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.

1/31/2023: The Keys to Higher Gold

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Greetings!

This might be the most important Gold Commentary of 2023.

Fundamentals are now setting up for gold and silver to enjoy truly explosive gains in coming months, and we want you to be fully prepared to take advantage of this turn in the market.

Gold has been on fire since late December, climbing for six straight weeks and adding more than $100 an ounce to reach a series of new 9-month highs. We think this is just the beginning.

The Fed's most aggressive rate-hike cycle in a generation is coming to an end. Treasury yields have peaked and the dollar is falling as other central banks are raising interest rates. The US economy is rapidly ebbing toward recession, if it's not there already, yet inflation remains a cause for concern. And geopolitical tensions remain extremely high.

In this edition of AGE Gold Commentary, I analyze these keys to higher gold and explain how they could easily drive it to a new all-time high above $2,058 this year.

In addition, I'll go through the latest charts and talk about the crucial relationship between gold and 30-year Treasury yields, a connection that is flashing extreme bullishness right now. And finally, I'll explain why silver has even more upside potential than gold today.

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 of this video is included below for your convenience.

The Keys to Higher Gold

[00:00:00] Intro

Hi, I'm Dana Samuelson, president of American Gold Exchange in Austin, Texas. This is a Gold Market Commentary for January 27th, Friday 2023. All the charts that you'll see in this presentation are from the close of business, Thursday, January 26th, 2023. Today we are seeing a market set up similar to what we saw in the spring and summer of 2019, which led to gold's breakout over $1,375 for the first time in six years.

The market is in a very similar situation today and that's why we're bringing you this update. It may be the most important Gold Market Commentary we send to you all year. So that's why we're doing this. I'd like to now share my screen and begin my presentation.

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

[00:01:21] In this issue

And this is what I'd like to talk about today. Gold market set up similar to June 2019. Well, the dollar continues to decline versus peers, but what we're seeing are bond yields taking the driver's seat for gold today. Gold consistently rallies following yield peaks. Bond yields peaked in October and the yield inversion that we have been seeing since last summer has widened over the last several months indicating that recession is growing more and more likely. That's what the market's betting on. Silver has more upside potential than gold, we'll get to that.

[00:02:13] Dollar decline continues

So let's talk about the dollar first, since we usually talk about the dollar as the main driver for gold. This is a 2-year dollar index chart. We used this same chart in our last update in early January, and as you can see, you know, the dollar made big gains in 2022 from 95. 5 on the index all the way to 114 before it reversed course and started to fall.

It was up 18% at one point in time. It ended the year up at about 103.5. When we sent out our January update at that point in time, gold was about $1,820 an ounce and gold is up another $100 since then to $1,930 today, yet gold excuse me, yet the dollar index is only down about two points to 101.5.

So there's more afoot here in the marketplace than just the dollar relative to gold. And that's why we're shifting our focus to bonds because we think bonds are in the driver's seat. And this is a similar setup that we saw back in June of 2019. So what's driving all of this?

[00:03:31] Economic indicators deteriorate

Well, US economic indicators are continuing to deteriorate.

Recession follows yield peaks 60% of the time and yields peaked in October. The indicators that we're following economically are all showing weakness. The Conference Board of the US Leading Economic Indicators index has fallen 1% a month for each of the last three months. This is consistent with many previous recessions.

Manufacturing is slowing down. Both a Philly Fed manufacturer gauge and the New York Empire State Manufacturing survey are both negative. Manufacturing is a leading indicator. Retail sales are down for November and December, which is unusual for the holiday time. Remember, consumer spending makes up about 70% of our economy and the consumers are getting squeezed because inflation has surged so much over the last year, and wages are simply not keeping pace. While wages are up, they're not keeping not rising as fast or as far as inflation has so far. And the housing market has been decimated by the much higher interest rates. Single family home building permits are down 35% year on year. Housing is actually already in a recession.

[00:05:01] Bond yields in the driver's seat

So this update is more about bonds than anything else and how they will affect the gold price. So let's get on to looking at the bond markets.

[00:05:14] 1-year Treasury chart

This is a 1-year chart of US Treasury yields featuring the 10-, the 20-, the 30-, and the 2-year Treasury yields. The 2- year is in purple. And as you can see, back in this time in 2022, we had a normal spread on bond yields. And through the course of 2022, the 2-year crossed over the 10, the 20, and the 30 to create the most significant inversion we have seen in bond yields since 1981.

