macklem (Canada's Jerome Powell) said that "We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed."

    Furthermore, while he added that the BoC could "pause our tightening" if inflation subsides, he cautioned that "we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target."

    However, with the latter much more likely than the former, the BoC's decision is likely a preview of what the Fed should deliver in the months ahead.

    To that point, Canadian inflation data was released on Apr. 20. Surprise, surprise: the scorching results came in hotter than expected. For context, the figures in the middle column represent economists’ consensus estimates.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Investing.com

    Furthermore, the most important point that investors miss is the political ramifications of inflation. For example, when low and middle-class citizens suffer financially, their hardship becomes front-page news. As a result, the unwanted attention is bearish for the financial markets because it forces politicians and, therefore, central banks to act.

    Please see below:

    Obraz zawierający tekst, wewnątrz, zrzut ekranuOpis wygenerowany automatycznieSource: Toronto Star

    Likewise, while America’s neighbor to the north is feeling the inflationary heat, the political story is the same in the U.S. To explain, I wrote on Apr. 20:

    CNBC released its All-America Economic Survey on Apr. 13. The report revealed that “47% of the public say the economy is ‘poor,’ the highest number in that category since 2012. Only 17% rank the economy as excellent or good, the lowest since 2014.”

    Please see below:

    Likewise, I’ve also noted on numerous occasions that U.S. President Joe Biden’s approval rating is inversely correlated with inflation.

    As a result, while investors assume that the Fed will bow down to the financial markets, the reality is that the game has changed. Previously, the Fed could support asset prices without the general public noticing. Now, inflation is front-page news and is hurting middle-class and poor Americans. Therefore, the Fed has to deal with the issue, and political pressure should force officials’ hands, whether they like it or not.

    Thus, while the S&P 500 and the PMs have largely denied these hawkish realities, their price action on Apr. 21 is likely a sign of things to come. In addition, with the inflation story far from resolved, my comments on Apr. 6 still stand: [Fed] officials should keep hammering the financial markets until investors finally get the message.

    A case in point: the Philadelphia Fed released its Manufacturing Business Outlook Survey on Apr. 21. The report revealed:

    “The indicators for prices paid and prices received continued to suggest widespread price increases and inched higher this month. The prices paid index rose 4 points to 84.6, its highest reading since June 1979 (…). The current prices received index edged up from 54.4 to 55.0.”

    Please see below:

    Source: Philadelphia Fed

    On top of that, this month’s special questions revealed that inflation expectations have also increased. The report stated:

    “The firms still expect higher costs across all categories of expenses in 2022: Responses indicate a median expected increase of 10 to 12.5 percent for raw materials and of 7.5 to 10 percent for energy and for intermediate goods, higher than when this question was asked back in January. The median expected change for total compensation (wages plus benefits) was unchanged at 5 to 7.5 percent.”

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznie Source: Philadelphia Fed

    Also, please remember that the survey data was collected from Apr. 11 to Apr. 18. Therefore, inflation is still running away from the Fed. As further evidence, Tracker Supply released its first-quarter earnings on Apr. 21.

    For context, the company operates a “retail chain of stores that sells products for home improvement, agriculture, lawn and garden maintenance, livestock, equine and pet care for recreational farmers and ranchers, pet owners, and landowners.”

    CEO Hal Lawton said during the Q1 earnings call:

    “What we’re seeing is very consistent with what we’re all reading in the headlines every day. I’ll start with persistent inflation. We had the CPI of 8.5% in the month of March, that we’ve seen 0.5 point increases a month for the last handful of months. It’s tough to say if we’re at peak inflation, the way I think about it is that we’re seeing persistent inflation. And I think we will see, strong inflation, not only through this year, but in the next year.”

    As a result, the company is pricing its products ahead of the 8.5% CPI:

    Source: Tractor Supply/Seeking Alpha

    Furthermore, I wrote on Apr. 21 that Procter & Gamble (P&G) had a similar message:

    CFO Andre Schulten noted that ~5% price hikes in Q3 will look more like ~6% in Q4.

    Please see below:

    Source: P&G/Seeking Alpha

    For your reference, favorable price elasticities mean that when P&G raises prices, the company is not seeing a drop-off in demand.

    Likewise, with Lawton also highlighting consumers’ lack of resistance to the company’s price increases, his observations are bullish for Fed policy and bearish for the PMs.

    Please see below:

    Source: Tractor Supply/Seeking Alpha

    Finally, The Conference Board released its Leading Economic Index (LEI) on Apr. 21. After increasing by 0.3% month-over-month (MoM) in March, the LEI has risen by 1.9% from September 2021 to March 2022. Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board, said:

    “The US LEI rose again in March despite headwinds from the war in Ukraine. This broad-based improvement signals economic growth is likely to continue through 2022 despite volatile stock prices and weakening business and consumer expectations. The Conference Board projects 3.0 percent year-over-year US GDP growth in 2022, which is slower than the 5.6 percent pace of 2021, but still well above pre-covid trend.”

