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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 Gold Read the Tea Leaves, It Would See the Shape of a Bear

    April 20, 2022, 7:34 AM

    Despite increased war tensions, gold failed to break above $2,000. What’s worse, rising USDX and interest rates are already lurking on the horizon.

    The precious metals just performed exactly as they were likely to. Despite the increase in war tensions, PMs and miners reversed instead of rallying, which indicated that the rally has probably run its course. Since the tensions can now (most likely) either decline or stabilize, gold and silver prices will presumably fall right away, or after a while, as the market starts paying attention to gold’s two key fundamental drivers:

    1. the USD Index
    2. the real interest rates.

    Both are inversely correlated with the price of gold, and both are on the rise. It’s therefore most likely only a matter of time before gold declines, and the same goes for silver and mining stocks. In fact, silver and mining stocks are likely to fall harder than gold, as they’ve been very weak in recent years anyway. Let’s not forget that while gold moved above its 2011 highs, silver and miners are well below the 50% retracement from their respective 2011 highs.

    Let’s check what gold did yesterday.

    The gold price declined substantially, and it closed below its late-March 2022 high, thus invalidating the breakout above it. Instead of the breakout above $2,000, we saw the above. Instead of a bullish sign, we got a sell signal.

    We also got another from the stochastic indicator that not only moved below its signal line, but also below the 80 level.

    Moreover, let’s not forget that it all happened in tune with what we saw back in 2020, after gold’s major top.

    Back then, gold retraced slightly more than 61.8% of the decline. Although this time it retraced slightly less, both cases are still very similar.

    Consequently, this month’s recent upswing was not really bullish – it was a natural part of a bigger bearish pattern.

    Just as gold reversed on Monday, so did silver. It also outperformed gold on a very short-term basis, which served as another bearish confirmation.

    Silver’s outperformance of gold is often a sell signal, especially when it’s accompanied by mining stocks’ weakness, and we saw the latter too.

    During yesterday’s trading, silver and junior miners were down rather similarly, but the latter had also been down on Monday, while silver had ended the session in the green.

    Also, miners just invalidated their breakout above the March 2022 high in terms of the closing prices. No wonder here – the attempt to rally above the previous highs was accompanied by rather weak volume, suggesting that it would fail.

    It did, and that’s a sell sign on its own.

    Consequently, the current outlook for the precious metals market appears bullish in the long run but bearish in the medium- and short 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

  • How Many Months Are Left Until Gold’s Fundamental Landslide?

    April 19, 2022, 8:53 AM

    While gold prices remain elevated and investors continue to ignore the implications of the Fed’s rate hike cycle, a reality check should emerge sooner rather than later. For example, Bank of America’s latest Global Fund Manager Survey shows that institutional investors don’t expect the Fed to turn dovish anytime soon.

    Please see below:

    To explain, the consensus expects six rate hikes in the coming months. However, while roughly 5% of respondents expected eight rate hikes in March, that figure increased to roughly 25% in April. As a result, institutional investors are slowly coming around to the hawkish realities that I warned about throughout 2021.

    Furthermore, institutional investors’ assessment of monetary policy risk hit an all-time high in April.

    Please see below:

    Denial

    However, old habits die hard, and while institutional investors realize what should materialize amid the Fed’s war on inflation, their positioning contrasts with the hawkish realities. As a result, the relative day-to-day calm contrasts with the crumbling house of cards.

    Please see below:

    To explain, the dark blue line above tracks the net percentage of respondents overweight equities, while the light blue line above tracks the net percentage of respondents expecting a stronger economy. If you analyze the right side of the chart, you can see that the light blue line is on par with the global financial crisis (GFC) lows. Despite that, though, institutional investors refuse to sell their stocks.

    Thus, while fund managers believe that a material tightening of financial conditions will commence, the ‘buy the dip’ mentality is hard to break. However, with reality likely to force institutional investors to recalibrate their positions, the prospective negativity should have a profound impact on the PMs.

    To that point, long oil/commodities are still the most crowded trades on Wall Street. Moreover, the idea that higher interest rates won’t impact commodity demand lacks credibility. In fact, slowing the U.S. economy should hurt commodities more than most sectors. As such, when the over-optimism reverses, the PMs should suffer substantial declines.