[00:05:49] Yields peak, inversion widens

Yields peaked in October, and at the point in time that they peaked, basically all of them were very tight in their spread to one another, so the inversion wasn't that large at that point in time. However, over the last two and a half to three months, while yields have come down a bit, the inversion or the steepening between the yields has widened considerably with the 2-year trading today at about a 4.2% yield, which is consistent with the Federal Funds Rate. These two are highly correlated.

So the 2-year Treasury yield and the Federal Funds Rate tend to track each other very closely over long periods of time. The longer yields, however, have fallen more sharply relative to the 2-year over the last three months. And this is the bond market sniffing out the economic weakness that's occurring right now.

And they're basically saying, Hey, we believe the economy is weakening and we are reacting more to economic weakness than the Fed is at this point in time, who is going to continue to show, resolve and raise rates, most likely another quarter-point in just several days when they conclude their next meeting on February 1st.

So what we're seeing is federal funds rate will stay up while bond yields weaken, and it's because the economy is weakening that yields are falling.

So bonds are leading right now. This is the very same setup we saw in the bond market relative to gold in the Federal Funds Rate in 2018, 2019, into 2020.

And this is why this is the most important update we may issue to you all year. Let's take a longer term look at the bigger trends.

[00:07:57] 30-year Treasury vs. gold

So we said that gold tends to rally after yield peaks, and this this chart illustrates that quite sharply.

This is a 30-year Treasury yield chart going back 15 years with gold highs and lows tagged, and the red dollar price boxes. At the bottom of the chart is the Federal Funds Rate. To the very left of the $1,218 gold price is the Great Financial Crisis beginning. So that's a knee jerk market reaction. Let's just discard that part of the chart for right now.

So the 30-year Treasury yield peaked at about 4.8% when gold was $1,218. And over the next two years, Treasury yields fell in half to 2.4%, and gold went from $1,220 to $1,900 an ounce. That was a peak for gold back at that point in time, and gold rallied sharply following a yield peak. Well, once the economies of the world started to gain traction, interest rates rose, yields rose and gold corrected down from $1,900 back down to $1,200 basically where it started.

Now, the whole time the Federal Funds Rate was at zero or just above. For the next six years, the 30-year Treasury yield traded at about a 1% range from 2.25% to 3.25%, and gold traded in a pretty tight $1,050 to $1,375 range.

Beginning in December of 2015, the Fed started to raise interest rates, cautiously at first and then a bit more aggressively over the next two years into the December rate hike in 2018, which brought the Fed Funds Rate up to 2.4%.

Now, during this rate hike cycle on the 30-year yield tightened up and traded between basically about 2.5% and 3.25%, but it didn't really go much higher. It goosed up just a little bit above that before a global economic slowdown began in late 2018, and that's when bond yields started to fall in reaction to that. So bond yields started to decline while the federal funds rate was being held at 2.4%.

Now, during that period of time, in the early spring of 2019, gold went from about $1,260 an ounce to $1,330, and nothing else was happening in the markets.

So we took a look at the bond markets and saw, hey, the yields are affecting the gold price. Gold is rallying following the yield peak then, and this is before the Fed started, the cut rates in reaction to the global economic slowdown. So we issued our June 4th, 2019 Gold Market Commentary, Turning Point, because we thought this was going to unlock the door for higher gold prices, and that proved to be the case.

As the global economic slowdown increased the Fed was forced to react and ease rates, yields fell much more sharply. The Federal Funds Rate fell and then Covid hit, and rates plunged. And the Federal, Funds Rate plunged, and gold rallied from about $1,650, $1,675 to $2,069. So gold moved up to about $300 on the first half of that before Covid hit, and then moved up about another $300, actually $400.

So a lot of that move came before the Fed really started to ease much and bond yields fell a lot, and we're in a similar situation right now. Now we saw a big rate increase from the bottom. When the 30-year yield was about 1.2% all the way up to 4.4% when gold went from $2 069 to $1,635. Since then, we've seen yields fall about 60, 70 basis points down to 3.5, 3.6 right now on the 30-year Treasury yield and gold is rallied sharply to $1,930, so gold is rallying again, following another peak.

But what both the dollar chart that we showed you previously and this 30-year Treasury yield chart show you is how much room they have to fall. They have a lot of room to fall. And gold is at $1,930, near an all-time high already, which is why we believe this could lead to a new, for new highs for gold if the economic weakness that we're seeing increases, becomes a true recession, or becomes a severe recession. But once the Fed stops raising rates, gold will buoy up a bit on that. The dollar will continue to weaken, but if the Fed is forced to go the other way and drop rates like they did in 2019 into 2020, gold has explosive upside potential, and that's the whole point of this market update.

[00:13:38] Gold rallies after yield peaks

Bonds are leading. The Fed will lag. And gold has explosive upside potential. Now let's look at the same chart, same information from gold's perspective.

