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.

1/4/2023: Gold and silver in 2023

Source:

Greetings!

Gold and silver were remarkably strong in 2022. Despite the Fed's most aggressive rate-hike cycle in 40 years and the strongest dollar rally since 2015, gold rebounded to finish near a six-month high. Silver was even more resilient, rising more than 2% for the year.

The strength of both metals in the face of extreme headwinds is testimony to their enduring appeal as currencies of last resort during times of economic and political turmoil. We think this is the beginning of a robust resurgence for both metals in 2023.

In this new video edition of AGE Gold Commentary, I'll detail the main reasons why 2023 has the potential to be a banner year for precious metals. I'll talk about easing inflation, the Fed's endgame, the looming recession, and the reversal of the dollar rally that weighed on both metals in 2022.

In addition, I'll go through the latest charts to put 2022 and the metals rebound into perspective. And I'll talk about the shifting dynamics of the physical gold and silver markets, how the supply squeeze that lifted premiums in 2022 is thankfully coming to an end.

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 full transcript appears below for your convenience.

Gold and Silver in 2023

[00:00:00] Intro

Hi, I'm Dana Samuelson, president of American Gold Exchange in Austin, Texas. This is a gold market update for January 2nd, 2023. I hope you all have had a wonderful holiday season and that you all have a healthy, happy, safe and prosperous 2023. 2023 will mark my 43rd year in the precious metals and rare coin industry, and 2023 will mark the 25th anniversary of American Gold Exchange.

For 25 years, we've been able to help you with your precious metals and vintage coin needs, and without you, our loyal clients and customer, 25 years would never have been possible. So we thank you from the bottom of our hearts for your business and your loyalty. Without you, this never would've been possible, and we are eternally grateful. Not a day goes by that we forget that. So thank you very much for your patronage and your loyalty. Here's to another 25 years. So I'd like to share my screen and get into my presentation.

So here's our contact information. Here's how you reach us.

[00:01:31] Outline

Today I want to talk about: How inflation will continue to dominate in 2023. How far will the Fed go. Recession dead ahead. Record dollar rally reverses. Gold and silver rebound. And the gold and silver bullon squeeze abates.

[00:01:52] Inflation will dominate 2023

Let's take a look at inflation.

[00:01:54] 17-year inflation chart

This is an inflation chart going back 17 years, and as you can see, inflation's surge from under 2% beginning of 2021 to a peak of 9.1% in the summer of 2022, uh, was dramatic. And it has driven all markets. It drove the Fed into their sharpest rate hike cycle in 20 years, which in turn caused the sharpest selloff in both stocks and bonds since 1981.

The last time we had a high inflation cycle, the stronger relative US economy compared to other world economies and the interest rate differential, which was higher here in the US, drove the dollar to its highest level relative to other currencies in 20 years. This in turn pressured gold and silver to cyclical short-term lows.

But now inflation is starting to ease and we expect that inflation will continue to moderate as we move into the spring and summer of 2023. We anticipate that the headline consumer price index will continue to drop into the 5% range over the next three to six months as the US economy slows down with other world economies.

That is clearly happening now. As you can see, housing accounts for a little over 40% of the consumer price index and rents and costs of shelter are slow to reset. Currently they're running about 6%. We continue to believe that this is a baseline below which inflation will not drop significantly for at least the first three to six months of this year.

So while inflation will moderate going forward, it may not moderate that much. But it will continue to drive Federal Reserve interest rate policy for much of 2023, if not further in time.

[00:04:05] Treasury yield chart

Here's a look at the four different major US Treasury yields, the two, the 10, the 20, and the 30-year Treasuries and their yields going back a year. Of particular note is how much the two-year Treasury has moved since the beginning of last year at about eight-tenths of a percent to the highest yield on the chart now at 4.4%. And in the course of the last year, the two-year has gone over the 10-year, the 30-, and the 20-year Treasury yields, creating the largest Treasury yield inversion since 1981.

The two-year has moved almost four basis points higher in the course of the last year. The inversion that we're seeing now between the two- and the 10-, the 20-, and the 30-year Treasury yields is the largest we've seen, again since 1981, and has signaled, an inversion like this, a recession in nine out of the last nine recessions.