    For more context, I wrote on Apr. 14

    With Brainard and Waller telling you that their goal is to create a bullish environment for the USD Index and the U.S. 10-Year real yield, the PMs have fought this battle before and lost this battle before.

    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, Fed officials aren’t even pretending anymore. Waller said on Apr 13:

    “All we can do is kind of push down demand for these products and take some pressure off the prices that people have to pay for these products. We can’t produce more wheat, we can’t produce more semiconductors, but we can affect the demand for these products in a way that puts downward pressure and takes some pressure off of inflation.”

    Likewise, Waller was even more realistic when he spoke on Apr. 11: He said:

    “With housing, can we cool off demand for housing without tanking the construction industry? Can we cool down labor demand without causing employment to fall? That’s the tricky road that we’re on.”

    As a result, while Fed officials understand how difficult it will be to normalize inflation, investors remain in la-la land. However, when the “collateral damage” eventually unfolds, the shift in sentiment should result in the profound re-pricing of several financial assets.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Bloomberg

    Building on that theme, Fed officials continue to use the d-word when describing how they will tame inflation. Speaking on Apr. 14, Cleveland Fed President Loretta Mester said: “It’s not really a tradeoff right now, it’s really an imperative that we take the action, that we are committed at the FOMC to do that, to get inflation on a downward trajectory.”

    As a result:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Reuters

    Likewise, Philadelphia Fed President Patrick Harker said on Apr. 14 that the central bank will deliver "a series of deliberate, methodical hikes" to curb "far too high" inflation.

    Please see below:

    Obraz zawierający tekst, wewnątrz, zrzut ekranuOpis wygenerowany automatycznie Source: Reuters

    As a result, while commodities remain the belle of the ball, the reality is that the Fed has to reduce demand. When the light bulb goes off that demand is dropping while prices remain sky high, commodities’ history of epic rallies and drawdowns will likely repeat.

    To that point, as long as inflation remains problematic, the prospect of a dovish 180 by the Fed is slim to none, and with the data still coming in hot, investors remain unprepared for the medium-term readjustments.

    For example, the New York Fed released its Empire State Manufacturing Survey on Apr. 15. The report revealed:

    “The prices paid index climbed thirteen points to 86.4, a record high, and the prices received index retreated seven points from last month’s record high, signaling ongoing substantial increases in both input prices and selling prices.”

    Please see below:

    Source: New York Fed

    In addition, the University of Michigan released its Consumer Sentiment Index on Apr. 14. Chief Economist Richard Curtin said:

    “Consumer Sentiment jumped by a surprising 10.6% in early April, although it remained below January's reading and lower than in any prior month in the past decade. Nearly the entire gain was in the Expectations Index, which posted a monthly gain of 18.0%, including a leap of 29.4% in the year-ahead outlook for the economy and a 17.2% jump in personal financial expectations. A strong labor market bolstered wage expectations among consumers under age 45 to 5.3%, the largest expected gain in more than three decades, since April 1990.”

    For context, wage growth of 5.3% is mutually exclusive with the Fed’s inflation goal. Moreover, when Powell and his crew begin their crusade to kill demand, consumers will likely suffer the same come-to-Jesus moment as investors.

    Finally, the U.S. Census Bureau released its U.S. retail sales report on Apr. 14., and with the metric hitting a new all-time high of ~$666 billion in March, consumers’ spending spree remains alive and well. As such, the Fed still has plenty of work to do to curb demand and inflation.

    The bottom line? While the PMs remain in momentum-driven upswings, their medium-term fundamentals continue to deteriorate. With real yields rising, the USD Index north of 100 and the Fed in inflation-fighting mode, the officials’ war against demand and inflation should upend the PMs in the coming months. As a result, while gold, silver, and mining stocks’ recent price action may seem bullish on the surface, there are plenty of material risks on the horizon.

    In conclusion, the PMs were mixed on Apr. 18, as financial markets continued to assess macroeconomic developments. Moreover, while the Fed keeps hammering home its message, investors are still far from acknowledging reality. Thus, while the timing remains uncertain, medium-term enlightenment should result in a profound shift in sentiment.