    Please see below:

    The bottom line? The data continues to support hawkish Fed policy and has only intensified in recent months. Therefore, while I’ve noted that the PMs’ medium-term fundamentals are more bearish than at the end of 2021, the consequences of the Fed’s rate hike cycle should knock some sense into investors over the next few months.

    Moreover, while Fed officials have been parroting the same message for weeks, Powell’s reality check on Apr. 21 is extremely bullish for the USD Index and U.S. real yields. Remember, the Fed needs to kill demand to tame inflation, which means pushing up real yields and reducing wages. As such, does this seem like a bullish six-to-12-month environment for risk assets?

    In conclusion, the PMs declined on Apr. 21, and mining stocks were material underperformers. However, the daily damage still leaves gold, silver and mining stocks’ prices well above their fundamental values. As a result, there is likely plenty of room for further downside over the medium term.

    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 War the Only Factor Buffering Gold Right Now?

    April 21, 2022, 7:55 AM

    Despite the fact that the financial markets were closed for the Easter holiday, there was still plenty of drama. For example, the U.S. 10-Year real yield hit 0% and briefly turned positive for the first time since 2020, the USD Index topped 101, and Fed officials warned of several rate hikes in the coming months.

    However, while all of these developments are fundamentally bearish for the PMs, the most crowded trade on Wall Street has the commodities complex sitting pretty. 

    Please see below:

    While Netflix's drubbing on Apr. 20 should be a cautionary tale of the consequences of deteriorating fundamentals, the PMs remain uplifted, but with the medium term likely to elicit a material shift in sentiment, don't be surprised if investors' wrath is eventually thrust upon them.   

    To explain, the devil is in the details, and when you watch for subtle clues, the puzzle pieces come together. For example, I warned on Apr. 13 that Fed officials' messaging couldn't be clearer. I wrote:

    Fed Governor Lael Brainard said on Apr. 12: “Inflation is too high, and getting inflation down is going to be our most important task.”

    More importantly, notice her use of that all-important buzzword.

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Reuters

    And:

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

    Moreover, where do you think she got it?

    Source: Reuters

    Likewise, St. Louis Fed President James Bullard said on Apr. 18 that inflation is “far too high” and that a rapid rise to neutral is the most likely outcome. For context, he wants to increase the U.S. federal funds rate to 3.5% by the end of 2022. Moreover, there is that word again:

    Source: Reuters

    Continuing the theme, San Francisco Fed President Mary Daly said on Apr. 20 that a 50 basis point rate hike in May is "complete" and "solid." As a result, it's like Fed officials have morphed into those toys that repeat the same message when you pull the string.

    Please see below:

    Source: CNBC

    As further evidence, can you guess what Chicago Fed President Charles Evans said on Apr. 11?

    Source: Reuters

    Therefore, do you think it’s a coincidence that Fed officials are repeating the same message? Of course not. After the FOMC’s December monetary policy meeting, I warned that Chairman Jerome Powell uses his deputies to deliver remarks on his behalf. I wrote on Dec. 16:

    As one of the most important quotes of the press conference, [Powell] 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.

    To that point, Evans added on Apr. 19: “On the way to December, you’d be looking for any confirmation of the storyline. It could be that short-term neutral is actually lower, and that by the time we get to 2.5%, it’s actually contractionary for a variety of reasons. It could go the other way too.”

    However, given the state of inflation, he realistically said: “Probably we are going beyond neutral. That’s my expectation.” As a result, more than one 50 basis point rate hike is on the table.

    Please see below:

    Source: Reuters

    Also noteworthy, Atlanta Fed President Raphael Bostic was the most dovish of the crew this week. He said:

    “I really have us looking at one and three-quarters by the end of the year, but [inflation] could be slower depending on how the economy evolves and we do see greater weakening than I’m seeing in my baseline model. This is one reason why I’m reluctant to really declare that we want to go a long way beyond our neutral place, because that may be more hikes than are warranted given sort of the economic environment.”

    However, stating that the neutral U.S. federal funds rate could range from 2% to 2.5% or be as low as 1.75%, he remains aligned with the FOMC's median projection of six more rate hikes (seven in total) in 2022. Also, there is that word again.

    Source: CNBC

    As a result, it’s funny how obvious Fed officials’ messaging has become. In a nutshell: Powell sets the tone, and his deputies recite his message in hopes that investors will react accordingly. However, with investors in denial and/or unable to see the forest through the trees, they’re not heeding the warnings. 

