Stagflation: the Worse for Us, the Better for Gold

Why Can We Get a Recession and How Could It Be?

As you’ve probably noticed, I expect a recession next year, and I’m not alone, as this has become the baseline scenario for many financial institutions and analysts. Even the DSGE model used by the New York Fed shows an 80% probability of a hard landing (defined as four-quarter GDP growth dipping below -1%) over the next ten quarters. Reasons?

Inflation and the Fed’s tightening cycle. The history is clear: whenever inflation has been above 5%, the Fed’s hikes in interest rates have always resulted in an economic downturn. The key yield curve has recently inverted, which means that the most reliable recessionary indicator has started to flash red light.

Although the coming recession could decrease the rate of inflation more than I assume, given the slowdown in money supply growth, I believe that high inflation (although lower compared to the current level) will continue through 2023 and perhaps also in 2024 due to the excess increase in money supply during the pandemic. It means that recession is likely to be accompanied by high inflation, forming a powerful yet negative combo, namely, stagflation.

If the calls for stagflation are correct, it suggests that the coming recession won’t be mild or short-lived, as it’s not easy to combat it. In the early 1980s, Paul Volcker had to raise the federal funds rate to above 17%, and later even 19% (see the chart below), to defeat inflation, which triggered a painful double-dip recession.

During stagflation, there is a lot of uncertainty in the economy, and monetary policy becomes much more complicated, as the central bank doesn’t know whether to focus on fighting inflation, which could become entrenched, or rising unemployment. In a response to the Great Recession or the Great Lockdown, the Fed could ease its monetary policy aggressively to address declining aggregate demand and neutralize deflationary pressure. But if inflation remains high, Powell’s hands are tied.

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Some analysts argue that today’s financial imbalances are not as severe as those in the run-up to the 2007-2009 global financial crisis. Partially, they’re right. Commercial banks seem to be in much better shape. What’s more, inflation has reduced the real value of debts, and it remains much higher than many interest rates, implying that governments and companies can still issue very cheap debt.

However, financial markets remain very fragile. A recent example might be the turmoil in the UK after the government proposed unfunded tax cuts that altered the price of Treasury bonds and negatively affected the financial situation of pension funds. The level of both private and public debt as a share of global GDP is much higher today than in the past, having risen from about 200% in 1999 to about 350% today.

It means that the space for fiscal expansion will be more limited this time, and that the current tightening of monetary policy all over the world could have huge repercussions for the global economy. We’re already observing the first symptoms: the financial bubbles are bursting and asset prices are declining, reducing financial wealth and the value of many collaterals.

This is why economist Nouriel Roubini believes that “the next crisis will not be like its predecessors.” You see, in the 1970s, we had stagflation but no debt crisis. The Great Recession was essentially the result of the debt crisis, followed by the credit crunch and deleveraging. But it caused a negative demand shock and low inflation as a result. Now, we could have the worst of both worlds – that is, a stagflationary debt crisis.

What Does It All Mean for the Gold Market?

Well, to be very accurate, nobody knows! We have never experienced stagflation combined with the debt crisis. However, gold shone both during the 1970s stagflation and the global financial crisis of 2007-2009, so my bet is that it will rally this time as well. It could, of course, decline during the period of asset sell-offs, as investors could sell it in a desperate attempt to raise cash, but it should later outperform other assets.

To be clear, it’s possible that inflation will decline and we’ll avoid stagflation or that the Fed will blink and prevent the debt crisis instead of fighting with inflation at all costs, but one or another economic crisis is going to happen. When gold smells it, it should rebound! 2023 should, therefore, be much better for gold than this year, as the economy will be approaching recession and the Fed will be less hawkish.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Stagflation Is Coming, and Gold’s Gonna Love It

US Monetary Policy vs Inflation Deep Analysis

As central banks all over the world are tightening their monetary policies, more and more analysts, including Paul Krugman, are afraid that Powell and his colleagues are hiking interest rates too aggressively, risking going too far. They believe that inflation will soon decline, so the Fed is braking too hard.

Well, as always, there is some truth in these opinions. The inflation rate is likely to decrease as the growth in the money supply decelerates and even declines below the pre-pandemic rates (see the chart below). And monetary policy operates with a long lag, which means that the effects of the hawkish Fed’s actions haven’t been fully felt by the economy.

Hence, the central bankers could easily overdo. After all, they are so incompetent that overreacting to inflation after a long period of underreactin wouldn’t be surprising at all.

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However, even my students are aware of lags in monetary policy, so there is a chance that someone from the army of PhDs working for the Fed has heard about them and taken them into account. But more seriously, although the pace of money supply growth has normalized, there is still an excess of money supply relative to output.

As the chart below shows, since the global financial crisis, the increase in M2 money supply has been outpacing real GDP growth, reaching a peak during the pandemic. This growth differential hasn’t disappeared or turned negative yet, so with too many people chasing too few goods, inflation won’t go away very soon.

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You see, the current monetary policy is hardly a tight one. According to the Taylor rule, the key tool used by the central banks, the Fed should set the federal funds rate at least at 6.7% (see the chart below) – just to have a neutral stance!

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As the next chart shows, the real federal funds rate – understood as the federal funds effective rate minus the CPI annual rate – is still deeply negative. I’m not saying that inflation won’t disappear without the real federal funds rate being positive. After all, what’s fundamental for inflation is what’s happening with the money supply.

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However, positive real funds rates are high enough to slow nominal growth and reduce demand in excess of supply. The point is that it could be difficult to re-anchor inflation expectations without positive interest rates. Inflation expectations seem to have already peaked, but they remain historically high (see the chart below).

As a reminder, what Paul Volcker did was take a huge hike in the federal funds rate to bring rates into positive territory and restore confidence in the Fed, pushing inflation expectations down. He raised the federal funds rate to 19% at the end of 1980. The real rate surged from -4.8% to 7.3% and then to the record 9.4%. Compare it with the current -5.7 (as of the end of October). We are not even close.

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What Does It All Mean for the Gold Market?

Well, the truth is that the Fed is still conducting too easy, not too tight, monetary policy. The lending conditions have tightened, but this is because the financial sector has been cautious and forward-looking, not because the US central bank has become restrictive. We’re moving into this territory, but very slowly.

It implies that a recession is coming just when the real federal funds rate is still deeply negative and the chorus of voices calling for a softening of the Fed’s stance gets louder and louder. For me, this is a recipe for stagflation rather than a successful disinflation. So far, the Fed has kept a stony, hawkish face, but when the economic situation deteriorates, I bet it will blink and won’t try to fight with inflation at all costs.

Have you seen how quickly the Bank of England intervened during the recent market turmoil? Actually, stagflation is certain, in the sense that the next recession will be accompanied by higher inflation than the last few ones. The question is how serious it will be!

That’s excellent news for the gold bulls, as stagflation is what gold likes best. This is because during stagflation, we have both economic stagnation and high inflation. When attacked by two enemies at the same time, most assets become vulnerable, and gold tends to outperform them.

This is not surprising, as during stagflation there is a huge amount of economic uncertainty, confidence in the central bank is low, and real interest rates are on the decline, with some of them falling into negative territory. In other words, stagflation makes gold’s fundamental factors bullish.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Another Jumbo Rate Hike, Another Decline in Gold

November’s FOMC gathering is behind us. It was quite boring. You know, another meeting, another 75-basis points hike…

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to -3-1/4 to 4 percent.

The Fed raised interest rates by that much for the fourth time in a row. It’s quite impressive, given that in the last tightening cycle, they increased the rates only in 25-basis point moves. As a result, the target range for the federal funds rate is now at 3.75-4.0%, the highest level since early 2008, as the chart below shows. Thus, we can say that the interest rates have finally normalized after the Great Recession!

Except for another hike, the statement on monetary policy was little change compared to September. The main alteration was adding the following sentence:

In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

In English, this sentence doesn’t mean anything special, as the FOMC didn’t say anything we wouldn’t have known about already. They didn’t reveal anything, apart from mentioning factors they take into account in their decisions. However, in Fedspeak, the sentence means that the Fed is going to decelerate the pace of the monetary policy tightening.

The key part is “the cumulative tightening of monetary policy”, which signals the smaller moves in the interest rates to account for all the previous hikes, which affect the economy with an important lag. The decision hasn’t been yet made, but, as Powell admitted, “that time is coming, and it may come as soon as the next meeting or the one after that”. This dovish signal should support the price of gold. Actually, initially gold gained somewhat, but then hawkish Powell came and spoiled all the bullish fun.

Powell Says that Ultimate Rates Will Be Higher

The Fed Chairman admitted that financial conditions have tightened significantly and for the first time acknowledged that the Fed sees “the effects [of monetary policy tightening] on demand in the most interest-rate-sensitive sectors of the economy, such as housing.” He also admitted that the window for a soft landing has “narrowed” because of the monetary policy tightening. These were rather dovish remarks, but afterwards the hawkish tone began to dominate.

