AGE's Gold Commentary

AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.

11/14/2022: Gold breaks out!

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Greetings!

Gold has surged to a three-month high above $1,775 after consumer inflation fell to 7.7% in October, the lowest level since last January.

Speculation is growing that peak inflation may have passed, which means the Fed may throttle-back on rate hikes. In addition, economic storm clouds are building that could push the US into a downturn or even a recession, further slamming the brakes on the Fed.

Both developments have the potential to exert strong upward pressure on the gold price in 2023.

In this latest video Gold Commentary, I analyze the current market fundamentals to illuminate the outlook for precious metals in coming months. Going though the latest charts, I'll explain why both silver and gold have truly explosive potential for big gains as the Fed slows and ultimately reverses its most aggressive monetary tightening in a generation.

We'll also talk about a couple of specials that offer outstanding value in the current market.

The Italy Gold 20 Lire in XF/AU, minted in the late 1800s, is one of the only smaller-sized gold coins available today at low premiums. In our opinion, these are better than bullion for bulk gold buyers.

And for potentially higher leverage to a rising gold price, $20 Liberty MS64 is one of our favorite pre-1933 US gold coins, offering low premiums, true scarcity, and a proven track-record at low prices.

Please join me by clicking the link below to view the video. You can also find it by going to the AGE YouTube channel.

Sincerely,

Dana Samuelson
President

P.S. – A transcript appears below for your convenience.

Hi, I'm Dana Samuelson, President of American Gold Exchange in Austin, Texas. This is a video gold market update for November 11th, 2022. We've had some big moves in the markets this past couple of days because the inflation print came out a little weaker than expected on Thursday for October's inflation.

We've also had a couple other big events happen. Number one, we've had the midterm elections and not much has changed. We're going to have a gridlock government going forward, most likely. And number two, the Fed has raised rates three quarters of a point following their November meeting, which was expected.

We have been expecting the Fed to raise rates another three-quarters of a point at their December meeting, but because the inflation print for October, which was released just a couple days ago, came out a bit lower than was anticipated markets, are suddenly gaming that the Fed will be less aggressive going forward.

So that's what's happening. Gold is breaking out, silver is moving higher as well, and the dollar and Treasury bill yields have been falling because of this jerk market move. So let's take a look what's happening. I'll get into my presentation. Let me share my screen.

And here we go.

[00:01:32] Outline

Gold breaks out. US dollar and T-bill yields fall. Inflation eases, but it will probably prove to be a bit more stubborn than most realize. We'll explain why and we'll talk about gold's truly explosive potential.

This is our company where American Gold Exchange. We're a national mail order dealer out of Austin, Texas.

This is what our website looks like. We have live, transparent online pricing on most of the major modern bullion items and vintage US gold and pre -World War II European gold coins. Let's get into our update.

[00:02:13] Gold breaks out!

[00:02:16] 1-year gold chart

This is a one-year gold chart. If you look at the chart it has done nothing but declined since the March high of $2,043, all the way down to a double bottom at $1,635 set in September. And again, just a couple, just about a week ago.

The blue trend line is the major downward blue trend line, and we've seen gold ease over. As we headed towards the midterm elections, I think that was the anticipation of a red wave, which unfortunately didn't materialize, pro-business potentially, and that hasn't happened.

But more so to the point, we've had the inflation print come out and we've had a knee-jerk move higher in gold because of that. So gold has broken above the downward blue trend line at $1,680. The lower green circle. On the chart. And now it's also punched well above the upside, short term resistant point at $1,735, as you can see in the higher green circle on the chart.

So gold's moving up and for good reasons.

[00:03:32] 3-year gold chart

Let's take a step back, however, though, and look at where gold is in the big picture at a three-year chart.

Gold under $1,750 is cheap in our opinion. It's traded above that for most of the last two years until this aggressive Fed rate hike cycle got started in earnest in March, and now we're see seeing it rebound back to about the $1,750 level trading, about $1,765 today.