    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

  • Beating Inflation: Are The Fed’s Dreams Gold’s Worst Nightmare?

    April 14, 2022, 9:58 AM

    While investors remain happy-go-lucky, fundamental data for gold and silver is now worse than in 2021. Is this the last chance to come back to earth?

    As another week comes to a close, the winds of change are blowing across the financial markets. However, while many investors and analysts can see only sunny days ahead, fundamental storm clouds should rain on their parade over the medium term, and it’s quite possible that it’s going to happen shortly.

    To explain, this week culminated with the USD Index soaring above 100, the U.S. 10-Year real yield hitting a new 2022 high, and Goldman Sachs’ Financial Conditions Index (FCI) hitting its highest level since the global financial crisis (GFC). However, the PMs paid no mind yet. In fact, investors across many asset classes continue to ignore the implications of these developments. So far.

    With sentiment poised to shift when the economic scars begin to show, the “this time is different” crowd may regret not heeding the early warning signs. For example, 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:

    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.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Reuters

    To that point, while investors continue to drown out officials’ hawkish cries, I warned on Apr. 13 that the Fed knows full well about the difficulty of the task ahead. 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.”

    She added: “I think there’s quite a bit of capacity for labor demand to moderate among businesses by actually reducing job openings without necessitating high levels of layoffs.” As a result, she’s telling you that Fed officials will make it their mission to slow down the U.S. economy. 

    With phrases like “capacity for labor demand to moderate” and “reducing job openings” code for what has to happen to calm wage inflation, the prospect of a dovish 180 is slim to none. As such, this is bullish for real yields and bearish for the PMs.

    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?

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Reuters

    Echoing that sentiment, Chicago Fed President Charles Evans (a relative dove) said on Apr. 11 that more than one 50 basis point rate hike could be on the horizon. "Fifty is obviously worthy of consideration; perhaps it's highly likely even if you want to get to neutral by December."

    As a result, with the USD Index and the U.S. 10-Year real yield already soaring, what do you think will happen if the Fed pushes the U.S. federal funds rate "to neutral by December?"

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznie Source: Reuters

    Even more hawkish, Fed Governor Christopher Waller said on Apr. 13: “I think we’re going to deal with inflation. We’ve laid out our plans. We’re in a position where the economy’s strong, so this is a good time to do aggressive actions because the economy can take it.”

    He added: “I think we want to get above neutral certainly by the latter half of the year, and we need to get closer to neutral as soon as possible.”

    As a result:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: CNBC

    Now, if we presented these quotes to the permabulls, they would say: "So what? We already know that the Fed is going to raise interest rates." 

    However, while a higher U.S. federal funds rate is now the worst-kept secret, the impact on U.S. economic growth is far from priced in. With investors assuming the Fed will normalize inflation without hurting the U.S. economy, they are positioned for an unrealistic outcome. Stagflation, anyone?

    Moreover, with the gold and silver prices ignoring everything the Fed throws at them, they're attempting to re-write the history books.

    However, with Brainard and Waller telling you that their goal is to create a bullish environment for the USD Index and the U.S. 10-Year real yield, the PMs have fought this battle before and lost this battle before.

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

    To that point, Fed officials aren’t even pretending anymore. Waller said on Apr 13:

    “All we can do is kind of push down demand for these products and take some pressure off the prices that people have to pay for these products. We can’t produce more wheat, we can’t produce more semiconductors, but we can affect the demand for these products in a way that puts downward pressure and takes some pressure off of inflation.”

    Likewise, Waller was even more realistic when he spoke on Apr. 11: He said:

    “With housing, can we cool off demand for housing without tanking the construction industry? Can we cool down the labor demand without causing employment to fall? That’s the tricky road that we’re on.”

    As a result, while Fed officials understand how difficult it will be to normalize inflation, investors remain in la-la land. However, when the “collateral damage” eventually unfolds, the shift in sentiment should result in the profound re-pricing of several financial assets.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Bloomberg

    Thus, investors’ uninformed state of denial will likely seem obvious in the months ahead. (Yes, I know, it’s difficult to remain rational while surrounded what’s irrational, and that’s the very thing that makes investing “simple, but not easy”). Moreover, while Macklem cautioned that the BoC could “pause our tightening” if inflation subsides, the same rule applies to the Fed. However, with inflation still raging, the Fed and the BoC are unlikely to change their hawkish tones anytime soon.