Most importantly, Powell stated that “the ultimate level of interest rates will be higher than previously expected”. As a reminder, at September’s meeting, the FOMC participants were seeing the peak in the federal funds rate between 4.5% and 4.75% next year. According to the CME FedWatch Tool, there are now about 72% odds of rates climbing to 5% or even higher by March 2023, an increase from about 22% one week ago. Higher expected rates implies lower gold prices.

Powell also reiterated the Fed’s commitment to remain restrictive in order to combat inflation: “the historical record cautions strongly against prematurely loosening policy. We will stay the course, until the job is done.”

And the job is clearly not done yet, so the Fed hasn’t over-tightened and it’s still not the time to think about a pause in rate hikes. But even “if we over-tightened, we have … our tools … [to] support economic activity. On the other hand, if you make a mistake in the other direction … then the risk really is that [inflation] has become entrenched in people’s thinking”, said Powell. Hence, the balance of risks is clear for the Fed: it would be better right now to have a too restrictive monetary policy rather than an easy one. That’s not what the gold bulls wanted to hear.

Implications for Gold

What does it all mean for the gold market? Well, the FOMC meeting was bearish for gold, as its price decreased again below $1,650, after an initial upward move to about $,1670. Today we see a continuation in declines, with the Comex price flirting with $1,620. All this implies that the downward trend that started in March this year (see the chart below) will remain untouched.

This is because there was no long-awaited pivot from the Fed. The FOMC members signaled the coming slowdown in the pace of the interest rates, but this dovish hint was more than neutralized by the hawkish message about a higher ultimate level of interest rates.

However, I believe that there is some room for very cautious optimism. What I mean here is that the Fed is entering a ‘fine-tuning’ phases instead of a ‘front-loading’ phase. The hikes will be continued, but we’re clearly approaching a peak in the level of the federal funds rate. According to the futures markets, we’ll see it as soon as in March 2023. And yesterday’s move by 75-basis points could be the last such big hike.

The implication for me is clear: gold will continue its downward move for some time, but next year should definitely be better for the yellow metal, as the Fed won’t be as aggressive as in 2022, and the chances of a hard landing, or a recession, are quite big – and even the central bank admits it.

Folks, on a personal note, this is the last edition of the Fundamental Gold Report, and it has been an honor and great fun to write these analyses for you throughout all these years. I’ll still be writing, and you’ll catch me soon, albeit with a different twist. I’m extremely grateful for this privilege and I wish you all lots of sun and big shiny profits!

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

A Recession Is Coming, but Gold Feeds on Fear

The famous House Stark’s words are “Winter is coming”. House Economists’ words are “recession is coming”.

I know that people can get fed up with recession warnings at some point, as they did with the boy who was constantly crying wolf. But there are more and more disturbing signals about black clouds gathering over the economy, despite the fact that the American GDP rose 2.6%, beating market expectations, in the third quarter.

First, America’s industrial engine is slowing down. The Philadelphia Fed Manufacturing Index for October came in at -8.7%, vs. -5% expected. The index remained in contraction territory for the second successive month. The Empire State Manufacturing Index also missed expectations. The index fell from -1.5% in September to -9.1%, while economists were looking for a decline to -4.3%.

Second, the Conference Board’s Leading Economic Index for the US decreased by 0.4 percent in September 2022 to 115.9, after remaining unchanged in August. The index is down 2.8 percent over the six-month period and this persistent downward trajectory suggests a recession is increasingly likely.

Third, according to the S&P Global Flash US Composite PMI, private sector firms in the US recorded a further downturn in output at the start of the fourth quarter. The index fell from 49.5 in September to 47.3 in October, as the chart below shows. The rate of decrease was the second-fastest since 2009 (with the exception of the early pandemic times).

The decline in business activity was driven by the solid fall in service sector output, as the S&P Global Flash US Services Business Activity Index posted a reading of 46.6 in October, down from 49.3 in September. As Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, commented on the report,

The US economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply. The decline was led by a downward lurch in services activity, fuelled by the rising cost of living and tightening financial conditions (…) The surveys therefore present a picture of the economy at increased risk of contracting in the fourth quarter at the same time that inflationary pressures remain stubbornly high.

Oh, boy, we will get both contraction and inflation at the same time. What an offer! Two for the price of one! It will be so much fun, especially for the Fed, who will have to decide whether to stimulate the stagnating economy or fight inflation. What could possibly go wrong?

The Key Yield Curve Inverts

However, the most important recessionary signal is the inversion of the yield curve. The spread between 10 and 2-year Treasuries has been negative since June, but recently the difference between 10-year and 3-month has dived below zero, as the chart below shows.

This is actually breaking news, as this yield curve is believed to be the most reliable recessionary indicator in the economic history. It’s not perfect, but it’s the best we have – in the past fifty years, its inversion preceded all economic downturns, without giving any false alarms. You have been warned!

Implications for Gold

What does it all mean for the gold market? Well, the looming recession is fundamentally positive for the yellow metal, especially that it could arrive before inflation recedes. In this scenario, we will have a stagflation in which gold should shine. Other positive factors are the latest ECB’s hike in interest rates today, which should strengthen the euro against the greenback (at least in theory), gold’s arch-enemy, and recent expectations for the Fed’s pivot (although they may be short-lived).

However, investors should remember that a recession is still a remote event. The inversion of the yield curve happens several months before the downturn. Additionally, fundamental factors don’t affect gold prices automatically or immediately.

They exert their influence through shaping market stories and people’s narratives about the gold market, under whose influence they make decisions. What I have in mind here is that unless people are really afraid of the recession, it won’t affect positively the gold market. What the gold bulls need is either a market panic or the Fed’s pivot that would result in a decline in real interest rates.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals.

In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

While Inflation Refuses to Go Away, Gold Refuses to Go Up

To paraphrase a famous Pink Floyd song, I wish you weren’t here, inflation! The CPI increased 0.4% in September, after rising 0.1% in August, according to the Bureau of Labor Statistics. The move was slightly higher than expected and occurred despite a 2.1% decline in the energy index. What’s really bad, especially for the poorest households, is that food prices continued to rise. The food index rose 0.8% for the month, the same as August, and was up 11.2% from a year ago.

Without plunging gas prices, inflation would be even higher. Indeed, the core CPI, which excludes food and energy prices, rose 0.6% last month, as it did in August. Increases in the prices of services (medical care, transportation, shelter) were the largest contributors to the increase in the core CPI monthly rate.

On an annual basis, the overall CPI increased 8.2% for the 12 months ending September, as the chart below shows. It’s a smaller number than the 8.3% rise in August but higher than expected (the market consensus was 8.1%). And the annual rate is still hovering near the highest levels since the early 1980s. The core CPI rose 6.6%, which means an acceleration from August, when it increased 6.3%.

The rise was also above expectations. Although it seems that the overall index has peaked, at least for a while, the core CPI is once again on the rise, which doesn’t bode well for the inflationary outlook. Inflation simply refuses to go away.

Inflation Takes a Bite

What does stubbornly high inflation imply for the U.S. economy? So far, inflation has not had a significant impact on consumer spending. After all, it was caused by all the newly printed money that got into the hands of consumers, boosting their purchasing power. However, this is going to change, and inflation will eventually take its heavy toll, and we already see the first signs. Retail sales were flat in September, below market expectations. Meanwhile, the recession risk within a year rose from 65% to 100%, according to Bloomberg Economics. Yup, you read it correctly. The Bloomberg model says that there will be – for sure! – a recession by October 2023. So much for an economy “strong as hell,” Mr. Biden!

Recession will occur as a result of either inflation or the Fed’s tightening cycle in response to price pressure. Bond yields rose following the release of the most recent CPI data, while the US dollar strengthened further. The odds of another 75-basis point interest rate hike at the FOMC meeting in November rose – right now, they are above 92%, compared to 60% one month ago, according to the CME FedWatch Tool.

Implications for Gold

What does it all mean for the gold market? Well, I don’t have good news. The fact that inflation remains absurdly high (and core inflation is even accelerating) implies that the Fed will stick to its hawkish monetary policy and continue to raise the federal funds rate.

The tightening of monetary policy, which contributed to the rise in both interest rates and the greenback, is the main culprit behind the current bear market in gold. As the chart below shows, the price of the yellow metal declined this week to slightly above $1,630.