So gold is still undervalued despite the recent rally of last. It's still a great buy and it has a lot of upside potential from here, and we feel the downside is limited.

Now let's take a look at silver.

[00:04:11] 1-year silver chart

Here's a one-year silver chart. As you can see, with the blue trend lines, silver has been been developing a modest upside pattern since September, and now we're seeing silver edge over upside resistance at $21.50 to about $21.70.

It's also crossing over the 200-day moving average.

Excuse me. Silver has actually been leading gold for about the last three or four weeks, which is unusual, moving higher more quickly than gold has. But now gold's been playing catch up. But silver, like gold, is cheap in the big picture as well.

[00:04:52] 3-year silver chart

Here's a three-year chart and you can see for most of the last two years, silver has been above $23 an ounce, up to as high as about $27.65, And it's been since March that silver's plunged under that level and been on sale, truly on bargain basement sale.

Now that sale's starting to end, but silver is still cheap.

[00:05:17] Dollar & T-Bill yields fall

So what's happened that's changed so much and pushed the metals higher? Well, the dollar has finally broken.

[00:05:24] 2-year dollar chart

From its major trend that it's been in since the beginning of the year. Until this past week, the dollar has been unstoppable this year. Following the drop in inflation in October down to 7.75% below the 7.9% expected print, the dollar fell sharply lower, plunging 3.8% in a two-day selloff. Its biggest decline in 13 years.

The better-than-expected inflation reading caused traders to speculate the Fed might reduce the size and frequency of rate hikes going forward. The Fed's fastest and strongest rate hike cycle in two decades is what caused gold to fall to cyclical lows, both this summer and again just a few weeks ago.

We've seen the dollar stabilize between 109.50 and 113.50 for the last two months, but now it's breaking down and the pendulum is starting to go the other way. The dollar closed at 106.75 on the dollar index on Friday.

If the US enters into an economic recession and the economic disparity with a stronger US economy relative to the rest of the world reduces because of a US recession, we expect the dollar to have further downside potential, which causes further upside potential for gold. We think this scenario is likely.

But inflation and how the Fed reacts to it will continue to be what drives all markets for the next several months at a minimum. And we expect to see choppiness and perhaps some big knee jerk market moves like this one in the coming several months.

Let's look at Treasury yields.

[00:07:29] US Treasury yields chart

US Treasury yields tumbled these past weeks as well, in reaction to the inflation print. The two-year note is yielding about 4.4% today with the 10-year yielding, about 3.9%, about a half a point inversion.

You know, over the last 20 years there's been a pretty direct correlation between the two-year yield and the Fed funds rate. So right now markets are anticipating that the Fed funds rate will go up to about 4.5%. Um, we think it'll probably go a little bit higher than that. The rate inversion right now is what really concerns us the most because the inversion we're seeing today is the biggest one we've seen since 1981, and it suggests that the US is headed for a pretty sharp recession in the first quarter or two of next year.

Let's look at the inflation chart.

[00:08:38] Inflation eases, remains stubborn

As you can see, inflation is starting to ease. Both core and headline CPI have fallen from their June highs, for the headline at 9.09% down to 7.75% through October. We're seeing the core print come down from 6.63% to 6.28%.

Part of this is due to energy costs falling from a 41% year-on-year increased this summer in June to a 19.3% in October. We are also seeing signs that the economic slowdown we are going through is undercutting demand overall, which is helping to curb, and make inflation recede from the 9.1% June peak.

In particular, used car prices are falling sharply right now in a clear sign of an economic slowdown. Normally it would be new car prices falling, but because of supply chain issues, the new car markets skewed a bit right now.

But we don't think inflation is gonna come down a whole lot more. And here's why. It's because of shelter costs. Shelter comprises about one-third or 33% of how the CPI is measured. And shelter is slow to reset because of how rents are renewed usually annually. And shelter costs lag four to six months. So according to the Bureau of Labor and Statistics, shelter costs have risen steadily from 5.7% in July, 6.2% in August, 6.6% in September to 6.9% in October.

