Monthly Archives: February 2023
Fed faces new inflection point amid troubling inflation data
Financial Times/James Politi/2/17/2023
“On the one hand, Fed officials are more confident they will avoid a rapid slowdown or even a recession in the short term, which means a ‘soft’ landing is still in sight. More unsettlingly, however, the central bank’s battle against high inflation appears far from over.”
USAGOLD note: This new infection point sounds a lot like the old inflection point……
Will investors follow central banks into gold
Seeking Alpha/Van Eck/2-15-2023
“During our most recent quarterly webinar, we said that it feels as if investors need to be ‘scared into’ owning gold. What we meant is that most investors seem uninterested in gold until things get ugly. Well, things got really ugly last year, and central banks took note, so you may say that they, too, got scared into owning gold, accelerating their purchases to record levels. Could the attitude of central banks towards gold be paving the way for investors more broadly?”
USAGOLD note: The time to buy gold is when things are quiet, not when they get ugly. That is precisely what the central banks have been doing over the past couple of years, and are doing now.
Chart by USAGOLD [All rights reserved] • • • Data Source: World Gold Council
Gold tracks sideways as ‘higher for longer’ gains traction
Holmes advises investors to take advantage of the gold-dollar inverse correlation
(USAGOLD – 2/23/2023) – Gold is tracking sideways this morning as the ‘higher for longer’ scenario gained traction, the dollar weakened slightly, and the markets weathered the release of January’s FOMC minutes no worse for the wear. It is up $2 at $1830. Silver is up 5¢ at $21.65. US Global Investors Frank Holmes advises investors to exploit the inverse correlation between gold and the dollar. The time to accumulate gold, he says, is during periods of dollar strength.
“Gold,” he continues in an advisory posted yesterday, “is nearing its strongest buy signal in four months as the US dollar eases off a rally that’s carried the greenback to its highest point since early January. According to the 14-day relative strength index (RSI), gold was at its most oversold level since October 2022 at the end of last week, indicating it may be time to consider buying in anticipation of mean reversion.… Gold is currently about 6% off its 2023 high of just under $1,960 an ounce, under pressure from the dollar, which has made gains against a basket of world currencies on economic data that all but guarantees additional rate hikes. Unemployment sits at 3.4%, the lowest reading in more than half a century, giving the Federal Reserve the go-ahead to continue its fight against inflation.”
US Dollar Index and Gold
(2000-present)
Chart courtesy of TradingView.com • • • Click to enlarge
Notable Quotable
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“Gold has your back when central bankers don’t.“
Jay Martin
Cambridge House International
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Fischer’s teaching will influence central banks for many years to come
Financial Times/Robin Wigglesworth/2-16-2023
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Stanley Fischer retired from his stint as the vicechair of the Federal Reserve more than five years ago. But the likely appointment of another of the former Massachusetts Institute of Technology professor’s protégés as the head of a leading central bank serves as a reminder that Fischer and the theories that he and his students have developed remain tenets of modern central banking.”
USAGOLD note: A revealing inside look at the intellectual origins of modern central banking……
Wholesale prices surge again in sign U.S. inflation is unlikely to ease quickly
MarketWatch/Jeffry Bartash/2-16-2023
“U.S. wholesale prices jumped 0.7% in January to mark the biggest gain since last summer, offering further proof that inflation is sticky and unlikely to decline rapidly. Economists polled by The Wall Street Journal had forecast a 0.4% increase.”
USAGOLD note: More surprising news on the inflation front (for those who ignore the connectionn between money creation and inflation.)
Producer Price Index
(%, Monthly)
Chart courtesy of TradingEconomics.com • • • Click to enlarge
Stocks face ‘meaningful’ downside risk amid ‘complacent’ markets: JPMorgan
MarketWatch/Vivien Lou Chen/2-15-2023
“Seventy-two percent of respondents in JPMorgan’s survey described markets as being too complacent. January’s stock action had been driven by a ‘fear-of-missing-out’ rally and, for a time, it seemed retail participation was on its way back, with recent sentiment among individual investors turning bullish. Data from Refinitiv Lipper, however, shows investors have been walking away from stock-market funds and going into bonds for weeks.”
USAGOLD note: Another no punches pulled warning from a top Wall Street investment firm……Only this time from its clientele. 68% said they would be sellers in the coming days/week, according to a survey conducted by the firm.
Short and Sweet
How to spot a bubble
‘Amount of leverage in U.S. equity markets now easily the highest in history.’