The problem is that as long as the Fed continues to raise interest rates, gold could continue to suffer. This week, Minneapolis Fed President Neel Kashkari said that “the Fed can’t pause its campaign of monetary policy tightening once its benchmark interest rate reaches 4.5% to 4.75% if ‘underlying’ inflation is still accelerating.” Traders are betting on another 75-basis points not only in November, but in December as well. It means that gold has, unfortunately, further room to go down this year.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

The Fed’s Challenge and Gold

Inflation Is Still a Challenge

It was a tough year for the Federal Reserve. The U.S. central bank’s inflation forecasts were embarrassing. In December 2021, it projected the PCEPI inflation rate at 2.6%, while it soared to 6.8% through June. The Fed disclosed $300 billion in unrealized losses on its assets as of the end of March, showing the negative impact of rising interest rates on the market value of the Fed’s balance sheet (that likely only intensified since Q1). There was a trading scandal with two top officials resigning.

The real challenges are still ahead of Powell and his colleagues. They are caught between a rock and a hard place. The rock is, of course, inflation, which was caused by the huge increase in the money supply in response to the pandemic. At its current level, above 8%, it’s intolerable and must be curbed. However, the hard place is an economic slowdown. The Fed continues its tightening cycle, but it might be too complacent about the strength of the labor market and overall economy.

Indeed, the OECD’s leading indicator of U.S. economic activity has been on a decline for months, as the chart below shows, while the latest PMI data shows a steep fall in output across the US service sector and the fastest fall in activity since May 2020.

The S&P Global US Sector PMI is really worrisome, as it shows a broad-based contraction in the private sector:

US private sector firms signalled a broad-based decline in output during August, as all seven monitored sectors registered contractions in business activity. It was only the second time on record (since October 2009) that all sectors had seen a decrease in output, the first time having been in May 2020 during the initial wave of COVID-19.

No recession risk, huh? You see, the problem is that the economy is already on the brink of recession, but the Fed hasn’t yet shown its hawkish claws. What I mean here is that with the federal funds rate at about 3% and inflation at 8.2%, the real interest rates are still deeply negative, below minus 5%, and the fiscal policy is also accommodative (although less than last year).

Thus, as Daniel Lacalle puts it rightly, “it is impossible to create a monetary tsunami slashing rates and pumping trillions of newly printed dollars into the economy and expect it to correct with a small splash of water in the face. It is worse, it is impossible to create a soft landing with an overheated engine.”

Indeed, the Fed never managed to engineer a soft landing during such high inflation.
The tightening of monetary policy initially hits only the most interest rate-sensitive sectors, such as housing, but it will affect the entire economy ultimately. The Fed reacted to inflation too late, but now – because of this delay – it could overreact, given the state of the U.S. economy, pushing it into recession.

The Fed may also overstate the level of liquidity in the markets. So far, financial conditions seem to be just fine, while markets have ample liquidity. However, liquidity is very tricky as there is plenty of it – until it isn’t! History teaches us that during financial crises, liquidity quickly evaporates. The strengthening dollar only aggravates the problem, as it’s draining global liquidity and tightening conditions violently for large parts of the international financial system.

Implications for Gold

What does it all mean for the gold market? Well, the Fed’s trap is fundamentally positive for the yellow metal. For now, the Fed remains relatively hawkish, which boosts the dollar and puts gold under downward pressure. However, when the unemployment rate starts to increase and the next economic crisis begins, the Fed will have to – as a lender of last resort – reverse its course and adopt a dovish stance again. Many analysts are skeptical about the dovish pivot, but this is exactly what history suggests, especially given the level of private and public debt.

As recession is likely to be accompanied by still high inflation, the macroeconomic environment will be quite stagflationary, which should also support gold prices through low real interest rates and elevated demand for gold as an inflation hedge and a safe-haven asset. Additionally, in such an environment, there is a high chance that monetary policy will be “whipsawed, seemingly alternating between targeting lower inflation and higher growth, but with little success on either,” as Mohamed A. El-Erian puts it. This scenario wouldn’t be good for the U.S. economy, but gold could finally shine then.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Gold Returns Above $1,700. For How Long?

Gold has returned above $1,700! The chart below shows the recent rebound in gold prices. Does it mean that the worst is behind us and now the yellow metal can only go up?

Well, such conclusions would definitely be premature. Let’s remember that September was really awful for the gold bulls, as the average monthly price plunged 4.7% compared to August. The price of gold slid below $1,700 amid strengthened expectations of a more hawkish Fed, and then the actual FOMC meeting pushed gold prices down even further. This is because the Fed delivered another 75-basis point hike and also boosted its projections of the federal funds rate from 3.4% and 3.8% to 4.4% and 4.6% in 2022 and 2023, respectively.

As a result, for the first time since 2008, the federal funds rate exceeded 3%. As the chart below shows, the current tightening cycle is the fastest in more than 40 years, which couldn’t be without negative consequences for the gold market.

A Decline in Yields Helps Gold

Despite all these headwinds, gold managed to return above $1,700. This is thanks to the decline in real interest rates. As the chart below shows, the yields on 10-year TIPS have moderated somewhat recently, which helped gold catch its breath.

It seems that markets are more and more worried about the risk of excessive tightening of monetary policy and its consequences for the economy. According to Morgan Stanley, dollar liquidity in the United States, Europe, Japan, and China has declined by $4 trillion since March and is falling fast.

As the chart below shows, financial conditions – although far from being in a panic mode – have tightened significantly this year. The Chicago Fed’s National Financial Conditions Index moved from -0.74 in mid-2021 to almost 0 (positive values of the index indicate financial conditions that are tighter than average).

Implications for Gold

What does it all mean for the gold market? Well, it goes without saying that gold could decline again amid the aggressive Fed’s stance. The Fed’s pivot may occur, but not necessarily anytime soon, but only in a more distant future. According to Atlanta Fed President Raphael Bostic, “we must remain vigilant because this inflation battle is likely still in early days”.

However, it’s also possible that gold is slowly building the basis for its next rally. Please keep in mind that monetary policy will be less restrictive next year, as – according to the recent dot-plot – the Fed will deliver only one 25-basis-point hike in 2023. Thus, we are quickly moving to the end of the current tightening cycle, and the peak could be already behind us.

Another optimistic issue for gold is that the forecast for GDP growth went down from 1.7% to 0.2% this year, and from 1.7% to 1.2% in 2023. Meanwhile, the projection for the unemployment rate next year increased from 3.9% to 4.4%. The implication is clear: the Fed’s tightening cycle will have negative consequences for the U.S. economy, most likely pushing it into recession. Given the very high inflation, it basically means that the Fed expects stagflation in the coming months. In such an environment, gold should shine.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Gold Price Forecast – King Dollar Lives On

The Fall in the Price of Gold During the Year

To say that gold has been struggling this year is an understatement. As the chart below shows, the price of the yellow metal declined from above $2,000 to below $1,700 (as of September 20). That slide occurred during the highest inflation since the great stagflation of the 1970s.

US Dollar Strength Was Crucial Pressuring Gold Price Lower

One of the headwinds blowing strongly in the gold market has been the strong greenback. As the chart below shows, the American currency has been appreciating since mid-2021. The broad U.S. dollar index rose from 110.5 in June 2021 to 124 right now, or more than 12%.

Wait, wait a second. The dollar strengthened during a period of high inflation (see the chart below) in which money is losing purchasing power. How could the currency gain and lose value at the same time? It doesn’t seem to make any sense.

Nevertheless, it does. Because of inflation, the dollar is losing its internal purchasing power, i.e., how many real goods and services can we buy with these green pieces of paper? However, the exchange rate is about external purchasing power, i.e., how many pieces of paper with different symbols and signatures issued by foreign central banks we can buy.

The answer is: more! As the chart below shows, the dollar is now near its highest levels in decades versus the British pound, the euro, and Japanese yen (please note that, for consistency, the chart paints the exchange rates as the dollar’s value in foreign currencies).

However, it doesn’t necessarily reflect the dollar’s greatness but the fact that other currencies have been even worse. As investors’ saying goes, the dollar is “the least-ugly mug in a beauty contest”. You see, the Fed was terribly delayed with its combat against inflation, but compared to other major central banks, such as the ECB and the Bank of Japan, it’s an uber-hawk that quickly stood up for a fight.

Remember that exchange rates are all about relative values. For example, inflation in the euro area surpassed 5% in December 2021 and by now it has increased to about 9%, but the central bank didn’t lift its interest rates until July 2022.

The faster and more decisive Fed’s reaction increased the divergence in monetary policies and interest rates (see the chart below) between the dollar and the euro, which strengthened the value of the former. The mechanism was simple: higher rates in America attracted money from all over the world, and as investors have been buying dollar-denominated assets, the value of the greenback has increased.

What Does a Strong Dollar Imply for the Global Economy?

Problems! Why? Well, maybe because about 30% of all S&P 500 companies’ revenues are earned abroad, a stronger dollar reduces the dollar’s value of these sales. Or maybe because many governments and companies have international debts denominated in dollars?