    Case in point. The U.S. Bureau of Labor Statistics (BLS) released the Producer Price Index (PPI) on Apr. 13.,and with outperformance across the board, green lights were present for all of the wrong reasons. For context, the gray figures in the middle column were economists’ consensus estimates.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Investing.com

    Likewise, the NFIB released its Small Business Optimism Index on Apr. 12. The report revealed:

    “The NFIB Small Business Optimism Index decreased in March by 2.4 points to 93.2, the third consecutive month below the 48-year average of 98. Thirty-one percent of owners reported that inflation was the single most important problem in their business, up five points from February and the highest reading since the first quarter of 1981. Inflation has now replaced ‘labor quality’ as the number one problem.”

    How about this divergence?

    “Owners expecting better business conditions over the next six months decreased 14 points to a net negative 49%, the lowest level recorded in the 48-year-old survey.”

    “The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading recorded in the series.”

    Moreover, “a net 50 percent plan price hikes (up 4 points).”

    Please see below:

    Source: NFIB

    On top of that, “a net 49 percent reported raising compensation, down 1 point from January’s 48-year record high reading. A net 28 percent plan to raise compensation in the next three months, up 2 points from February.”

    Please see below:

    Source: NFIB

    Thus, while the Fed hopes to rein in inflation, U.S. small businesses plan more price hikes and wage increases than in February. Therefore, officials’ hawkish intentions are not nearly hawkish enough. As a result, the medium-term outlook for the U.S. federal funds rate, the USD Index and the U.S. 10-Year real yield couldn’t be more bullish. As mentioned, let’s not forget how optimism often turns to pessimism when the drama unfolds.

    The bottom line? Investors lack the foresight to see how the Fed’s rate hike cycle will likely unfold. Moreover, with Fed officials warning of the “collateral damage” that occurs when they curb demand to reduce inflation, the permabulls have simply closed their eyes and covered their ears. However, when sentiment is built on a foundation of sand, it often collapses when reality re-emerges.

    In conclusion, the PMs rallied on Apr 13 as momentum remains the name of the game. However, while sentiment remains robust, gold, silver, and mining stocks’ fundamentals are worse now than at any point in 2021. As a result, history shows that not only are the current prices unsustainable, but profound drawdowns are required for the PMs to reflect their intrusive values.

    What to Watch for Next Week

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

    • Apr. 21: Philadelphia Fed manufacturing index

    With the regional data providing early insight into April’s inflation dynamics, continued price increases will put more pressure on the FOMC.

    • Apr. 22: S&P Global’s U.S. manufacturing and services PMIs

    Unlike the Philadelphia Fed’s index, S&P Global’s data covers the entire U.S. As a result, the performance of growth, employment, and inflation will be of immense importance.

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

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim 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

  • With the Russia-Ukraine War, Gold’s Safe-Haven Status Lasts

    April 13, 2022, 9:26 AM

    While several asset classes have suffered immense stress in recent weeks, the PMs have remained relatively elevated. Moreover, concerns have arisen that since the Russian central bank pegged the ruble to gold, it helps uplift the yellow metal. 

    For context, the Russian central bank announced on Mar. 25 that it would pay 5,000 rubles ($52) per gram of gold. This allowed the USD/RUB to garner an exchange rate of ~96.15 (5,000/52). However, the important point is that the policy was aimed at supporting the ruble, not the PMs. 

    To explain, when Russia invaded Ukraine, NATO responded with seismic sanctions. As a result, the USD/RUB rallied to an all-time high of 121.21. However, the threats worked perfectly for Russia, as the USD/RUB is now at ~79.68 and lower than the 85.28 recorded pre-invasion. Furthermore, Russian President Vladimir Putin attempted the same feat when he said that all Russian gas exports would need to be paid for in rubles. 

    A Reuters article stated:

    "Putin's order to charge 'unfriendly' countries in rubles for Russian gas boosted the Russian currency after it plunged to all-time lows when the West imposed sweeping sanctions on Moscow for its invasion of Ukraine. European gas prices also rocketed up."