So we think because they comprise one third of the CPI and they're pretty stable and they lag that they will create a baseline below which inflation won't fall much below for the next four to six months. And right now, that's running at 6.9%. Janet Yellen even cited this recently in one of her speeches.

We are seeing wage price pressure, which is another form of sticky inflation ease a bit. Wage inflation was 5%. In March, it hit 5.7%. In June, it's down to 4.7%. Today, if layoffs ramp up as we expect they will, as the bus business cycle continues to slow, wage price pressure will ease further. But most of you probably know that employment or jobs are one of the last things to roll over when the economic cycle turns.

Most employers, no, they'll cut wages. They'll cut jobs last because they want to keep good employees.

[00:11:59] Federal funds rate chart

So here's the Fed funds rate-hike cycle, the last one and the one that we're in now. As you can see, the Fed has been in the most aggressive rate hike cycle we've seen in a long time and much more aggressive than they were during the last cycle, when they raised rates from 0.14% to 2.44% over three years.

Today, they've raised rates from 0.1% to 3.83% in eight months, 60% higher in lot less time than they did during the whole last rate hike cycle. Whether the fed raises rates a half a point or three quarters of a point in December, their next meeting, we don't think it matters that much in the big picture because Chairman Powell has pretty much indicated that he wants to see rates get to 5%.

So we think that that's where they may ultimately be headed to. And Chairman Powell, since his August 26th, Jackson Hole speech has been steadfast in his resolve to tame inflation in this cycle, regardless of the pain, the Fed rate hikes cause and pain is coming. Remember, there's about a six- to nine-month lag between when the Fed raises rates and those rate hikes really are felt in the economic cycle.

And we are just now beginning to feel those, the effects of those rate hikes. And this isn't your average rate height cycle. This is the most aggressive rate hike cycle we've seen in a generation, the full effects of which will not be felt until sometime in Q1 or even Q2 of next year.

And the Fed's also engaging in quantitative tightening or QT, the selloff of their balance sheet, which began in earnest in September, and QT has an amplifying effect of about 50 basis points on top of the Fed funds rate. So this will further exacerbate the economic slowdown.

[00:14:12] US Economy losing steam

So what's already happening? The Dow's down about 10% this year, but it's been down as much as 22% just a month ago. Higher borrowing costs have really affected the housing market.

New home sales have fallen 25% year on year, and new mortgage applications are down 41% year on year. And then since May, homeowners have lost $1.5 trillion in home equity.

On top of that, the personal savings rate is falling sharply. It's down to 3.1%, the lowest level since the great Financial Crisis, and credit card balances are surging as well to a record high recently of $930 billion. So the consumer is tapping out their savings and leaning on their credit cards to supplement what inflation is taking from their ability to spend.

Small businesses have been affected. Bloomberg reported 37% of small business owners were unable to pay their full rent in October, and small businesses employ about half 50% of the workers in this country.

So we're already just now starting to feel the effects of these rate hikes, but we won't feel the full effects 'til sometime the first quarter or second quarter of next year, and we've already had negative GDP in the first and second quarter of this year.

We had a pretty good GDP print in the third quarter of 2.6%, but there were some anomalies there. A lot of that was driven by abnormally high exports, of which those were primarily oil sales. We've also seen a big uptick in inventories, which makes GDP look better, but that's slowing now and we'll see those inventories sell down, which will have a reducing effect on GDP in Q4.

So the US economy is clearly losing steam, according to Reuters. Here's a quote:

"Despite the shiny headline number for GDP in Q3, a look under the hood shows a much grimmer picture, I'm sorry, grimmer picture of the US economy, one that is clearly losing steam. With the full effects of past and future Fed rate hikes still to be felt, the economy appears to be poised for a modest downturn in the first half of next year."

[00:16:49] Gold's explosive upside

We think the downturn could be more than modest. So let's take a look at gold in the big picture.