Hence, the stronger the dollar, the higher the debt to be repaid. According to the IMF, 60% of low-income countries are in or at high risk of government debt distress. Tighter financial conditions in the U.S. and a stronger dollar could only increase the pressure on countries with foreign debts.

The dollar is America’s currency, but the emerging market’s troubles. Egypt, Pakistan, and Sri Lanka have already asked the IMF for help – and others may follow suit.

Please also note that about half of international trade is invoiced in dollars, which means that importers are facing higher costs not only because of inflation and supply-chain disruptions but also because of the stronger dollar.

What Does the Strong Dollar Mean for the Gold Market?

It goes without saying that the recent appreciation of the greenback has weighed on gold prices. If not for the strong dollar, gold would have fared much better. Indeed, this year, the yellow metal lost about 6% of its value when measured in the U.S. dollar, but it gained 6.2% in euros and 9.3% in British pounds. Thus, maybe gold’s performance hasn’t been disappointing, but simply the greenback has been shining, and maybe gold is an inflation hedge, after all (but in other currencies than the US dollar)!

It gives hope that when the dollar weakens (for example, due to the start of the recession and the Fed’s pivot, or due to the end of the war in Ukraine), gold will start rallying eventually. It seems that the greatest part of the upward move in the greenback is already behind us.

The strong dollar could also trigger some economic turbulence, which could benefit the yellow metal. However, I wouldn’t bet that financial crises in emerging markets will induce a safe-haven demand for gold. Precious metals investors don’t care too much about other countries than the U.S. or Western Europe.

Bottom Line

There is a true silver lining for gold bulls: one reason behind the appreciation of the dollar. The Fed’s tightening cycle is only one driver, but another is safe-haven inflows. Investors have been moving to the U.S. dollar not because it is so strong, but because of economic turmoil and recessionary risk. If so, gold could at some point (perhaps when the Fed pivots and adopts a dovish policy again) start to move in tandem with the greenback.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Gold Enters the Last Quarter of 2022 Depressed

Ladies and gentlemen, please welcome the final quarter of the year! What were the first nine months of 2022 for the gold market? Well, in Q1 there was an impressive rally in gold, with the yellow metal staying above $2,000 for a while. However, the next few months brought a gradual decline in gold prices. After several weeks of being traded between $1,700 and $1,800 during the summer, in September, gold gave up and slid below $1,700, as the chart below shows.

The reason behind this bearish trend in gold is clear, and its name is the Fed, the hawkish Fed. The tightening of monetary policy by the U.S. central bank boosted the greenback, gold’s nemesis, and bond yields (see the chart below). The higher the interest rates, the less attractive gold is compared to interest-bearing assets. Unfortunately for gold, inflation stabilized somewhat, which – with the hikes in the federal funds rate – lead to the rise in the real interest rates that are key for the gold market.

What’s Next for Gold?

We know what happened, but the key question is what awaits us in the last months of the year. Well, I don’t have a crystal ball, but obviously gold could struggle more during this tightening cycle of U.S. monetary policy. Interest rates are set to continue higher until inflation retreats closer to the 2-percent target. The Fed could go all the way to 4.5%. The more hawkish the Fed and the steeper the expected path of the federal funds rate, the worse for gold.

However, everything passes away, and this applies also to gold’s disappointing performance (although please note that gold is still one of the best assets this year – just think about declines in equities – and gold fares much better in other currencies than the U.S. dollar). At some point, either inflation softens or a recession arrives. In August, Bloomberg’s US recession probability forecast increased from 40% to 50%, and according to the World Bank, “as central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023.”

Then, the Fed will likely reverse its course, and gold could rally again, especially if the economic downturn is accompanied by still high inflation. Gold has historically performed relatively well during stagflations and recessions (according to the World Gold Council, “gold’s median return during such periods has been 0.92%, higher than comparable major asset classes with the exception of US Treasuries and corporate bonds”).

What could also help gold a bit is the Ukrainian counteroffensive (it increases the odds of a resolution and a lack of the energy crisis in Europe during winter) and the continuation of the tightening cycle started recently by the ECB (it could reduce the divergence between interest rates across the pond).

Implications for Gold

Of course, waiting for the Fed’s pivot could be similar to waiting for Godot. In Beckett’s play, Godot never arrives, but we know that at some point, the Fed will at least stop raising interest rates. We just don’t know exactly when this will happen. However, it’s possible that we are already behind the peak of the Fed’s hawkishness and that the upcoming hikes will be smaller compared to those from September and previous months.

I also believe that the biggest increases in real interest rates and the U.S. dollar index have already been made. The full reversal in the Fed’s stance would be much better for gold, but such a moderation should be welcomed as well.

Hence, gold could find a bottom in the final quarter of 2022, although it could struggle until Q1 2023. Why? Well, inflation probably won’t moderate this year, and I expect more economic weakness that would finally force the Fed to make a policy shift.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Will Gold Survive Another Jumbo Rate Hike?

The Fed’s Projection Will Be Key for Gold

Ladies and gentlemen, please take your seat and fasten your seat belt, as we’re approaching the FOMC meeting and there could be some turbulence! Actually, gold has already entered an area of turbulence and has declined below the psychologically important level of $1,700. As the chart below shows, the price of the yellow metal has declined from $1,726 last week to the current level of $1,664, in a response to the strengthened expectations of a more hawkish Fed.

The sad truth is that if today’s FOMC meeting turns out to be more hawkish than expected, gold may go down even further. On the other hand, if the Fed surprises markets with a dovish side and provides some clues about the end of its tightening cycle, gold may catch its breath and even rebound somewhat.

What can we expect? Well, some analysts say that the Fed could deliver a full percentage point hike in the federal funds rate to show markets that it’s taking inflation seriously. Such a decision could ruin gold. However, I doubt it. Such a big raise could be interpreted as a panic move and be counter-effective. This is why I expect another 75-basis point hike.

This is also supported by futures: the odds of such a move are 84%, while the chances of a full 1% move are only 16%, according to the CME FedWatch Tool. The size of the hike is one thing. However, the markets also await for fresh economic projections, as investors want to know how high the Fed will raise interest rates and what the economic effects of these hikes will be.

What can we expect here? Well, long story short, prepare for projections of slower GDP growth, higher inflation, a higher unemployment rate, and higher interest rates. The interest rate forecast for the next year could move from the current 3.8% to 4-4.5%. If the new dot-plot turns out to be more aggressive, gold could get another hit.

On the other hand, Powell and his colleagues are likely to put numbers to the “pain” they’ve been thinking of in recent days. Hence, the expected unemployment rate will rise to reflect the effects of rising interest rates on aggregate demand. The economic slowdown and deteriorating labor market, in the Fed’s eyes, could provide some support for gold prices, especially if their scale is larger than expected.

Implications for Gold

How does the FOMC meeting affect the gold market? Well, it depends, but given the persistent inflation, the monetary policy statement and Powell’s press conference would be decisively hawkish. The federal funds rate is likely to rise by another 75 basis points, the next jumbo-hike in a row, and its forecast for the next year will also increase, creating downward pressure on gold prices. True, much of this is already priced in, so the mere absence of a full 1% increase could provide relief for gold. However, I’m afraid that the event could catalyze the next leg lower in precious metals, especially if we get any hawkish surprises.

Gold bulls will seek clues about the much-anticipated Fed’s pivot. I don’t expect any such hints at this meeting, but there might be signals about the slowdown in the pace of interest rate hikes. There is a clear limit to how high the Fed is willing to hike rates, especially given that the higher the rates, the more costly the federal debt is and the greater the odds of a recession. And the higher we climb, the closer we are to the peak. Gold could find some comfort there. If not comfort, then the bottom at least, setting a stage for the rally in the future.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Gold Price Forecast – What’s a Recession, Anyway?

After the real GDP declined in the first two quarters of this year, many commentators declared that the economy had fallen into a recession. Such calls are met with a fierce denial from the government’s officials. Both President Joe Biden and Treasury Secretary Janet Yellen insisted that the economy is not in a recession but in a “state of transition”.

Recession or Transition?

Who is right? Well, in a sense, both sides are right – and both are wrong. Why? Two consecutive quarters of negative economic growth constitute only the so-called technical recession. Which is the popular definition of recession used widely by the financial press and those analysts who don’t want to wait several months for the final verdict of the National Bureau of Economic Research (NBER), the official arbiter of recessions in the U.S. Also, not all people like the idea that recessions are decided by a small committee of Ph.D. economists.

However, what’s the official NBER definition of recession? It is “the period between a peak of economic activity and its subsequent trough, or lowest point” and “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Although most of the recessions identified by the NBER do consist of two or more consecutive quarters of declining real GDP, not all of them do. This is because what also matters is the depth of the decline, and economic activity is not identified solely with real GDP, but with a range of indicators:

Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies.

These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions.