[00:13:52] 20-year gold chart

This is a 20-year gold chart showing the same changes in yields on bonds. If you can see, when yields fell gold rose from $1,218 to $1,900, when yields rose gold fell from $1,900 back to $1,200, the sideways pattern that we went through for six years, and then the breakout from $1 185 to $2,069, and the channeling that gold went through.

The correction so far has been very mild from the previous highs of $2,069 and $2,040 only down to $1,635, and this is during one of the sharpest increases in yields on all Treasuries, and the sharpest rate hike cycle, we've seen from the Federal Reserve in 20 years. Gold only dropped about $400. Last time it dropped $700 or $800.

So gold has held up much better this time, and we believe that's because of the debt, the inflation problems that we're going to continue to have, and of course, some of the conflict that's occurring in the world today is helping to buoy gold. Now, gold is back up to $1,930, today $1,935, and has a lot of upside potential from here.

Another thing to consider looking at this chart is gold continues to set over time, higher highs, and higher lows. Major resistance becomes major support, and today gold has major support between $1,700 and $1,750. And if it gained over 50% during the two previous cycles when yields fell sharply, and it gains 50% from the $1,635 low, that would put gold in the $2,450 range.

Now, even if it goes up 10% to 15% from here, which is entirely possible, that puts gold in the $2,100 to $2,200 range, and we think that's extremely likely. So gold has a lot of upside potential from here based on where yields are and how much they could fall, based on where the dollar is and how much it could fall, based on our debt, and based on, especially on, the economic cycle that's weakening materially right before our eyes.

[00:16:22] 1-year gold chart

Let's drill down just a little bit. Here's a short term, 1-year gold chart. You can see gold falling from $2,043 to $1,635 and rising sharply back up.

The notable thing on this chart is the green circle all the way to the right, where the 50-day moving average has crossed back above the 200-day moving average. This is what we call a golden cross and a signal that further gains are in store. Gold has been hitting a pretty solid ceiling in the short term at about $1,940, $1,945 and it's going through a similar pattern that it did on the way up from the low at around 1,810, $1,820. So we think we'll go sideways for a little bit here, but this is a window of opportunity to take advantage of this before gold makes the next move higher.

Now, the low that we saw last year was simply driven by extremely strong dollar, which we've talked about in the past, and the US interest rate differential, with higher interest rates here than we had in the rest of the world, causing a lot of money to come into the US, buoying the dollar to inordinate highs.

Now that is over. That is over. So the dollar will probably weaken further from here, and that'll help to buoy gold in addition to declining yields. And if the Fed, as we said, decides to ease goal has truly explosive potential.

[00:17:55] 2-year silver chart

Let's look at silver. This is a 2-year silver chart showing a very similar pattern to gold over the last year in particular.

Again, silver has the golden cross with the 200-day moving average moving sharply above the 50-day moving average about a month ago. What's of note here with silver is while gold is near previous all-time high, silver is less than half of its previous, all-time high, and it's still in the lower part of its basic trading range for the last two years at about $24. Actually, it's about $23.50 today.

[00:18:32] Silver's greater upside

Now silver has an easy 10 to 15, maybe 20% upside potential from here just relative to the gold price, let alone what could happen if gold takes off on the back of further declines and yields and the dollar. So silver has truly explosive potential.

[00:18:52] Gold-to-silver ratio

And if you measure that with the gold to silver ratio, you know, today the ratio is about 81.7-to-1, and at 82 and above, silver becomes extremely cheap relative to gold. It's a point that we don't get to very often. We've seen it more recently over the last couple years because gold has been leading. So silver is an even better value than gold right now, and gold is a good value even though we look at it and think it's expensive in dollars.

[00:19:25] 20-year silver chart

So putting the silver price into perspective over the last 20 years, you can see that silver is less than half of its previous peak where gold has set new highs in the, during this last 2-, 3-year cycle.

And this again, leads us to believe that silver has a lot more upside potential than gold when it moves, and we could be on the cusp of one of those moves over the course of the next three to six months. So take advantage of this low silver price while we have it.

And we also have even lower premiums today than we had a couple weeks ago during our early January updates. So you can buy physical silver now at extremely competitive rates and at good silver prices.

So that is our update. Again, this is how you contact us.

Thank you for your time. Thank you for your business, your patronage. We truly appreciate it. The next three to six months could be quite challenging for the US economy, and we think that this will be beneficial for precious metals, especially in the longer term.

So please take advantage of this pause that we're in right now. We think it will prove to be a very good buying opportunity. So thank you very much and have a good day. Appreciate your time.