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.

7/24/2023: Gold setting up for major rally

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Greetings!

In April and May, gold surged to near-record highs above $2,050 on flights to safety after the astonishing failure of Silicon Valley Bank and other major lenders. Silver also rallied impressively to a two-year high near $26 an ounce.

Then in June, as the threat of further bank failures was contained, both metals gave up portions of those gains. The Fed's decision not to increase interest rates that month offered some support. But the central bank also signaled the likelihood of higher rates to come, pushing gold and silver prices to cyclical lows.

Over the past three weeks, however, the picture has changed. Both metals have resumed their solid 2023 uptrends despite the typical summer doldrums in the metals markets, and we think this is just the beginning.

In this brief video edition of AGE's Gold Commentary, I outline the major factors influencing precious metals right now, including the outlook for inflation, interest rates, bond yields, and the dollar.

In addition, I analyze the current charts and explain why I believe gold has the potential to rally as much as 30% from today's prices, to as high as $2,500 an ounce, as the Fed unwinds the most aggressive campaign of monetary tightening in 40 years.

So please join me by clicking on the link below.

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. This is a video gold market update for Monday, July 24th, 2023.

We're having a bit of a quiet summer, the first quiet summer we've had in since 2019. We are seeing some things happening in the markets that we think are worthy of bringing to your attention at this point in time. So I'd like to share my screen and begin my presentation.

Our company is American Gold Exchange. We're a national physical, precious metals and vintage US gold and European gold coin dealer out of Austin, Texas, a national mail order company. If there's any way we can help you in physical precious metals, we'd love to have that opportunity.

[00:01:01] In this issue

Here's the topic of our gold market update. Inflation eases and the dollar weakens; the US economy is weakening modestly; gold uptrend remains intact; and silver is following gold higher from short term lows.

Let's drill down on these subjects a little bit.

[00:01:26] Inflation eases

This is a chart of inflation, the consumer price index, going back to 2000. And inflation continues to ease, with the headline CPI dropping to as low as 3% as of the June figures, which is the lowest inflation's been in two years, while the core CPI is coming in at 4.8%.

We've seen energy prices drop substantially over the last six months, which has been the leading contributor to falling inflation. We are seeing the price of a barrel of oil hold firm recently, though, and we are seeing gasoline prices bouncing from lows that they were at about a month or two ago. The lower inflation rate that we've seen from primarily lower energy costs may be waning a bit here.

Now with regard to core inflation, rents are about 44% of the consumer price index composition, and rents continue to come in pretty high at about 6.34%. As of June, rents have been declining 30 to 40 basis points per month for the last five or six months, which is helping to bring core inflation down, but they're staying a bit stickier than the Fed would like. We do expect rents to continue to ease modestly going into the rest of the year, so that's going to help a bit with sticky inflation.

But another component of sticky inflation is wages and wages have been holding up at [rising] about 4.4%, month-on-month. And that is going to contribute to trying to keep this core inflation number over 4% and truly be sticky.

Now remember when a landlord raises the rent, or an employer raises someone's wages, these are things that are not taken back easily, and they don't tend to be near as volatile as the basic price of a commodity like oil can be, or the components for the cost of food. So we expect inflation to ease a bit further, but sticky inflation may be a bit stickier than the Fed would like it to be, regardless.

The lower rate of inflation and the degree to which it's falling now has given markets reason to believe that the Fed may be at the end of their rate hike cycle with the meeting that they're going to hold the last week of July, where everyone's expecting the Fed to raise the federal funds rate another quarter-point, potentially for the last time to 5.4%.

Despite this [coming increase], the lower inflation print for June has helped the market think that the Fed is, indeed, at the end of their rate hike cycle. And it has helped to cause the dollar to weaken.

Because if the Fed is done raising rates and inflation is moderating here in the US, [and] we're seeing higher inflation in Europe and higher fundamental fund rates and bond yields in Europe, the interest rate differential is now going in favor of Japan, the Eurozone, and Great Britain, which would make sense for the dollar to weaken.

[00:05:23] The dollar softens

Let's take a look at the latest dollar chart. As you can see, the dollar has been on quite a wild ride over the last year. When the dollar tends to be strong, it inversely pushes gold values lower, and when the dollar is weak, it tends to buoy the gold price higher.

For the last six months or so, the dollar has channeled on the US dollar index between about 101 and 105.5 In bumpy trade. You can see when the dollar's been at the lows on the chart, gold has been higher, and when the dollar has been at the higher end of this trading range, and gold has been lower well over the last week and a half.

Following the release of the June consumer price index, the dollar broke below support materially for the first time in three years. So this is a major trend change. Now it's rebounding a bit as we go to press. We'll see whether it can climb back over the support level at 101 or whether it will continue to ease lower.

[00:06:37] US economy weakens

Right now, the dollar is fundamentally helping to buoy gold higher, but there's more to the equation than just the federal funds rate-hike cycle and inflation. There's the US economy. Let's take a look at one of the leading economic indicators, the Conference Board's leading economic indicator chart, and this goes back to 2000.