Cartoon courtesy of MichaelPRamirez.com
“If you want my opinion,” writes Hussman Fund’s John P. Hussman in a recent analysis, “I suspect that a near-vertical market plunge on the order of 25-35% is coming, probably quite shortly, most likely out of the blue, as in 1987, driven by nothing more than the sudden concerted effort of overextended investors to sell, and the need for a large price adjustment in order to induce scarce buyers to take the other side. As usual, no forecasts are necessary. … This dysfunctional behavior isn’t about any particular video game retailer. I suspect it’s actually about some sort of fragility or segmentation in order-flow mechanisms, possibly coupled with poorly managed derivatives exposure. As I used to teach my students, show me a financial debacle, and I’ll show you someone who had a leveraged, mismatched position that they were suddenly forced to close into an illiquid market. Though my concerns run far beyond the amount of leverage in the system, it isn’t helpful that the amount of leverage in the U.S. equity markets is now easily the highest in history.”
These days spotting the bubble is about as difficult as finding it in the Ramirez cartoon above. Hussman attacks Wall Street’s new rationalization of buying into the bubble, i.e., extreme valuations are justified by low interest rates. Those who are all-in for fear of missing out – blindly walking on air – are obviously the most vulnerable. When investing becomes a matter of faith, that faith will be tested. A solid diversification, we will add, would blunt the downside. Though investor margin debt is small compared to the leverage funds and institutions deploy in the market, it does serve as a bellwether for analysts looking for what might trigger a market crash. SentimenTrader’s Jason Goepfert recently posted a warning to his readers that at $831 billion, we are fast approaching a “year-over-year growth rate in [margin] debt – on both an absolute scale and relative to the change in stock prices – will compare with some of the most egregious extremes in 90 years.”
Are you worried about the egregious extremes in the stock market?
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Gold pushes to higher ground on light short covering, bottom fishing
Standard Chartered sees fading headwinds for gold
(USAGOLD – 2/22/2023) – Gold pushed to higher ground in early trading on what looks to be a combination of light short covering and some investor bottom fishing. It is up $8 at $1845.50. Silver is up 11¢ at $22.02. Standard Chartered, the German investment bank, says gold’s headwinds have begun to fade.
“We would gradually add exposure to gold (especially those who are underinvested),” it says in an advisory reported at FXStreet, “given that XAU/USD is starting to look oversold. Moreover, central bank demand remains strong and we expect that to continue supporting gold prices. The rebound in real yields and the USD is likely to level off, in our view, fading headwinds against gold. The bright metal can also serve as an attractive hedge against short-term volatility due to geopolitical tensions.”
Couldn’t resist passing along Ramirez’ latest:
Cartoon courtesy of MichaelPRamirez.com
The inflation boogeyman now hides in services
Bloomberg/John Authers/2-15-2023
“The most painful message from the figures is that disinflation won’t happen all at once and could turn out — as more than one analyst put it — to be a long and winding road. Here, then, is an attempt at a guide to what is really happening to prices in the US.”
USAGOLD note: Though services, as Authers points out, are the driving force behind the current inflation rate, we should not dismiss the anecdotal evidence from supply managers who report higher prices for goods that go into the production process. Should the price of finished goods begin to rise again, those increases will be in addition to the already high cost of services.
The barbarous relic
Comerica Wealth Management/John Lynch/2-13-2023
“While the fundamental strategies driving the move higher in gold can be disputed between its use as an inflation hedge or a safe-haven asset, the technicals are indisputable – momentum is strong, and flows are mild – suggesting further gains ahead.”
USAGOLD note: Lynch starts with John Maynard Keynes’ famous description of told as the “barbarous relic” which he says questioned its usefulness as an investment. However, Keynes’ wasn’t talking about gold as an investment in that context, but as a national asset backing the value of the currency. That said, Lynch goes on to paint of picture of gold that shows it as anything but a barbarous relic. He focuses on the longer-term trends.
Solving the puzzle of high inflation, weak growth and low unemployment
The Hill/Nicholas Sargen/2-15-2023
“To understand what is happening, one needs to consider how the pandemic unfolded, the policy response to it and the ways businesses and workers altered their behavior.”
USAGOLD note: A solid overview of where we are now and how we got here……
Investors need to prepare for era of ‘big government’, Bank of America says
Financial Advisor/Karen DeMasters/2-13-2023
“Because of these actions, investors should put some of their money in hard assets, such as minerals, metals, and agriculture commodities, or commodities that will become scarce because of government protectionism, according to the report. Investors need to have some precious metals, [BoA’s Joe] Quinlan said.”
USAGOLD note: Quinlan says that big government will build up higher levels of debt creating “distortions” investors with which investors will be forced to contend. “The next five years are not going to be as easy for investors as the last decade,” he cautions.
Gold tracks lower on Fed rate trajectory
Gold would have to be priced at $32,000/oz to cover Fed’s balance sheet
(USAGOLD – 2/21/2023) – Gold tracked to the downside in early trading as worries about the Fed rate trajectory continued to weigh on market sentiment. It is down $8 at $1836. Silver is down 8¢ at $21.81. Goldman Sachs’ chief economist Jan Hatzius predicts the Fed will raise rates another 0.75% by mid-year with no cuts until 2024. Analysts will be looking for clues on where the Fed might be headed in the minutes from February’s FOMC meeting to be released tomorrow.