There is no fixed rule! So, basically, dating the peaks and troughs of the business cycles by the NBER resembles deciding which pictures are pornographic by the Supreme Court. “I know it when I see it,” as Justice Potter Stewart famously said.

Anyway, the key question is whether the U.S. economy is experiencing a significant and broad-based weakening. Not yet. As the chart below shows, the decline in the real GDP wasn’t too deep, at least so far. I mean here that the GDP dropped 0.4% in Q1 and 0.23% in Q2 (quarter-to-quarter), which is significantly less than in past recessions. However, I wouldn’t be surprised if the GDP declined in the third quarter as well.

What’s more, other indicators, such as real personal income, real personal consumption expenditures, or industrial production, don’t call for a recession either. However, they show weakness, while some other indicators are flashing red. The yield curve has inverted, the manufacturing PMI is slowing down, and home sales are plunging. The recession may not be there yet, but it’s coming! We may be unprepared, but at least we have memes!

Another issue is that the pundits say that we shouldn’t fear recession because the labor market remains strong. However, given that employment never fully recovered from the pandemic, the GDP may decline with relatively strong nonfarm payroll numbers. It’s also worth being aware that the labor market may be in worse conditions than it’s commonly believed. After all, according to the household survey (instead of the establishment survey), the U.S. economy lost 168,000 jobs since March 2022 (see the red line in the chart below).

Additionally, according to PwC’s survey, half of more than 700 US executives and board members said they are reducing headcount or plan to, and 52% have implemented hiring freezes. So, layoffs are becoming more widespread, which is pretty odd for a “strong” labor market.

Will It Be Beneficial for Gold?

The general problem with both the popular and NBER’s definitions of recession is that they merely describe the various manifestations of recession instead of explaining its essence. So, what is it? According to Frank Shostak, a recession is a period of liquidation of economic activities that came into being because of the credit expansion and loose monetary policy of the central bank.

In other words, just like a hangover is an unpleasant but necessary readjustment process after a previous alcoholic binge, a recession is an unpleasant but inevitable readjustment period after previous distortions of the economic structure triggered by artificially low interest rates and easy money.

What does it all mean for the gold market? Well, we are so far in the so-called technical recession. The official NBER definition hasn’t been fulfilled yet, but a recession is coming. Actually, if we adopt the liquidation perspective of the Austrian school of economics, we could say that recession has already begun, although it may not be seen in all the indicators observed by the NBER.

This will be an unpleasant process for the economy, but should be pleasant for gold, especially when the unrest in the markets intensifies and the Fed makes a dovish pivot. The officials will deny recessionary signals as long as it is possible (and, ideally, until mid-term elections), but the economic crisis will play out, whatever the pundits say or do. After a boom, there is always a bust.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

When Rising Unemployment Is Not Good News for Gold

Powell, we could have a problem! According to the BLS, the U.S. unemployment rate rose to 3.7% in August from 3.5% in the previous month, as the chart below shows. It seems to be a fatal blow to the narrative of a strong labor market.

It seems to be, but it’s not! After all, as one can see in the chart below, the U.S. economy created 315,000 jobs last month, roughly in line with expectations, although less than 526,000 jobs added in July. Notable job gains occurred in professional and business services, health care, and retail trade.

What’s more, the rise in the unemployment rate was accompanied by an increase in the labor force participation rate from 62.1% in July to 62.4% in August, which means that more people entered the labor market looking for a job. On the other hand, after revisions, employment in June and July combined is 107,000 lower than previously reported.

However, the headline increase in the unemployment rate is mostly due to the rise in the labor participation rate, so it’s not terrible news. Actually, August’s employment report was strong enough to enable the Fed to continue its tightening cycle at the current hawkish pace. Indeed, the market odds of a 75-basis point hike at the September FOMC meeting rose from 75% to 82% over the last week, according to the CME FedWatch Tool.

The Fed’s commitment to a decisive fight against inflation through hikes in the federal funds rate was also confirmed by recent remarks from the central bankers. Fed Vice Chair Lael Brainard said that the Fed will maintain tight monetary policy “for as long as it takes to get inflation down” and that the U.S. central bank’s stance “will need to be restrictive for some time to provide confidence that inflation is moving down.”

Similarly, the new Boston Fed President, Susan Collins, in her first media interview at this job, said that although the Fed has raised interest rates significantly, “there’s more to do.” All this is bad news for the gold bulls, who are waiting for the Fed’s pivot.

The Dollar Strengthens Further

The Fed’s tightening cycle is not the only reason behind the current strength of the U.S. dollar. Another is the relative dovish stance of other major central banks as the ECB and Bank of Japan. As a consequence, the Japanese yen plunged to the level of 143 per dollar, the lowest level since July 1998, as the chart below shows.

Similarly, the EUR/USD exchange rate has recently tumbled below parity, and also the lowest level since October 2002, as one can see in the chart below. The ECB is not as dovish as the BoJ, but the euro is suffering due to the European energy crisis. The common currency slumped this week after Russia shut the key Nord Stream 1 pipeline into Europe, sending gas prices higher and boosting concerns about a recession.

Implications for Gold

What does it all mean for the gold market? Well, the recent employment report was strong enough to make the Fed feel comfortable with the continuation of its hawkish monetary policy and with further interest rate hikes. The Fed’s tightening cycle is supporting the U.S. dollar, which is weighing on gold. As the chart below shows, the price of the yellow metal remains close to $1,700 and continues its struggle to find bullish momentum.

Unfortunately for the gold bulls, prices can decline further, given the Fed’s stance and the dollar’s strength. Gold will start a new rally only if either the recession fears intensify, boosting the safe-haven demand for the precious metal, or if the Fed pivots (which won’t happen until the economy seriously slows down).

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

After a July Slowdown, Has Inflation Finally Peaked?

A Deep Look at Inflation Data

Yes and no, but before I elaborate on this enigmatic answer, let’s see what happened in July. On a monthly basis, the CPI was unchanged then, after rising 1.3 percent in June, as the chart below shows. The core CPI, which excludes food and energy prices, didn’t come flat, but it still decelerated from 0.7% in June to 0.3% in July, according to the BLS.

The price hikes also took a breather on an annual basis. As the next chart shows, the seasonally adjusted rate of increase in the CPI slowed down from 9% in June to 8.5% in July.

Meanwhile, the core CPI rose 5.9%, the same pace as in the previous month. This is due to a 10.9 percent increase in the food index over the last year, the largest 12-month increase since the period ending May 1979. What’s important is that the headline inflation readings came better than the markets and analysts expected.

Does it all mean that inflation has already peaked? Yes, it’s possible, at least in the short-term. After all, the Producer Price Inflation (for finished goods) has also moderated recently. As shown in the chart below, the annual PPI rate of change rose 15.3% in July, down from 18.3% in June.

What’s more, the slowing economy coupled with the Fed’s tightening cycle could negatively affect the demand side of the economy and, thus, curb inflation. Additionally, some of the supply problems have already been resolved, while the rate of increases in the money supply has returned to a more normal level than seen before the pandemic. As one can see in the chart below, the pace of M2 money supply growth has peaked at 27% in February 2021 and since then it has decelerated below 6%.

Moreover, the monetary base has declined 8.6% in June 2022 over the last twelve months, while fiscal deficits have normalized, although at high levels.

However, it’s also possible that inflation hasn’t peaked yet. There is still strong inflationary pressure, and monetary forces operate with a significant lag. What worries me is the rising home prices (which are reflected in the CPI with a lag) and shelter costs. As the chart below shows, the CPI shelter subindex accelerated slightly from 5.6% in June to 5.7% in July. It’s really disturbing, as shelter costs are the biggest component of the CPI. They are also stickier and harder to fix than other constituents of inflation.

More generally, one month of moderation is not enough to draw any sensible conclusions about the future path of inflation, as there are always ups and downs on the way as a part of normal economic volatility. The Fed is still behind the inflation curve.

The key argument against prematurely celebrating the victory over inflation is that not all the newly created money during the pandemic has already shown up in inflation. Why? This is because people buried it in the backyard.

Actually, they didn’t bury it but stashed money in their bank accounts. However, the economic effect is similar: the fresh money hasn’t been fully spent and translated into higher prices. When people spend all these excess savings, inflation will get a second boost.

Additionally, according to the Bank of International Settlements, “as inflation rises, it naturally becomes more of a focal point for agents and induces behavioural changes that tend to entrench it.” In other words, inflation has risen so much that it could become more persistent as self-feeding dynamics kick in. It means that “we may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched.”

What does it imply? Well, as the main drivers are fading, inflation is likely to moderate somewhat in the near future. The local peak is near or it’s already been achieved. However, inflation is likely to stay elevated for some time. Actually, the top half of the population by wealth still has some excess savings.