So this is a consistent economic indicator of likely recession. Over the course of the last few months, these yields have fallen, but over the last month they have risen. So we don't expect the yields to go much higher from where they are now, but we do expect them to remain choppy going forward for the next three to six months until the US economy, its economic fate, and, what the Federal Reserve are going to do is really determined in full, which we're not there yet.

[00:06:00] 2-year Treasury & Fed funds rate chart

Let's take a look at the next chart, which is the two-year Treasury yield and the Federal Funds Rate since January, 1990. These two are very consistently traveling in tandem, so what, where the market thinks the Funds Rate will go is the two-year Treasury yield. And of course, the other, line on the chart is the Federal Funds Rate, currently at about 4.25%, with the two-year slightly higher at 4.42%.

Now, the Fed has signaled since August that they have resolved to fight inflation. And Chairman Powell said the central bank will continue raising rates in 2023 despite the threat of recession, with the terminal rate to projected be to be, excuse me, projected to be more than 5%. This was following the December meeting.

In addition, New York Fed President John Williams and San Francisco Fed President Mary Daley, said separately that interest rates will have to go much higher to choke off inflation, prompting fears that the Fed will tighten too much.

[00:07:20] Recession dead ahead

So the US economy is poised for what could be a modest to a severe recession. Remember these rate hikes have a six-to a nine-month lag before they fully affect the US economy, and they began in March. RIght now is the ninth month. So we are now fully into feeling the effects of these rate hikes, which are not over yet going forward into 2023.

The next six months, in particular, will be decisive in determining how much and how far the Fed will continue to raise rates, whether they will be able to control inflation, and how much they're going to affect the economy going forward. So the next three to six months is where the rubber is really going to meet the road, and we think the US economy is going to go into a pretty weak period for the first half of this year, 2023.

Now, because of all this, the question really is how much pain will the Fed allow before they start to reverse course? And we're going to find out.

[00:08:36] Global packing paper chart

The next chart that we have is a global packaging paper demand chart, which shows that demand for packaging paper is falling sharply.

Why does this matter? Well, everything that gets shipped gets put into a box and clearly demand for boxes is falling. This chart is indicative, and it's a bit of a leading indicator of where things are headed. In addition, US retail sales have fallen to their lowest level since January of last year.

New research from the Fed showed the US economy passing through a key resistance, a key threshold, rather, that often signals a coming recession. More than half of the 50 states have falling economic activity now, according to the St. Louis Fed, which provides "reasonable confidence" that the nation as a whole will fall into recession in the near future.

Well, we think we're at the cusp of one right now, From the San Francisco Fed, a report released late December concluded that the recent bottoming out and then rising of the unemployment rate is also a reliable signifier of coming recession. Now jobs are the last thing to roll over, so they're a lagging indicator.

We're seeing manufacturing slow down across the board. So the US economy is clearly weakening, and of course, the US home market has been dramatically impacted by sharply higher interest rates. US pending home sales tumbled 4% in November for its sixth consecutive monthly decline, according to the National Association of Realtors. This is an unexpectedly sharp drop has brought the NAR index to its lowest level since April of 2020.

Now, the majority of US homes have their wealth in home values. Uh, homeowners have their, uh, wealth and home values, which have lost a cumulative $1.5 trillion of value over the last six months.

Let's look at the dollar index.

[00:11:07] Record dollar rally reverses

As you can see, the dollar has been dramatically higher through the first nine months of 2022, but now it's fallen sharply beginning in October. At one point it was up 18% in 2022. As we close out the year with a dollar index at about 103.5 today, it's up 8.5% year-on-year from where it started in January of 2022.

What is significant relative to the dollar is that central banks around the world are playing catch up in their tightening cycles to combat inflation, which has helped to bring other currencies backup relative to the dollar, as the dollar is measured here on the US dollar index. The last central bank to fall into line was the Bank of Japan, which allowed the 25, uh, pardon me, the quarter-point peg on the Bank of Japan, 10 year treasury yield, where they've held that rate for all year, to rise to 50 basis points or a half a percentage point.

