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.

3/13/2023: Gold rebounding after dip

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Greetings!

In February, gold and silver were surprisingly pushed lower on speculation that the Federal Reserve may accelerate its aggressive rate hikes. Stubborn inflation and upbeat US economic data lifted bond yields and the dollar, pressuring alternative assets.

But recent shifts in the markets have opened the door for the metals to resume their climb. In this brief edition of AGE's Gold Commentary, I explain in detail the recent dips in gold and silver, the bottom that has recently formed, and why now is a great buying opportunity before the metals break out again.

I also analyze the crucial relationship between bond yields and the gold price, and talk about the instability in the financial markets caused by higher interest rates, as evident in the astonishing closure of Silicon Valley Bank. And, of course, I'll go through the latest charts.

Sincerely,

Dana Samuelson
President

P.S. – A full transcript of this video appears below for your convenience.

[00:00:00] Intro

Hi, I'm Dana Samuelson, president of American Gold Exchange in Austin, Texas, and this is a gold market update for Friday, March 10th, 2023.

Here's our company information. We're American Gold Exchange. We're a national physical mail order, precious metals dealer out of Austin, Texas. We also specialize in vintage pre-1933 US gold coins.

[00:00:37] Outline

In today's update, I want to talk about: how the US economy is resilient so far; Jerome Powell - higher for longer; bond yields remain the driver and are choppy; the latest metal charts for gold and silver; gold stair-stepping higher; and silver remaining undervalued.

So last November, we advised you that inflation is likely to be more stubborn than most realized because rents comprise about 40% of the consumer price index. They're slow to reset and they were coming in at about a 6% year-on-year rate. Also, wage growth was about 5% year-on-year at that point in time. In December, we advised that markets would be choppy going into the first quarter and first half of 2023 because inflation was driving market reactions everywhere.

The Fed is reacting to inflation; bond yields are reacting to the Fed; and the dollar, stocks, and commodities are reacting to the changing cost of financing and changing economic conditions. In January, we advised you the US was headed towards a recession. The fastest and sharpest rate hike cycling in 20 years had put the real estate market into a recession already; manufacturing was weakening along with retail sales.

[00:02:12] Economy resilient so far

As we move into early March, inflation continues to be stubborn. Markets remain very choppy but the US economy has proven to be far more resistant to sharply higher interest rates at this point in time than most anticipated. A blockbuster payrolls report for January of over 500,000 new jobs, followed by the just-released February payroll report of 311,000 jobs, has been much stronger than almost every analyst and pundit imagined.

Consumer spending, 70% of the economy, has remained fairly robust despite record-low savings and record-high credit card debt. But much of the growth that we have seen in jobs and consumer spending has been in the services sector as the public at large continues to go on vacation and enjoy meals out. As one analyst said: the consumers so far seems to have forgotten that we're supposed to be in a recession. So far so good.

The Fed clearly under-reacted to inflation last year and now we're waiting to see if they will overreact this year by raising rates too far, too fast. We'll just have to see. But I must give Chairman Jerome Powell some credit. Since his Jackson Hole, Wyoming speech last August, he has been a resolute hawk with regard to inflation. At the end of the last Fed meeting on February 1st, with inflation easing a bit, Chairman Powell said during his press conference, the disinflationary process had begun. In fact, he said the word disinflation 16 times.

[00:04:08] Powell - higher for longer

But with continued strong job gains, a surge in retail spending, a mild rebound in manufacturing, and wages continuing to grow, although at a milder rate than expected, Jerome Powell has once again reiterated his higher-for-longer interest rate mantra in recently concluded Senate testimony. He put half-point rate increases back on the table and a higher than previously anticipated final Fed funds rate of perhaps 5.5% percent to 6% in play.

The next Fed meeting is scheduled for March 21st and 22nd. We're going to get the next consumer price index report on March 14th. In the meantime, markets are gaming whether the Fed will raise rates 25 basis points at the conclusion of their next meeting, or 50 basis points.

Currently, it's a 50-50 bet, and this is causing the choppiness we're seeing. Chairman Powell understands that if the Fed doesn't contain inflation now, it could persist in waves for years to come like it did in the '70s.

And Chairman Powell has been acting like the adult at the dinner table saying, kids eat your vegetables. Meanwhile, the kids got to dessert early, got a sugar rush and have been knee-jerking around higher and lower as incoming data continues to arrive and all markets try to anticipate what inflation and the Fed will do next. But based on Chairman Powell's resolve, we should all expect higher for longer, regardless of the consequences for the economy.

Adding to the market mayhem today was the second largest US bank failure in history. Silicon Valley Bank, the 18th largest bank in the United States, with $174 billion worth of deposits as of the end of last year, failed this bank. This is a bank focused on the tech industry used by venture capitalists and the titans of Silicone Valley.

The bank got into trouble buying long-term US bonds early last year that lost value when the Fed raised rates sharply starting about a year ago. Sharply higher rates made Silicon Valley Bank's holdings of bonds less attractive at the lower yields that they locked in at, making their bonds worth less than they paid, creating large paper losses in their portfolio.

Unfortunately, the bank needed to raise capital into a contracting tech industry that they're highly dependent on, which created a double whammy of having to take losses, selling their bonds to compensate for falling deposits. All of this escalated very quickly into an old-fashioned run on the bank.

The tech industries of Silicon Valley have been in severely impacted by sharply higher rates, and this bank is a victim of its direct correlation to tech and the Fed's rate hikes.

Markets are a bit on edge now, waiting to see if there is unanticipated collateral damage. In a way, this is similar to the British Pension Fund debacle from last September, when British pension funds got gobsmacked by inordinately large margin calls on their leveraged bond portfolios with hedge funds for the same reason.