When people tap into them, inflation could accelerate again. I’m not saying that inflation rates will continue to rise, reaching double-digit values. My claim is that inflation hasn’t said its last word yet.

What Does It All Mean For The Gold Market?

Well, the July deceleration in inflation is good news for the gold market because it may prompt the Fed to adopt a more dovish monetary policy. However, inflation is still obscenely high, which will force the U.S. central bank to continue its interest rate hikes and quantitative tightening.

The second bout of inflation, if it happens, will only reinforce the hawkish stance of the Fed. But even without it, the central bank will continue its current monetary policy, unless there is a strong and decisive slide in inflation rates. The following increase in real interest rates would be negative for gold prices. However, the Fed’s monetary policy would lead at some point to recession or even to stagflation, which should make gold rally.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Gold Falls as Powell Appeared Hawkish in Jackson Hole

Markets Were Quick to React to Powell’s Speech

Jackson Hole is behind us! What have we learned from Powell’s remarks at this year’s symposium? Well, the Fed Chair delivered a decisive and firm speech that reinforced the Fed’s hawkish stance and put to rest beliefs about a quick dovish pivot:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Although Powell didn’t specify how large the next interest rate hike will be, he said that “another unusually large increase could be appropriate at our next meeting”. Importantly, Powell downplayed July’s deceleration in inflation, saying that “a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down”.

Powell also emphasized the Fed’s commitment for delivering low and stable inflation. He said that:

Our responsibility to deliver price stability is unconditional (…). There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job (…). We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

What’s important, is that Powell acknowledged the costs of restoring price stability in the form of drag on aggregate demand and the labor market (and that it would bring “some pain,” or the so-called hard landing), but he seemed to be ready to bear these costs in order to defeat inflation. The logic is simple: as “the employment costs of bringing down inflation are likely to increase with delay,” the Fed should act with resolve now until the job is done:

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Last but not least, Powell clearly stated that estimates of the longer-run neutral level of federal funds rate – estimated in June FOMC’s economic projections to be 2.50% – are not a place to stop or pause the Fed’s tightening cycle. It means that interest rates may go significantly higher. This week, Cleveland Fed President Loretta Mester said that the Fed will need to raise the federal funds rate somewhat above 4% by early next year.

Powell’s speech at Jackson Hole pushed the dollar and bond yields higher, while equities plunged. As the chart below shows, the 10-year yield on U.S. Treasuries rose from 3.03% to 3.12%, while the S&P 500 Index plummeted from 4,199 to 3,955. Moreover, according to the CME FedWatch Tool, the odds of 75-basis points hike in the federal funds rate increased from 64% to 72%, which also put downward pressure on the gold prices.

Implications for Gold

What do the recent Fed’s hawkish comments imply for the gold market? Well, they add downward pressure on the yellow metal. As the chart below shows, the gold prices have been gradually sliding in August from $1,800 towards $1,700. Powell’s speech at Jackson Hole has accelerated this downward trend, pushing the price of gold from $1,754 to $1,702 one week later.

Unfortunately for the gold bulls, this downward trend could continue for a while, although most of the downside risks seem to have been already priced in. The hawkish Fed, strong greenback, and rising real interest rates are clear headwinds for gold that keep its price below $1,800 or even lower.

However, remember that talk is cheap. Powell’s speech was resolute, but the question is how is he going to sound when the data seriously deteriorates. After all, a recession is practically unavoidable, and the only question is how deep and painful it will be. Hence, gold is likely to struggle further, but at some point, it should get a boost from recessionary and stagflationary tailwinds.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Even a Steep Decline in PMI Didn’t Move Gold Higher

Economic Slowdown Is Likely to Intensify

The latest S&P Global Flash US Composite PMI doesn’t bode well for the U.S. economy. The headline Flash US PMI Composite Output Index declined from 47.7 in July to 45 in August, as the chart below shows. It was the second successive monthly decrease in total business activity. The drop in output was the steepest seen since May 2020. Actually, excluding the pandemic period, “the fall in total output was the steepest seen since the series began nearly 13 years ago,” as Siân Jones, Senior Economist at S&P Global Market Intelligence noted.

It was also broad-based, with both manufacturers and service companies registering lower activity, although – interestingly – service sector firms recorded the steeper rate of decline. The S&P Global Flash US Services Business Activity Index declined from 47.3 in July to 44.1 in August, while the Flash US Manufacturing Output Index dropped from 49.5 to 49.3.

However, the overall manufacturing activity remained within expansion territory, as Flash US Manufacturing PMI posted at 51.3 in August, down from 52.2 in July. But this index fell to its lowest level in just over two years. Coupled with two quarters of negative GDP growth, it doesn’t look the best economy in modern history.

OK, so what’s happening in the U.S. economy? Why is the output declining? Well, the culprits are – who would have guessed it? – inflation and the Fed’s tightening cycle. Surging prices and hikes in interest rates simply squeezed the real disposable incomes of Americans and reduced their spending. The supply issues, such as material shortages and delivery delays, also didn’t help producers.

Oh, and one more thing, rising costs: although the rate of producer price inflation slowed down, rising wages, transportation surcharges, and supplier costs pushed up business expenses. Additionally, although it’s another report, new home sales plunged 12.6% to 511,000 units in July, which also shows the negative impact of higher mortgage rates.

This is in line with what I wrote some time ago: a recession (or a serious economic downturn) is practically inevitable, as either the Fed’s tightening of monetary policy or inflation on its own will lead to a decline in economic activity. You see, the dichotomy between inflation and recession is a false one. The actual choice is between a recession with high inflation or a recession with moderate inflation under control. Inflation distorts the economic structure, and it was obvious from the very beginning that high inflation would severely hit the economy. This is exactly what we are observing right now.

I don’t have good news about the future. Why? Inflation, even if it has peaked, will remain elevated for several, if not a few months. Similarly, although the Fed is going to slow down the pace of hikes in the federal funds rate, it will remain hawkish for some time (at least until there is a big increase in the unemployment rate or a really serious economic crisis or strong recession). Hence, the downward pressure on people’s disposable incomes will continue, dampening further the pace of economic growth. The decline in new orders was the sharpest in over two years, as the composite survey’s new orders index dropped from 50.8 in July to 48.8 in August.

Implications for Gold

What do the recent PMI reports imply for the gold market? Well, the immediate reaction was rather limited, as one can see in the chart below. The fact that the steep decline in PMI wasn’t able to move gold prices decisively higher is disturbing.

However, from the fundamental point of view, the slowdown in economic activity should be positive for gold prices. It brings us closer to stagflation and increases the odds of a more dovish Fed in the future.

Anyway, tomorrow Jerome Powell will speak at the Jackson Hole Economic Symposium. Who knows, maybe this will even provide a catalyst for the gold price. If the Fed Chair is more dovish than expected, the yellow metal could gain. However, if Powell delivers a more hawkish speech than anticipated, gold prices could go down. You have been warned!

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals.

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Sunshine Profits: Effective Investment through Diligence & Care

2022 Doesn’t Have to Be Like 1980 for Gold

Recession and Stagflation

Everyone says that the upcoming recession and stagflation will be good for gold. However, will they really? Some doubts also arose in my mind, so let’s investigate them. I, of course, don’t dispute that gold soared in the 1970s. This is a fact which is illustrated nicely by the chart below.

But was it really caused by stagflation, or was it just a time coincidence? What I mean here is that the 1970s were a special time, the end of Breton Woods. In 1971, Nixon ended the gold window, and the price of gold was allowed to fluctuate freely. Under the gold standard, the US dollar was defined as 13.71 grains of gold, which implied that it was convertible to gold at the fixed rate of $35 per ounce.

However, such a fixed exchange rate (technically, it wasn’t an exchange rate as the dollar was defined in terms of gold) was introduced in 1934, and since then the dollar had been losing its purchasing power. Hence, the rally in gold prices after the convertibility was ended was completely natural and could have had a limited relationship with the rampant inflation. The peg was artificially high for years, so the dollar was overvalued while gold was undervalued.

Another issue is that in the 1970s, the world moved into a new world of completely fiat, floating currencies, so there was a lot of concern and a safe-haven demand for gold. In short, the 1970s were a very special time in which several bullish factors occurred, boosting gold prices. But some of these drivers won’t be present in the 2020s, as the fiat monetary system is well established today, while in the 1970s it was in its infancy. You can’t break the gold standard twice.

That’s true, but there were bull markets in gold also in the 2000s and in 2019-2020, even though some factors characteristic of the 1970s were absent. Moreover, it’s very difficult to separate the end of the gold standard from stagflation, as the concerns about the new monetary system would be lower if rampant inflation were absent. It’s obvious that Nixon’s shock contributed to the overall economic situation, but trends in gold prices were driven ultimately by macroeconomic forces – and these forces can reemerge.