While this is not a significant increase in interest rates from a quarter-point to a half-point with the Bank of Japan 10-year treasury yield, it is a major change of policy in Japan and it boosted the end, which helped to make the dollar come down.

It also helped to boost gold in December, so this is a big turning point for Japan. Now, more importantly, their finance minister who has been in place for over 20 years will be resigning in the next three or four months. So we'll get a new Japanese finance minister who could change policy even further.

So the dollar is coming down because other central banks are hiking rates and the US economy is weakening. We expect the dollar to fall further going.

Our friends and colleagues, the Aden sisters of the world-aaclaimed Aden Forecast have said that if the dollar index falls below 101.5, that will signify a major reversal in the dollar. And at 103.5 today we're close.

The important point to remember here is the dollar is still up 8.5% from where it started last year.

[00:13:48] Gold and silver rebound

Now let's see how that looks compared to gold.

[00:13:52] 3-year gold chart

Gold and the dollar tend to trade inversely of each other. As the dollar surged in 2022 on the back of the Fed rate hike cycle, gold fell to cyclical lows of $1,633 a couple of times in August, and then again in September and October, before it rallied and is rallied sharply back over $1,800 to about $1,820.

Today, the green circle shows where we issued our November gold market update stating, hey, gold is in a breakout mode because the dollar is rolling over.

Now, the most important thing to remember is, gold today at about $1,820 is about the same price it started 2022, where the red arrow is. But remember, gold and the dollar tend to trade inversely. The dollar is still 8.5% higher than where it was at the beginning of the year, yet gold has regained all of those losses that it suffered during the summer and fall of 2022— in spite of the fact that the dollar is still 8.5% higher than where it was at the beginning of the year.

So gold is doing quite well quietly in the face of the sharply stronger dollar, and especially considering investments like stocks and bonds, which would suffer their worst year in 2022, in 40 years. The important thing to consider with gold here is if the dollar weakens further, gold will go up higher.

Once the Fed stops raising rates, gold will catch a bid because truly the pressure will start to come off gold. If the Fed is forced to ease because they've tightened too much too fast and created too much economic damage.

With this aggressive rate hike cycle, gold truly has explosive potential, higher and especially if they're forced to go back to quantitative easing, and Chairman Powell has said, Hey, if we tighten too much, too far, too fast, we know what to do. We've done it before. And if that's what happens, gold has truly explosive upside potential from where it is today. The downside risk is minimal, we think, with a much better upside potential going forward.

So gold is looking really good as we move into 2020. Now let's take a look at silver.

[00:16:50] 3-year silver chart

Silver has followed the same trading pattern over the last year that gold did. Now silver started 2022 at about $23 an ounce, and it's going to finish 2022 at about $24.20. So silver's actually a little higher than it was at the beginning of the year. But it has suffered just like gold did, bottoming at $17.67 this summer, forming a pretty big triple bottom, before it moved higher again. The green circle shows where we indicated that, hey silver's breaking out it from the down trend, and it has moved $2 higher since then.

In fact, silver has actually been leading gold higher during the last three or four months, which is unusual. Gold usually leads. There may be a very fundamental reason for that.

We're seeing a sharp drawdown in Comex warehouse supplies of physical silver. Since peaking in February 2021 at 152 million ounces of registered physical silver in Comex warehouses, there has been a steady drawdown of available physical silver for delivery against Comex contracts to just 35 million ounces today.

Now, the Comex also lists eligible physical silver, but the owners of eligible silver have not made those ounces available for delivery against contracts. The London Bullon Market Association, known as the LBMA, has seen a similar but less severe drawdown in available physical silver inventories as well.

So these two major world silver warehouses have seen a pretty big drawdown in available physical silver. We have seen huge demand for physical silver. Over the last two years —because of Covid, debt, you know, all the things that have happened, inflation— there's been a big, big appetite for physical silver.

But this drawdown in the Comex warehouse, physical silver is really sharp. And if it proves to be a tipping point for physical silver, silver truly has dramatically explosive upside potential should it get to that point where there's not enough physical silver to go around. We're not there yet, but if we do get there, look out for silver to go many times higher than it is today—many dollars higher.

And that is why I believe silver has been leading gold higher over these last three or four months, because the markets are aware of this drawdown, and it's pretty severe. Time will tell.

