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Gold peaked at 2085 on May 4. Since then, it’s been more or less one-way traffic to the downside, short-term spikes aside. Sentiment is in the bathroom but on its way to the sewer. People are already throwing in the towel, but we haven’t seen capitulation yet. This is typically what we see at major lows, and this time is no different.
The Fed is talking hawkish, setting the stage for two more rate hikes of 25bp. From their perspective, inflation is not falling fast enough towards their 2% goal and more rate hikes are needed to reach that objective. This is despite the fact that the unadjusted PPI has fallen from 9.2% a year ago to 2.9% last month, a 6.3% decline, or put another way, a 67% drop. The risk the Fed runs is that they overdo the rate hikes, already the fastest tightening in history, and trigger a renewed banking crisis, recession, and outright deflation.
A rate hike of 0.25% at the next FOMC on July 26 is a 90% probability as I type. In other words, it’s already priced in. On Friday, we get the Non-Farm Payrolls report. For the last fourteen months, it has come in higher than expected thirteen times. The only month it didn’t was in March, when it missed expectations by a mere 3k at 236k, only to be revised down to 165k in April. Cumulatively, Payrolls have beaten expectations by a whopping 39% over the past fourteen months. Point being that it is likely to come in higher than the forecasted 225k in June. If that plays out, then not only is a July rate hike a virtual certainty, but it could be 50 basis points, or more likely, the probability of another September hike of 25 basis points soars. This would send Gold below 1900, in my opinion, and take the rest of the sector down with it. Only a surprising miss on Friday would have the opposite effect.
However, if we get yet another higher-than-expected Payrolls number, the two rate hikes the Fed is proposing will be priced into precious metals, miners, bonds, stocks, the dollar— basically everything. Gold and the rest will dump initially. But if the bad news is already fully priced in, then counterintuitively, the risk from there is up! Simply stated, we could see a dramatic decline across the board on Friday, except for the dollar, and from there we head higher starting late Friday or early next week.
And then there’s the banks. We already had a mini-banking crisis in March. Call it a preview of things to come. This was triggered by a run on banks that held assets (loans) that were suffering enormous unrealized losses due to the rapid increase in interest rates, while liabilities—i.e., deposits—were disappearing down the sink hole. Deposit withdrawals couldn’t be met without taking massive losses. The banks were insolvent. What do you think will happen when they squeeze the banks even further with more rate hikes? The next banking crisis will be the main event, imho.
What happened to Gold during the mini banking crisis? It soared from 1813 to 2085 in less than two months! Is there any reason not to expect the same to happen the next time around? Or even more so?
In summary, if we get another gigantic beat in NF Payrolls tomorrow, monetary metals and miners will likely be clubbed to the downside initially. But once the rate hikes are more-or-less fully priced in, the risk-reward is significantly skewed to the upside. It is likely that the bottom is in and we’re heading to new record highs in Gold next. As far as I am concerned, with respect to the correction in metals and miners, the end is nigh.