    Ironically, the U.S. technology sector has been decimated in recent months, while commodities remain uplifted. However, seven to 12 rate hikes over nine months will heavily impact demand and are materially bearish for commodities’ fundamentals. Therefore, one could argue that commodities have more to lose in the coming months than technology stocks. 

    In any event, investors seem to believe that either inflation will subside on its own or the Fed will back off. However, neither outcome is realistic. I’ve mentioned on numerous occasions that political ramifications should keep the pressure on the Fed. As a result, as long as inflation persists, the prospect of a dovish 180 is slim to none. To explain, I wrote on Apr. 20:

    CNBC released its All-America Economic Survey on Apr. 13. The report revealed that “47% of the public say the economy is ‘poor,’ the highest number in that category since 2012. Only 17% rank the economy as excellent or good, the lowest since 2014.”

    Please see below:

    Likewise, I’ve also noted on numerous occasions that U.S. President Joe Biden’s approval rating is inversely correlated with inflation.

    As a result, while investors assume that the Fed will bow down to the financial markets, the reality is that the game has changed. Previously, the Fed could support asset prices without the general public noticing. Now, inflation is front-page news and is hurting middle-class and poor Americans. Therefore, the Fed has to deal with the issue, and political pressure should force officials’ hands, whether they like it or not.

    To that point, the inflation data continues to sizzle. For example, the Fed released its Beige Book on Apr. 20. The report revealed:

    Source: U.S. Fed

    As for wage inflation:

    “Employment increased at a moderate pace. Demand for workers continued to be strong across most Districts and industry sectors. But hiring was held back by the overall lack of available workers, though several Districts reported signs of modest improvement in worker availability. Many firms reported significant turnover as workers left for higher wages and more flexible job schedules.”

    “Persistent labor demand continued to fuel strong wage growth, particularly for footloose workers willing to change jobs. Firms reported that inflationary pressures were also contributing to higher wages, and that higher wages were doing little to alleviate widespread job vacancies. But some contacts reported early signs that the strong pace of wage growth had begun to slow.”

    As a result, with inflation and employment still holding firm, this is bullish for Fed policy and bearish for the PMs.

    Furthermore, Procter & Gamble (P&G) released its third-quarter earnings on Apr. 20. For context, the company sells various consumer staples and household products. CFO Andre Schulten said during the Q3 earnings call:

    “We said each quarter that we will undoubtedly experience more volatility as we move through the fiscal year. We've seen another step in cost pressures, and foreign exchange rates have moved further against us. Transportation and labor markets remain tight. Availability of materials remains stretched in some categories and markets. Inflationary cost pressures are broad-based and continue to increase with little sign of near-term relief and have resulted in consumer price increases across CPG categories and beyond.”

    Thus, Schulten noted that ~5% price hikes in Q3 will look more like ~6% in Q4.

    Please see below:

    Source: P&G/Seeking Alpha

    For your reference, favorable price elasticities mean that when P&G raises prices, the company is not seeing a drop-off in demand. Moreover, P&G is no small fry. In fact, the company ranked second on Consumer Goods Technology's (CGT) 2021 Top 100 Consumer Goods Companies list. Therefore, it's more fuel for the hawkish fire.

    Source: CGT

    The bottom line? While the answers are hiding in plain sight, investors do what they usually do: they ignore the fundamentals until something breaks. Then, it’s a rush for the exits and the financial media does a post-mortem about why everyone should have seen it coming. However, it’s simply the nature of investor psychology.

    Therefore, no matter how many times Fed officials say “expeditious-ly” or how much the inflation data supports even more hawkish policy, investors usually don’t get the message until it’s too late. However, when reality re-emerges, there will likely be a long way down before the PMs’ prices get to the oversold territory, from which another powerful rally could emerge.

    In conclusion, the PMs were mixed on Apr. 20, as momentum still remains elevated. However, with real yields and the USD Index rising, the only things holding up the PMs are the Russia-Ukraine conflict and sentiment. Therefore, when the latter two wane and the former two remain, gold, silver, and mining stocks should suffer profound drawdowns.

    What to Watch for Next Week

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

    • Apr. 26: Confidence Board consumer confidence, Richmond and Dallas Fed’s manufacturing and services indexes, S&P/Case-Shiller home price index.

    With consumer confidence providing insight into employment and inflation sentiment, the data highlights how “anchored,” or lack thereof, consumers’ medium-term expectations are with the Fed’s mandate. Likewise, the Richmond and Dallas Fed indexes are leading indicators of inflation and employment, while the S&P/Case-Shiller home price index offers a lagged look at housing inflation (which often leads to rent inflation).

    • Apr. 28: Q1 GDP and Kansas City Fed manufacturing index.

    GDP is lagged data, and investors are forward-looking. However, it's still important to monitor. Moreover, it will be interesting to see if the Kansas City Fed's data aligns with the Richmond and Dallas Fed's results.

    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

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