[00:16:59] 15-year gold chart

This is a 15-year gold chart going back to November of 2007. As you can see, gold was under $1,050 an ounce. And those big V moves in 2008 were the great financial crisis. But then the Fed started to ease. They lowered rates to zero, and they engaged in QE I, QE II, Operation Twist, and QE III. And gold more than doubled in price.

For the next two years, gold stabilized between about $1,550 and $1,775 an ounce. And when the US economy and the other economies of the world started to gain traction in 2013, gold took a tumble and fell below $1,375.

The Fed's first rate hike in their last rate hike cycle was in December of 2015, when gold bottomed at $1,050. It wasn't until the Fed began to cut rates, in the spring of 2019, as we looked on the last chart, that gold was able to break above $1,375, and that was a modest rate cut of just a quarter point on a modest global economic slowdown that started in the fall of 2018.

When that happened, gold popped. It went from $1,375 all the way up to about $1,675 before Covid hit.

And then, we went through our economic closures. Our debt exploded 20%, and inflation was unleashed, which led to the new Fed rate hike cycle.

The key here is how much gold moved up the last time the Fed eased. It moved up about $200 to $300 an ounce on modest rate hike cuts. Now we're in the most aggressive Fed rate hike cycle we've seen in a generation, and what's gonna happen if the Fed not only quits hitting the brakes and pauses, but what if they have to start easing again and go to QE because of the effects of what they've done to the economy need to be reversed. And this is a possibility.

Chairman Powell even said in his last press conference, If we tighten too much, we know what we need to do, which is go back to the old playbook. This is what gives gold truly explosive, upside potential.

And we've seen it in the last couple of weeks. With the gold pop based on the fact that the Fed might, might only raise rates 50 basis points in December because inflation's easing a bit. We've also seen gold catch a 5% bit higher in late September when the Bank of England was forced to intervene in their bond market when their 10 year Guilts went into a a death spiral selloff because the pension funds over there were leveraged in guilts and the market took a tumble.

So if there's an easing that has to be done financially, gold has truly explosive upside potential. And if there's an economic crisis or a breakdown somewhere like we almost saw in the British bond market, gold also has great upside potential from here. And we've got a pretty good bottom in place, a double bottom at $1,633.

So we think gold looks really good right now, which is why we're getting this update out to you. Things are starting to happen. So we've got a couple of specials.

[00:20:48] Italy gold 20 lire special

We've got these Italian 20 lira from the 1800s available, 1880s-1890s. These are trading sized coins. They're about a fifth of an ounce per coin, 0.1867 ounces per coin. It takes 5.3 of them to equal an ounce.

In the current market, there's not very many quarter- or tenth-ounce, small trading-sized, modern bullion coins to be found. We're in a precious metals squeeze right now in the little guys. The quarter- and the tenth-ounce gold coins are especially hard to find, and the premiums are double and triple what they should be.

But these older Italian 20 lire are not. And these are popular 20 franc-size coins, like the Swiss 20 francs and the French 20 francs. So these are our really good value if you want a smaller trading size coin, and we have quantities available.

[00:21:43] $20 Liberty MS64 special

In a more speculative coin, we have the $20 Liberty in MS64 condition on sale. Today, there's about 143,000 of these known versus the more popular MS65 $20 Saint-Gaudens. It has double, 275,000 known examples. The $20 Liberty's trading for about $100 more than the Saint. But in the previous market, it's got a $200 better upside at $3,040 an ounce, I'm sorry, $3,040 a coin, trading about $2,550, $2,580 today. In 2009, this coin hit $3,800 a coin.

So this is a great blue-chip, vintage, classic US gold coin. It's one of the more scarce ones and it's got great potential upside potential.

So that's it. Thank you for your time. Again, here's what our website looks like and if you'd like to contact us, here's how you do so.

Thank you very much for your time today. Good luck out there. Have a happy Thanksgiving. We're really pretty concerned about where the US economy's headed in the first and second quarter of next year.

This is time to be defensive and potentially very defensive. I think the potential for these Fed rate hikes to undermine the US economy pretty sharply are very high. So please be careful and thank you very much for your time.