Now, we have seen an abatement of demand in physical silver over the last 60 days since the first, second week of November, and we think that the recent rally in silver from $18 to $24 per ounce has had an impact on that demand abatement.

But that's what's happening. So keep an eye on available physical silver in the Comex warehouse going forward for the next two or three months to see whether we truly are reaching a tipping point or not. But I wouldn't wait to get physical silver. And it gets a little better, we'll get to that in a moment.

[00:20:37] Gold-to-silver ratio chart

Quickly, here's the gold-to-silver ratio going back to 1995. It peaked at 96.75-to-1 this summer when silver hit a bottom of $17.67 an ounce, and gold was about $1,630. Today that ratio has fallen sharply to 75.5-to-1, which puts it more in the reasonable range and not so much of an extreme range, where it's been for the last six months.

So that shows you that silver's playing catch up, and it's catching up sharply to gold. We have talked about in the past how silver oscillates at a wider, uh, degree than gold does, and that's what's happened. Silver got oversold further than gold did, and now it has played catch up more sharply than gold has rebounded.

[00:21:28] 3-year platinum chart

Looking at the platinum chart, platinum has rebounded as well. It's back up to about $1,075 an ounce as we close out 2022. For about a $100 gain, net on net, from the beginning of the year where the red arrow is. But again, it's been a volatile, choppy year as we've gone through this aggressive Fed rate hike cycle and sharply higher dollar, which is now weakening.

But remember, platinum demand is mostly contingent upon diesel automobile catalytic converters, and that has been weak. So whether platinum can truly break out and move sharply higher again we'll have to see. A lot—50%—of the world's platinum comes out of Russia, and with the problems in the Ukraine, that is certainly having effect in helping to buoy the price a bit.

[00:22:16] 3-year palladium chart

But what's more interesting is the palladium price. Palladium has come down sharply since peaking earlier this year at $2,981. It fell to as low as $1,665 an ounce just a couple weeks ago. Now it's rebounded to about $1,800, but as you can see, this puts palladium near the lowest price that it's been for the last three years.

Now we've seen a similar drop in the palladium price, which rebounded sharply as we got into the year. So if this is a cyclical decline, it's really kind of hard to tell at this point in time. But we do like palladium at this price. It is lower than the gold price, which has only happened twice in the last two years.

And briefly, another thing, which is anecdotal on our part—and completely anecdotal— is that we see a bit of a correlation between economic activity in China and the palladium price. And with the Covid closures, which have been relieved and now Covid running rampant through China, that may have been an impacting factor on the price drop down to about $1,660, which we thought was a real buy. We didn't communicate that to you because it was close to the holidays. But at $1,800, we do think palladium is a good buy.

[00:23:46] Bullion squeeze abates

Moving into the physical silver arena, which is where we are dealers, we're seeing premiums for sovereign-minted gold and silver coins returned to normal for the first time since March of 2020.

Silver bullion coins and bars

And that's a relief. Now the exception of that is US Gold Eagles and Buffalos are still a bit high, but they've come down quite a bit. While other sovereign-minted gold coins like Maple Leafs, Philharmonics, Britannias are trading at normal premiums today.

In silver, US Silver Eagles are still abnormally [tight] but the premiums have come down substantially. Other sovereign minted silver products like Australian Kangaroos, Austrian Philharmonics, British Britannias, silver Maple Leafs from Canada, and South African silver Krugerrands, they're all trading at normal premiums again, which is a relief. So you can buy physical silver, which is becoming much more plentiful in the last six weeks, at reasonable premiums again for the first time since March of 2020.

Here at American Gold Exchange, we have been leaders in dropping our prices, our premiums, as the various world-mint distributors' inventory accumulated a bit and they lowered their premiums to dealers like us. So we always strive to give you the best value that we can give you for the money. It's a way for us to show you that we're sincere in wanting to attract your business and make it hard for you to go somewhere else with your business. We're not afraid of the competition because we are the competition.

So that is our update for today. Again, here's our contact information. Thank you so much for the 25 years of great business that you've given us, and again, best wishes for a happy, healthy, safe, and prosperous 2023.