Last but not least, it seems to me that although gold’s initial rally in 1972-1973 had more in common with the abandonment of the gold standard than with CPI inflation and other macroeconomic variables, after that period, trends in gold prices were more related to inflation and other fundamental factors (see the chart below). Hence, it would be hard to argue that the whole 1970s bull market was caused by the collapse of the gold standard.

My second concern is probably more disturbing. Although the 1970s were a great time for gold, its price peaked in tandem with inflation in early 1980 (see the chart below), entering a bear market for two decades. Hence, my worry is that when inflation peaks, gold may plunge, as it did in 1980-1981 due to the lower inflation expectations and high interest rates, which raised the opportunity costs of investing in gold. After all, during disinflation, inflation expectations decline while real interest rates increase, which should negatively affect gold prices.

However, history doesn’t repeat itself (though it often rhymes). As the chart below shows, gold hasn’t actually surged with the current inflation. The rally occurred in the first half of 2020 amid the coronavirus recession when both actual inflation and inflation expectations initially plunged. Hence, the peak in inflation doesn’t have to be detrimental to gold. After all, what didn’t rise can’t fall.

What’s more, real interest rates have already surged (see the chart below), so the room for further movement is limited. Of course, they can always go up, but the risk of a spike similar to that seen in 1980-1981 is much lower, especially given the recessionary worries and their dampening impact on rates.

A Repeat of 1980?

Additionally, please remember that years of ultra-low interest rates created a lot of economic bubbles (some analysts say about “everything bubble”), so the upcoming economic crisis could be really severe, especially given the pace of the Fed’s tightening cycle (compared to 2015-2018). In other words, the level of debt and financial imbalances is larger than in the 1970s, so the Fed may turn to a dovish stance (or at least soften its hawkish stance) even if inflation remains high.

So far, Powell can flex his muscles, but only because the unemployment rate is staying low and interest rate hikes haven’t yet hit the financial sector. However, when the unemployment rate starts to go up and financial markets begin to falter, the US central bank will be under strong pressure to stimulate the economy once again.

I seriously doubt whether there would be a willingness to accept a really huge economic cost to combat inflation. Hence, luckily for gold, the upcoming recession doesn’t have to be like that of 1980, but it can be rather similar to that of 2007-2009 or 2020.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Gold Barely Reacts to July FOMC Minutes

Yesterday (August 17, 2022), the FOMC published the minutes from its last meeting from the end of July. They don’t reveal many surprises for the markets. However, the publication shows a few interesting things. First, Fed officials continue to worry about inflation, believing it will remain elevated for some time:

Participants agreed that there was little evidence to date that inflation pressures were subsiding. They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and would likely stay uncomfortably high for some time (…).

Uncertainty about the medium-term course of inflation remained high, and the balance of inflation risks remained skewed to the upside, with several participants highlighting the possibility of further supply shocks arising from commodity markets.

Second, because of this grim inflation outlook, the US central bank is going to continue its tightening cycle and further hike the federal funds rate.

In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives. With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability.

What’s more, the FOMC members agreed that moving to a restrictive stance would also be wise from a risk-management point of view:

In light of elevated inflation and the upside risks to the outlook for inflation, participants remarked that moving to a restrictive stance of the policy rate in the near term would also be appropriate from a risk-management perspective because it would better position the Committee to raise the policy rate further, to appropriately restrictive levels, if inflation were to run higher than expected.

The fact that the Committee’s participants remain hawkish and firm in the fight against inflation is negative for gold prices.

The Fed Expects an Economic Slowdown and a Rise in Unemployment

However, and this will be the third interesting issue revealed by the minutes, the FOMC participants are fully aware that the US economy is decelerating and that monetary policy tightening is one of the reasons behind the slowdown.

With regard to current economic activity, participants noted that consumer expenditures, housing activity, business investment, and manufacturing production had all decelerated from the robust rates of growth seen in 2021 (…). Participants observed that indicators of spending and production suggested that the second quarter of this year had seen a broad-based softening in economic activity.

Many participants remarked that some of the slowing, particularly in the housing sector, reflected the emerging response of aggregate demand to the tightening of financial conditions associated with the ongoing firming of monetary policy.

Participants anticipated that U.S. real GDP would expand in the second half of the year, but many expected that growth in economic activity would be at a below-trend pace, as the period ahead would likely see the response of aggregate demand to tighter financial conditions become stronger and more broad-based.

Fourth, although the labor market remains strong, the Committee’s members worry that it might not be as tight as it’s widely believed:

Several participants also observed, however, that the labor market might not be as tight as some indicators suggested, and they noted that data provided by the payroll processor ADP and employment as reported in the household survey both seemed to imply a softer labor market than that suggested by the still-robust growth in payroll employment as reported in the establishment survey.

Additionally, the FOMC participants admitted that some labor markets were deteriorating:

Many participants also noted, however, that there were some tentative signs of a softening outlook for the labor market: These signs included increases in weekly initial unemployment insurance claims, reductions in quit rates and vacancies, slower growth in payrolls than earlier in the year, and reports of cutbacks in hiring in some sectors.

In addition, although nominal wage growth remained strong according to a wide range of measures, there were some signs of a leveling off or edging down. In some districts, contacts suggested that labor demand–supply imbalances might be diminishing, with firms being more successful in hiring and retaining workers and under less pressure to raise wages.

Moreover, the Fed’s staff projects that the unemployment rate will start rising in the second half of 2022 and will reach an estimate of its natural rate at the end of next year. Oops… Please remember that the official view was that there was no recession because the unemployment rate remained low. However, now the Fed’s staff itself forecasts rising unemployment. Does it mean that a recession is coming or that it has already begun?

Fifth, the US central bank is fully aware that the worst is yet to come. I have here in mind that the tightening of monetary policy hasn’t yet been transmitted fully into the real economy. So, you can expect a further slowdown:

Participants pointed to some evidence suggesting that policy actions and communications about the future path of the federal funds rate were starting to affect the economy, most visibly in interest-sensitive sectors. Participants generally judged that the bulk of the effects on real activity had yet to be felt because of lags associated with the transmission of monetary policy (…).

Hence (and sixth), the pace of monetary tightening will slow down after some time and the Fed will pause with interest rate hikes at some point:

Participants judged that, as the stance of monetary policy tightened further, it would likely become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation. Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it would likely be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent.

The Fed’s pause, not to mention the reversal of its hawkish policy, would be positive for gold prices.

Implications for Gold

What do the recent FOMC minutes imply for the gold market? Well, the price of the yellow metal barely moved yesterday and stayed in a slightly downward trend. However, from the medium-term perspective, gold remains in a sideways drift. As the chart below shows, gold has been trading in a corridor of $1,700-$1,800 since early July.

However, the minutes show that more rate hikes are coming, but their pace should slow as the Fed expects a softening labor market and a slowdown in economic activity. After the publication of the minutes, the odds of a 50-basis point hike increased relative to the odds of a 75-basis point hike, according to the CME FedWatch Tool.

In other words, given the deteriorating economic outlook, the FOMC members started to worry about possible overtightening – many of the committee’s participants noted a risk that the Fed “could tighten the stance of policy by more than necessary to restore price stability”. This is why, at some point, the US central bank will pause on interest rate hikes, but it won’t stop the stagflationary train.

It seems that the nasty combination of elevated inflation, stagnant growth, and rising unemployment is coming fast. It will crush everything in its path – except gold, which should shine in these unusual economic conditions.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Does Gold Know That a Recession Is Coming?

Is a recession really coming? We already know that the yield curve inverted last month for the second time this year, but what are other indicators of looming economic troubles? Well, let’s start with GDP.

Recession indicators

GDP Growth

According to the initial measure of the Bureau of Economic Analysis, real GDP dropped 0.9% in the second quarter, following the 1.6% decline in the first quarter (annualized quarterly rates). On a quarterly basis, real GDP decreased by 0.4 and 0.2 percent, respectively. Hence, the American economy recorded two quarters of negative growth, which implies a technical recession.

New York Fed’s DSGE Model

Second, the New York Fed’s DSGE Model became pessimistic in June, as it predicted modestly negative GDP growth in both 2022 (-0.6%) and 2023 (-0.5%). According to the model, the probability of a soft landing is only 10%, while the probability of hard landing—defined to include at least one quarter in the next ten in which four-quarter GDP growth dips below -1 percent—are about 80 percent. When the Fed’s own models predicts recession, you can be sure that the situation is serious!

Money supply growth

Third, money supply growth has slowed down significantly in recent months. As the chart below shows, the growth rate declined from the peak of 26.9% in February 2021 to 5.9% in June 2022. This is a significant shift, because money supply tends to grow quickly during economic booms and slow before recessions, as banks “slam on the brakes” on money creation.

