Gold moves through whipsaw city heading into Fed week

Oct 27, 2023

With Gold Futures remaining in a five-week downtrend from a peak near all-time highs reached in early May, the safe-haven metal has been chopping inside of a tight range between $1985 and $1950 since Monday. The likelihood of the Federal Reserve taking a break in its aggressive interest-rate campaign during the FOMC meeting next week is becoming further priced into the marketplace, keeping gold above support at $1950.

When further U.S. data showed economic growth slowing further this week, along with weekly jobless claims pushing back to their highest level since Oct. 2021, the CME FedWatch Tool is now pricing in a 73% chance of an interest rate pause next Wednesday.

Yet, the market sees a 52% chance of a resumption of quarter-point increases in July after an expected pause. A month ago, there was only a 10% chance of another rate-hike. The recent "hawkish pause" rhetoric from financial analysts, combined with an estimated $1 trillion of Treasury issuance beginning this week as part of the latest debt-ceiling resolution taking yields higher, is keeping pressure on gold below $1985.

Meanwhile, the U.S. dollar appears to be topping after the DXY may have peaked at a lower high last week at 106.61 on news of the debt ceiling being pushed back to January 1, 2025. Only a move under 102 could suggest the top is in, with the final breakdown being confirmed on a break below the key 100 level.

This conflicting macroeconomic information has created a schizophrenic precious metals environment, causing the gold price to post several outside day reversals in either direction this week. When a high and low price for the day exceeds the high and low of the previous day's trading session, this creates an outside reversal price pattern that indicates a potential change in trend on a price chart. The indecision regarding gold's direction has both bulls and bears being whipsawed out of trading positions.

All the while these juxtaposing gold moves have been taking place, PCE data due out a day before Fed-speak next Wednesday may show inflation rising again. If Fed Chair Jerome Powell feels compelled to maintain a tightening bias even with a possible pause, the odds increase of the central bank creating another financial crisis as the 2-year U.S. Treasury yield rises towards 5%.

A rise in the 2-year yield to 5% during a previous rate-hike cycle created a global banking crisis in 2008, and a regional U.S. banking crisis during the current cycle earlier this year. The Fed's fastest monetary policy tightening campaign since the 1980s is largely responsible for the ongoing banking crisis, which saw the collapse of four banks when the 2-year yield rose to 5% again into March, including the second and third-largest bank failures in U.S. history.

The higher rates go, the bigger risk of the global economy cracking under the strain and becoming vulnerable to more black swan events. President Joe Biden signed Congress' debt-ceiling legislation over the weekend, officially suspending the U.S debt ceiling until January 1, 2025. But with U.S. debt already near $33 trillion at over 120% of GDP, there is cause for concern as this new deal ultimately gives the U.S. government free rein to run up unlimited debt into 2025.

Currently, the U.S. federal government spends $1.3 billion per day on interest payments alone, locked into historically low borrowing rates seen after the pandemic in 2020. Half of the U.S Federal debt, with no ceiling now until 2025, matures in the next 3 years. But 30% of the debt matures in the next 5 months. Inevitably, this debt will need to be refinanced at today's significantly higher interest rates, setting the stage for another banking crisis.

Not only is the U.S. government drowning in debt, but the average American is also struggling to make ends meet. With banks tightening lending following the recent financial market turmoil, credit has become very expensive following 500 basis points worth of interest rate increases from the Federal Reserve in just 14 months.

The Fed recently reported that credit card debt has risen by $250 billion over the past two years amid record inflation, and spiked to its highest quarterly level in Q4 2022 after increasing by $85.8 billion. The average American household has about $10,000 in credit card debt, marking an 8.9% YoY increase. Americans are facing $1 trillion in credit card debt due to rising APR and inflation.

Bankrate reported that 46% of cardholders cannot pay off their monthly credit card payments, up 7% from last year. The average APR is around 24% as of May 2023, and rises with each Fed rate hike. Food, energy, shelter, and all the essentials for survival have reached historic levels. If nearly half of the people cannot pay their credit card balances off each month, with interest at a record high and climbing, consumer debt is guaranteed to rise as the world's largest economy moves closer towards inevitable recession.

At the end of April, the CME's FedWatch tool was predicting rate cuts to begin as early as July of 2023. This picture has subsequently changed with the possibility of the first cut now showing up in September of this year.

The yield curve between 2-year and 10-year treasuries inverted in March of 2022. Historically, inversions precede recessions by between six and twenty-four months, which puts the September rate cut expectations into context and tells markets that one way or another we should have some monetary policy clarity by Q4. There have been seven significant recessions over the past 50 years, and the annual average appreciation in the gold price during those seven recessions was over 20%.

When considering the full magnitude of events that are currently unfolding, it is not hard to see why the current macroeconomic backdrop is fueling a "perfect storm" for the gold price to break out of its 12-year cup & handle pattern in the not-too-distant future.

The best-case scenario for the gold price breaking out above $2100 would be the Federal Reserve opting to cut interest rates at some point in 2023, while being forced to raise its target inflation rate.

With the Fed unlikely to cut rates unless they are forced to by an unexpected crisis, a pivot in policy would confirm the recessionary fears that are already contributing to higher gold prices. And if the Fed is forced to pivot with inflation still above its 2% target, this would provide even stronger fuel to the gold rally.

But until then, Fed-speak next week could be the catalyst to break the gold price out of its tight trading range in either direction. On the upside, gold needs to take out $2000 and preferably $2025 to confirm the low is in. Above $2050, new highs become probable and a monthly close above $2100 would be a technical breakout. On the downside, there is more support in the $1900-$1880 region, with stronger support at $1850.

After gold miners sold down to stronger support at $30 in GDX and nearly $35 in GDXJ into the end of May, both are attempting to form a higher low with weak, down-trending volume. However, there is an open upside gap generated by the introduction of the U.S. regional banking crisis in early March at $28 in GDX that may fill before a higher-low can be established.

A seven-year pattern of bombed-out gold stocks created a major bottom again in Q4 2022. But despite both miner ETFs having been making higher lows and higher highs along with gold since then, patience is wearing thin as volume dwindles lower in the junior space due to lack of interest during each sell off.

After a 40% move up in the GDXJ from a higher-low in March, opportunities are being created for patient speculators in quality juniors as the gold price continues to consolidate its six-month $465 move higher.

In anticipation of the incredible gains the junior sector should begin to experience once the gold price prints a technical breakout above $2100, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality juniors with 3x-10x upside potential into 2025-26.

If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.

By

Contributing to kitco.com