    However, with the ruble strengthening materially in recent weeks, the policy is no longer needed.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznie

    Likewise, it’s the same story for the PMs. After announcing the fixed peg on Mar. 25, the Kremlin scrapped that policy on Apr. 7, since the ruble is strong enough and doesn’t need any indirect support.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznie

    Furthermore, the Russian central bank cited a "significant change in market conditions" for reversing the policy. In a nutshell: since the ruble is stronger than it was before the invasion, the currency impact of sanctions is immaterial. Therefore, the central bank is happy to let the ruble float.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznie

    All in all, the moves made by the Russian central bank were designed to support the ruble. When a currency plunges, the FX-adjusted cost of imports skyrockets. As such, sanctions would cripple growth, inflation would rage, and the Russian economy would suffer stagflation on steroids. However, by stabilizing the currency, Russia solves half of the problem. Thus, while the recent developments may seem like they uplifted the PMs, they're largely immaterial from a medium-term perspective.

    More importantly, the PMs' domestic fundamental outlooks continue to deteriorate. For example, the U.S. 10-Year real yield hit a new 2022 high of -0.12% on Apr. 11, and closed at -0.13% on Apr. 12. Moreover, while momentum keeps the yellow metal uplifted, history shows that the current gold price is unsustainable. 

    Please see below:

    Still a Momentum Trade

    To explain, the gold line above tracks the price tallied by the World Gold Council, while the red line above tracks the inverted U.S. 10-Year real yield. For context, inverted means that the latter's scale is flipped upside down and that a rising red line represents a falling U.S. 10-Year real yield, while a falling red line represents a rising U.S. 10-Year real yield. 

    Moreover, I wrote on Apr. 11 that gold and the U.S. 10-Year real yield have a daily correlation of -0.92 since 2007. Therefore, we must ignore 15+ years of historical data to assume that gold's best days lie ahead.

    To that point, the famous quote from John Maynard Keynes is relevant here. He said that "markets can stay irrational longer than you can stay solvent." In a nutshell: the price action can make investors second-guess themselves, even when the data supports the opposite conclusion. Furthermore, if you analyze the arrows above, you can see that investors' optimism helped gold outperform the U.S. 10-Year real yield in 2011, while investors' pessimism helped gold underperform the U.S. 10-Year real yield in 2015.

    As a result, sentiment rules the day in the short term, and the algorithms move in whichever direction the wind is blowing. Therefore, we find ourselves in that situation now. With the Russia-Ukraine conflict increasing gold's geopolitical appeal, safe-haven momentum remains ripe. In addition, another 2022 high in the headline Consumer Price Index (CPI) also increases gold's inflation-hedge appeal. For context, the metric increased by 8.5% year-over-year (YoY) on Apr. 12.

    Please see below:

    However, investors are short-sighted about the medium-term implications. While conventional wisdom implies that abnormally high inflation is bullish for the PMs, the reality is that pricing pressures awaken the Fed. Since positive real yields are essential to curb inflation, the Fed has to tighten financial conditions to achieve its goal.

    To explain, I wrote on Apr. 5:

    I warned throughout 2021 that a hawkish Fed and tighter financial conditions are bearish for the PMs. And while the fundamental expectation worked perfectly before the Russia-Ukraine crises erupted, the medium-term thesis is clearer now than it was then.

    Please see below:

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

    However, if you focus your attention on the right side of the chart, you can see that the FCI has declined materially from its highs. Therefore, financial conditions are easier now than they were before the March FOMC meeting. However, the Fed needs to tighten financial conditions to calm inflation. But since market participants are not listening, Chairman Jerome Powell needs to amplify his hawkish rhetoric until the message hits home.

    Think about it: if looser financial conditions are used to stimulate economic growth and inflation, how can the Fed calm the pressures without reversing the situation? Moreover, please remember that the current policy stance contributed to 8%+ annualized inflation. Thus, it’s unrealistic to materially reduce inflation from 8% to 2% without the Fed materially shifting the liquidity dynamics. Therefore, investors’ optimism will likely reverse sharply over the medium term.