In an article posted at Eurasia Review, macroeconomic analyst Alexander Gloy offers food for thought: “At the current price of $1,875 per ounce, US gold reserves are worth approximately $490 billion. In order to back all outstanding currency with gold reserves, the price of gold would have to reach $8,800 per ounce, roughly five times higher than it is today. If gold were to cover all money created by the Federal Reserve (which is equal to its current liability of $8.4 trillion) the price of gold would have to be upwards of $32,000 per ounce (nearly eighteen times the current price of gold).”
Gold and the Fed Balance Sheet
(%, 2007-present)
Chart courtesy of TradingView.com
Morgan Stanley strategists say stocks ignore Fed, earnings reality
Bloomberg/Farah Elbahrawy/2-13-2023
“[Morgan Stanley’s Michael] Wilson — a staunch Wall Street bear who correctly predicted last year’s selloff when US equities posted their worst performance since 2000 – expects deteriorating fundamentals, along with Fed hikes that are coming at the same time as an earnings recession, to drive equities to an ultimate low this spring. ‘Price is about as disconnected from reality as it’s been during this bear market,’ the strategists said.”
USAGOLD note: In other words, the stock mania continues unabated…… As the old Wall Street saying goes, they do not ring a bell at the top. Once the scramble to get out begins, things could deteriortate rapidly. Previously, Wilson predicted the S&P 500 will hit bottom between 3000 and 3300 – an almost 30% drop from where we are now.
The latest from John Paulson on gold, fed policy, currencies, stocks and more
Alain Eldann Interviews/Interview of John Paulson/2-12-2023
“If you possess physical gold you don’t face that risk. You also have the potential for appreciation. We’re at the beginning of trends that are going to increase the demand for gold, and inflation and geopolitical tensions will determine the rate at which gold increases. This year gold will appreciate versus the dollar, and also over a three, five and ten-year basis.”
USAGOLD note: Paulson offered this answer in response to why nation states are switching from holding dollars in their reserves to physcial gold. Of course, the appreciation Paulson states is not confined to nation-states, but applies to anyone who owns gold. He believes that we are at the beginning of a long term gold uptrend. He advises, “you’d be better off keeping your investment reserves in gold at this point.”
There’s a new inflation warning for consumers coming from the supply chain
CNBC/Lori Ann LaRocco/2-13-2023
“[L]ogistics managers are warning of a persistent source of inflation in the supply chain, and saying consumers should be ready for the impact it will have on their wallets.”
USAGOLD note: Some will recall that long before rising prices began to show up in the Labor Department’s consumer price index, purchasing managers warned of persistent price increases in the supply chain.
The stock market is wishing and hoping the Fed will pivot — but the pain won’t end until investors panic
MarketWatch/Satyavit Das/2-6-2023
“The ability of asset holders to ride out a prolonged period of higher rates and lacklustre growth remains unknown. As history illustrates, price falls, margin calls, forced selling as investors seek to generate cash, illiquid markets, suspension of redemptions and falls in credit availability can fuel a rapid negative financial cycles.”
USAGOLD note: The above is one of three “p’s” Das believes “may be relevant for 2023.” The other two are “persistence” and “pain.” He says inflation is unlikely to fall to central bank targets (2%-4%) “for some time.” Needless to say, the realization of such could cause turmoil in financial markets around the globe.
Gold up marginally as dollar firms; investors worry about Fed rate trajectory
Gilbert sticks with his $2428 forecast, but says support must first hold at $1845-50
(USAGOLD – 2/20/2023) – Gold is up marginally this morning as the dollar firmed and investors continued to worry about the Fed’s rate trafectory. It is up $1 at $1846. Silver is down 2¢ at $21.79. Market analyst Avi Gilbert welcomes gold’s recent pullback as the “set-up” for his forecasted $2428 target. He says support, though, must first hold in the $1845-50 region.
“As long as that support holds,” he says in an advisory posted at Seeking Alpha. “I am expecting a rally over the coming weeks. Should that rally take shape as an 5-wave structure, which adheres to our Fibonacci Pinball structure, then we will have to prepare for a break out in gold over the coming month, which will next point us north of $2,100SPX and quite rapidly. However, if the next rally is corrective in nature or if we see a sustained break of $1845/50 support, then it opens the door to the potential that this pullback/consolidation will take us several more weeks, and can potentially take us down to test the $1735/1,780 region.”
Ukraine war turns Russia into a nation of gold bugs
Financial Times/Anastasia Stagnel and Lelie Hook/2-11-2023
“After Russian President Vladimir Putin announced the country’s invasion of Ukraine last February, Natalia Smirnova’s phone started ringing off the hook. The financial adviser’s Russian clients were panicking. ‘Should I buy gold?’ one asked her. ‘If worst comes to worst, at least I can bury it.’”
USAGOLD note: War and inflation have a tendency to do that. Of course, the urge to accumulate is not confined to Russia alone. Demand for gold among private investors in Europe is also on the rise.