The pressure of higher interest rates continues to create steam that pops out in unusual places.

[00:08:09] Bond yields are the driver

We advised in our last update that bond values and bond yields are driving all markets as they react to the Fed, which is reacting to inflation. So let's look at the latest charts. We'll go through them for bonds, yields the dollar, gold, and silver.

[00:08:34] US Treasury yields chart

So here's the latest Treasury yield chart, nine months, for the 2-, 20-, 10-, and 30-year Treasury. The 2-year is in purple, and it is on top. The red is the 10-year, and those are the two that we're going to focus on here.

As you can see, as of last, the end of October, the spread between the 2- and the 10- was inverted at about 50 basis points. So this is an inversion of about half a point, and inversions typically lead into recessions.

Now as inflation eased from that peak in October down through into early 2023, yields fell as inflation eased, yields fell as the markets gamed that the Fed, hey, could slow down on their rate hike cycle, which is what they did. They went from half-point rate hikes to quarter-point rate hikes.

But then starting in early January, we started to see the economy doing a bit better than most anticipated. And as of early February we got that blockbuster jobs report of half a million new jobs. We got a strong retail sales figure come in. The producer price index came in more stubborn than people anticipated.

So yields continued to rise between January all the way through into trading yesterday, with the spread widening between the 2- and the 10- to over 100 basis points, as of yesterday, when the 2-year peaked at about 5.05% and the 10-year peaked at 3.95%.

Now just in the last 24 hours, we've seen that big drop of the very right of the chart, with the 2-year dropping to 4.6% and the 10-year dropping from 3.95% to 3.7%. So the spreads narrowed a little bit to 90 basis points. There was a huge flight to safety today into bond buying because of the Silicon Valley Bank failure.

So, It's made a big change and it gave a big boost to gold. We'll get to that in a minute, but this is the kind of pressure that we're seeing in the market and the unusual things that can happen.

The point to take away here is the 2-year Treasury yield correlates very directly with where the Federal funds rate is right now. They're close to the same, with the 2-year being a little under the Fed funds. The spread [between 2-year and 10-year yields] is 90 basis points, which is huge. We haven't seen the spread this wide since 1981, and the longer-term yields are saying, hey, we don't quite agree that the Fed's going to be able to hold rates higher for longer, so we're going to offer less the longer you give your money to us on the longer-term Treasurys.

So we'll just have to see what happens with the Fed meeting in another week or another two weeks. But we're seeing some of the biggest yields we've seen in the 2-year—set a new high—and the biggest inversion we've seen since 1981, which is in indicative of a recession.

[00:12:12] US dollar index chart

Here's the US dollar Index. As you can see, the US Dollar Index made a big move last year into October, where it peaked, came all the way back down into early February, and now it's rising again as those bond yields have run up. So the bond yields are leading and the dollar is following.

You can see where gold has been, you know, was as low as $1,633 last October, rallied all the way to $1,945. When yields peaked just a couple days ago, gold bottomed at $1,820. And now we've seen the dollar take a tumble today, like yields took a tumble in that flight to safety, from about 105.5 to a little over 104. So the dollar took a big drop today based on what happened with Silicon Valley Bank.

So, but these are choppy markets and we're going to continue to see choppiness in these markets because of what's happening. Let's take a look at gold.

[00:13:10] Gold chart

See, gold dropped as the dollar and the yields got strong going into November. Then gold took a big rebound from the $1,630 bottom all the way to $1,946 on the chart. And today it's corrected back down to about $1,817, and today we had a sharp rise up to about $1,865, a big rebound,

But this is the important thing for you to take. Gold was on sale last year. It's rebounded from being overly sold, and as we get into new corrections after runs, it is setting higher lows, stair-stepping higher.

Right now, the bottom is at $1,820, thereabouts, with a high at $1,945, and I think with the bias to the upside, because we're seeing more tension in the financial markets, obviously because of Silicon Valley Bank.

But we're also seeing more geopolitical tension with what's happening in the Ukraine because of the US and other allies increasing their military assistance to the Ukraine; and China in particular, potentially getting in to aid Russia. So that could become a bigger conflict. And gold is holding higher gains when it corrects, I think because of some of these increasing geopolitical tensions. But we're going to have continued chopping markets.

Right now, the bottom in gold is about $1,820, and we continue to say buy the dips. Buy the dips when you get 'em. Don't wait too long. This market could take off at any particular time. I think we've really, really got a good base under this market now at $1,820, and $1,780 in particular. I don't think gold will ever get much cheaper in the short term and perhaps in the long term as.

[00:15:13] Silver chart

Silver has had a wider swing than gold. As you know, it's got a wider trading range with less defined ups and downs. We've had a bottom at about $20.75 and a run all the way up to $24.30. Silver is a little under that $20.75 bottom today, holding it $20. So silver has pretty good support at $20 right now. We're about $20.50, $20.60 at the close of business today.

I would look for silver to tentatively go higher. I think gold is going to hold gains and look to advance further. But again, inflation is driving all markets, driving the Fed, driving the bond market, which is in turn driving everything else. So we're going to continue to be choppy, but you should take advantage of these dips as we move forward.

Our debt is just going to continue to increase. If the Fed has to hold higher for longer, we're going to see the cost of everything just continue to stay up. And this will devalue the dollar, its purchasing power, and gold and silver will hold their purchasing power better over time than just about anything else, and act as both a currency of last resort and a trading vehicle if you need hard cash.

So this is how you can reach us. That's our short update for today. Thank you very much for your time and if we can help you, we'd certainly love to have that opportunity. Good luck out there. Thanks again.