    To that point, while the implications of a higher FCI and higher real yields take time to play out, the Fed has upped the hawkish ante in recent days. In the process, both the bond and the stock market have changed their tones. Therefore, commodities like the PMs will likely be the last shoe to drop.

    For additional context, 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.

    Thus, 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.

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

    She added: “I think there’s quite a bit of capacity for labor demand to moderate among businesses by actually reducing job openings without necessitating high levels of layoffs.” As a result, she’s telling you that Fed officials will make it their mission to slow down the U.S. economy. 

    With phrases like “capacity for labor demand to moderate” and “reducing job openings” code for what has to happen to calm wage inflation, the prospect of a dovish 180 is slim to none. As such, this is bullish for real yields and bearish for the PMs.

    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?

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Reuters

    For context, Powell said that on Mar. 21. The bottom line? It’s remarkable how the PMs’ fundamentals can deteriorate so rapidly while sentiment remains so optimistic. However, while the Russia-Ukraine conflict keeps the momentum alive, it’s likely a long way down when the war premiums unravel.

    Moreover, while real yields and financial conditions imply much lower prices for the PMs, they still have plenty of room to run over the medium term. As a result, while the permabulls may feel invincible, the fundamentals that drove the PMs’ performance over the last 15+ years couldn’t be more bearish.

    In conclusion, the PMs rallied on Apr. 12, as momentum runs high across the commodity complex. However, investors either fail to foresee the medium-term consequences of the Fed’s rate hike cycle, or they simply don’t care. Either way, reality should re-emerge over the next few months, and once sentiment shifts, the PMs’ lack of fundamental foundations should result in profound drawdowns.

    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.

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    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Dark Clouds Over the Gold Market Form a Bearish Shape

    April 12, 2022, 6:49 AM

    Gold’s efforts misfired, silver probably faked another breakout, and gold miners aren’t doing very well either. Is there a repeat of events from a decade coming?


    Yesterday’s session served as a great bearish sign, not just because of gold’s and silver’s reversals, but also because of miners’ underperformance.

    Let's take a look at gold.

    During yesterday’s session, gold moved slightly above its previous local high, but then quickly invalidated this small breakout. Invalidations of breakouts in gold are a sell signal on their own, but the fact that we saw the same thing in silver makes the bearish nature of this development even more prominent.

    After having been relatively calm in April, silver soared above its declining resistance line… only to disappoint shortly thereafter. The white metal still closed the day slightly above the resistance line. However, given that the reversal took place on relatively high volume, the odds are that this breakout will be invalidated shortly.

    In fact, it was only yesterday when I wrote that silver was known for its fake breakouts right before starting much bigger declines. It appears that we have witnessed this kind of performance once again.

    While both precious metals ended the session higher, mining stocks ended it lower. This could be a sign that the top is in. Let’s take a look at junior miners’ short-term chart.

    While the GDXJ ETF didn’t invalidate its tiny breakout above the triangle pattern in terms of the daily closing prices, it did move back below it on an intraday basis.

    So, if gold’s and silver’s reversals are followed by lower prices, junior miners will likely invalidate the breakout and trigger more selling.

    Let’s keep in mind that while gold and silver are repeating their 2012 performance, we can spot some analogies in GDXJ too.

    At first, in late-September 2012 and early-October 2012, junior miners consolidated, and then they declined, thus entering the back-and-forth decline mode. It happened on relatively low volume.

    Right now, GDXJ is also after a consolidation that’s been taking place on relatively low volume and that followed a rather sizable short-term upswing.

    What happened next in 2012?

    Well, at the late-2012 top, the GDXJ closed at $87.83. Months later, it closed at $29.59, or roughly one third of its initial price. In other words, junior miners erased about two-thirds of their initial price. Yes, it was a great time for inversely trading instruments. The JDST wasn’t trading at that time yet, but DUST (which trades opposite to GDX) moved up by over 600%.

    Even though the short-term outlook is somewhat unclear, the medium-term outlook for the precious metals sector remains very bearish, and the upside potential for the short positions in junior mining stocks remains enormous, in my opinion. In my view, patience is likely to be very well rewarded.

    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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