S&P 500, credit spreads and more

That’s not all! The S&P 500 has entered a bear market, although it has recently managed to recover part of the losses, while credit spreads have widened significantly. Financing costs for “junk” companies have almost doubled this year. Residential investment plunged 14% in Q2 2022, the largest decline in 12 years (excluding the pandemic era), and the housing market in general is suffering right now.

The auto bubble is showing signs of bursting, and banks are already leasing more land to handle the expected surge in repossessed used cars. Business confidence and consumer sentiment are very low. Commodity prices (like copper) have plunged recently, and rising inventories at retailers could also foreshadow upcoming economic weakness.

Unemployment rate at low levels

Of course, not all the data points to a recession. In particular, the unemployment rate is still very low and the labor market remains tight. The problem is that the unemployment rate is a lagging indicator, as people start to lose jobs only when the economy has already begun declining. However, as the chart below shows, the unemployment rate hasn’t changed since March 2022, when it reached 3.6%.

It suggests that it has found its bottom and may be ready to go up after a while. Moreover, jobless claims have risen from 166,000 on March 19 to 262,000 on August 11, which may herald upcoming problems. If we could have a jobless recovery from the 2001 recession, why couldn’t we have a jobful recession, at least in theory?

Consumer spending remains healthy

The second popular counterargument is that consumer spending remains healthy. This is true, but it shows some signs of slowing as inflation hits Americans’ budgets. In particular, real spending, adjusted for inflation, shows a less optimistic picture, as the chart below presents.

Generally speaking, pointing at high spending during inflation doesn’t make sense, as this is exactly why we have inflation – newly created money by the Fed and commercial banks goes to people who are spending it. Moreover, during high inflation, spending money on goods and services is a reasonable course of action because it’s better to have some tangible assets than money, which is losing purchasing power each month.

More generally, inflation has become so persistent that only a serious monetary policy tightening could bring it back to the Fed’s target of 2%. Actually, inflation is so high that it could trigger a recession on its own, as it seriously disrupts economic life. The problem here is that there is so much private and public debt that the aggressive interest rate hikes – needed to combat inflation – could burst asset bubbles and trigger a debt crisis.

What does it all mean for the gold market?

Well, for me, the case is clear. We are either already in a recession or heading toward one. Given that gold is a safe-haven asset, a recession should be positive for its prices. As the chart below shows, gold usually rallies during economic downturns – and this has been the case in the past three recessions.

However, this relationship is not set in stone. The double-dip recession of the early 1980s was bearish for gold. The yellow metal soared during stagflation, but when Volcker hiked interest rates to combat inflation, it plunged, despite the fact that the Fed’s tightening cycle triggered recession. Hence, if the inflation rate goes down, real interest rates could increase further, putting downward pressure on gold. However, a recession is likely to be accompanied by a dovish Fed and declining bond yields, which should support gold.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

Recession Is Good for Gold, but a Crisis Would Be Even Better

What Is Recession, Anyway?

Ladies and gentlemen, please welcome the technical recession! According to the initial measure of the Bureau of Economic Analysis, real GDP dropped 0.9% in the second quarter, following a 1.6% decline in the first quarter (annualized quarterly rates). As the chart below shows, on a quarter-on-quarter basis, real GDP decreased by 0.4 and 0.2 percent, respectively. Thus, the US economy recorded two quarters of negative growth, which implies a technical recession.

However, are we really in a recession? The Fed and the White House deny that. For example, President Biden said last week: “We’re not going to be in a recession, in my view.” Similarly, Treasury Secretary Janet Yellen said that the US economy is not in a recession, instead it’s “in a period of transition in which growth is slowing”. Yeah, sure! But what else could the officials say?

There is a grain of truth in their statements. After all, with a very low unemployment rate and several economic indicators still relatively strong, the picture isn’t very gloomy. However, unemployment is a lagging indicator, so I wouldn’t seek comfort in the labor market. As well, I wouldn’t trust the officials this time, as they are the same guys who were claiming that high inflation would be only transitory.

Sure, a true recession is defined by the NBER, which determines when the US economy is in such a state as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” In this light, we are not yet in a total recession, as the scale of the decrease has been too small – so far. However, this can change when the impact of high inflation and the Fed’s interest rate hikes is fully transmitted into the economy. The monetary policy operates with a lag, so the worst is yet to come.

This is also what is suggested by the yield curve. The spread between 10-year and 2-year Treasury bonds (red line) has already fallen deeply into negative territory, while the spread between 10-year and 3-month Treasuries (blue line) will probably do it soon, as the chart below shows.

However, who actually cares – except the politicians – about the labels? The economy may be in a recession or not, but one thing is clear: the state of the economy is not good and it’s getting weaker. Just look at the Atlanta Fed’s projection of GDP in the third quarter. According to the GDPNow model estimate from August 1, the real GDP growth (seasonally adjusted annual rate) in the Q3 of 2022 will be 1.3%, down from the 2.1% projected on July 29. It doesn’t bode well, does it?

The same scenario was in late 2007, when economic data was already looking bad, but the pundits disagreed with statements that the US was headed into a recession. People always try to deny their problems – until they become undeniable some time later.

Implications for Gold

What does it all mean for the gold market? Well, gold – as a safe-haven asset – usually thrives during recessions. In recent weeks, the yellow metal rebounded from about $1,700 to about $1,760, as the chart below shows.

One reason for this upward move was a more dovish FOMC meeting than expected. Another driver could be renewed tensions between China and Taiwan, but gold could also start to smell recession.

To be clear, it’s too early to declare a new bull market in gold. Gold needs a full-blooded recession or an economic crisis that would trigger a lot of fear and force the Fed to ease its monetary stance. Please be prepared that gold could decline substantially before it starts its new rally. In my view, the last FOMC meeting reduced the odds of a large decline, but the sell-off at the beginning of a crisis phase is still very likely, as it was in 2008 and in 2020.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Gold Sees Dovish Light in the Fed’s Hawkish Darkness

Powell Announces Further Hikes

The July FOMC meeting produced another exceptionally hawkish result. The US central bank raised the federal funds rate from 1.5-1.75% to 2.25-2.5%. It was the second 75-basis point hike in a row!

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate.

This time, the hike was unanimous, which indicates that support for aggressive tightening has strengthened within the FOMC. Indeed, the current tightening cycle is much steeper than the two previous ones, in which the Fed usually raised interest rates in 25-basis point moves, as the chart below shows.

However, the hawkish stance is not particularly surprising, given that the inflation rate is above 9% while the unemployment rate remains low. Thus, the hike was widely expected by the traders, although some of them bet on a 100-basis point move.

Besides another 75-basis point move, the July monetary policy statement wasn’t too interesting. The only important change compared to June was that the Fed admitted that “recent indicators of spending and production have softened.” Indeed, today’s first release of the GDP data for the second quarter of 2022 is likely to be very weak. The US central bank also removed the following sentence about Chinese lockdowns: “In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”

The FOMC meeting was followed by Powell’s press conference. He reiterated a few times how the Fed is committed to restoring price stability and announced that another big interest rate hike could be appropriate. Although Powell didn’t specify the next move, he didn’t exclude another 75-basis point move:

We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will continue to depend on the incoming data and the evolving outlook for the economy. Today’s increase in the target range is the second 75 basis point increase in as many meetings. While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then. We will continue to make our decisions meeting by meeting and communicate our thinking as clearly as possible.

However, my reading is that Powell sent a dovish signal, suggesting that the pace of hikes could slow down in the near future:

As the stance of monetary policy tightens further, it will likely become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation.

Hence, Powell would feel more comfortable with a 50-basis point move rather than with the 75-basis point one for the third time in a row, especially if inflation moderates somewhat. As he said:

Now that we’re at neutral, as the process goes on, at some point, it will be appropriate to slow down. And we haven’t made a decision when that point is, but intuitively that makes sense. We’ve been front-end loading these very large rate increases. Now we’re getting closer to where we need to.

Implications for Gold

What does it all mean for the gold market? Well, the price of gold increased yesterday from about $1,715-1,720 to about $1,735, as the chart below shows, and it continued the upward trend today in the morning.

Why did gold prices rise despite the hawkish FOMC meeting? The likely reason is that the Fed stuck to a 75-basis point hike and didn’t go more aggressively with the 100-basis point increase like the Bank of Canada did.

Another factor is that the federal funds rate is getting closer to the neutral rate, so the pace of further hikes is going to slow down. It means that we are also approaching the peak in the interest rates or even a reverse in the Fed’s stance. Indeed, investors believe that the Fed will raise the federal funds rate by 50 basis points in September, followed by two 25-basis point moves in November and December. They also expect the FOMC to cut interest rates in early 2023, according to the market probability tracker compiled by the Atlanta Fed.

Hence, we are finally noticing dovish light in the dark and hawkish night of the Fed. In this light, gold could shine.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care