[00:07:03] Leading economic indicators

The Conference Board's leading economic index is in blue. You can see it's falling pretty sharply over the last year and a half. The gray line is the underlying GDP. They tend to trade in tandem, but we are seeing a distinct divergence now between the leading economic indicators in blue dropping sharply below the GDP.

US GDP is holding up pretty well. The economy here in the US is more resilient than most people thought it would be at this point in the most aggressive fed rate-hike cycle in a generation. But that may be changing.

The leading economic index is down 4.2% over the six-month period between December 22 and June 23. There's a steeper decline than the previous six months.

"The LEI fell again in June, fueled by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction," said Justina Zabinski Lamonica at the Conference Board.

She went on further to say:

"The leading index has been in decline for 15 months, the longest streak of consecutive decreases since 2007 to 2008 during the run up to the great recession taken together. June's data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 '23 to Q1 '24. Elevated prices, tighter monetary policy, harder to get credit, and reduced government spending are poised to dampen economic growth further."

So a weaker US economy in conjunction with diminishing inflation will give the Fed room to pause. We may be at the end of their rate hike cycle following the last week of July's meeting, which is this week.

If the US economy weakens enough, which inevitably at some point in time it will, the Fed will be forced to stimulate again by lowering the Fed funds rate, and that will help to bring bond yields down. Today these yields and the federal funds rate are at the highest level they've been at in years. Let's take a look at those yields and the Fed funds rate.

[00:10:04] Fed funds rate v. Treasury yields

This is a chart of the Fed funds rate in black, the two-year Treasury yield in purple, and the 10-year Treasury yield in red. The Fed funds rate today is about 5.15%. They're going to raise it. Everyone expects a quarter-point, bringing it to 5.4%, the highest level it's been at since 2001.

In addition, the two-year Treasury yield is coming in at about 4.8% right now. It tends to mirror the federal funds rate, but it's a little bit lower than the Fed funds rate, which suggests the market thinks that this rate will come down, the Fed funds rate will come down.

In addition, the 10-year Treasury yield is coming in at about 3.8% today, and it's substantially below the two-year Treasury yield. We call that an inversion. We've been in this inversion for over a year now. It's a very consistent leading indicator of a recession, although we haven't had one yet. But we may be heading towards that going into the end of this year.

The Fed may actually have engineered the soft landing that they've so hoped for, contrary to what most economists believe might would happen.

But regarding precious metals, the most important thing for all of us to remember is that the federal funds rate is at the highest level it's been at in 20 years. Bond yields are near the highest level they've been at since prior to the great financial crisis. They have a lot of room to come down.

We've already seen the dollar break a little bit on the weaker inflation report, and if the US economy goes into a true slowdown, which it looks like it may be going into now, these yields come down and the Fed is forced to ease the federal funds rate.

This is the perfect setup for substantially higher gold and silver prices. Gold and silver will catch a substantial bid when this happens, which is inevitable at some point in time. It's just a question of when.

So we continue to believe that we remain in the perfect setup for substantially higher precious metals prices because of these high federal funds rate and the higher bond yields. And the fact that the dollar is leading the markets a little bit lower already could be a leading indicator.

But in the economic cycle, when new orders start to fall, manufacturing falls. We're starting to see that. Profits tend to fall behind that. And then employment falls behind weaker profits. So we're probably somewhere in the middle of this declining economic cycle now, where we haven't seen corporate profits undermined by the higher cost of financing. But we will because manufacturing, which leads, is slowing down.

And then on the back of falling profits, that's when employment finally tends to roll over, and that's, of course, what the Fed is most concerned about is employment. There may be a few months before we see that really start to happen, but we're in the window of opportunity now to continue to accumulate precious metals while rates and yields are high.

Let's take a look at the gold and silver charts.

[00:13:40] Gold uptrend intact

This is a one-year gold chart and you can see it's been setting higher highs and higher lows since last fall's abnormally low gold price based on extremely strong dollar. Gold has held support as indicated by the blue trend line on the most recent dip down to $1,915.

You can see how gold caught a major bid following the SVB bank failure. It rallied $200 from about $1,840 to $2,055. Gold bumped up against all-time highs twice when there was a lot of fear that the banking problems might continue to cascade.

Now that we've seen that fear ease and go out of the market condition, gold ease lower down to support at $1,915. But with the dollar breaking support at 101 on the index, gold has rallied from about $1,920 to $1,980, a $60 rally.

Technically, gold remains well above its 200-day moving average. And on this last break on the dollar, with gold punching up to $1,980, gold crossed over its 50-day moving average as well, which is a bullish signal.

Now, if gold is holding $1,900 and is bumping up against all-time highs, the potential for gold to gain another 10%, 20%, maybe 30% when the US economy slows down enough for the Fed to ease, is really high.

I think gold could easily be in the $2,200 to $2,400 range, maybe even get over $2,500, as we go into this cycle. It's clearly not going to give up that much in the short term because it hasn't, and we've gone through a quiet phase over the last month or two.

In addition, our debt has jumped another trillion dollars in just the last month as the debt ceiling negotiations were concluded and the US was finally able to print again. So we're at about $32.5 trillion in debt in the US, and that's only going to go higher. And in the big picture, gold has tracked our debt higher over the last 20 years. It's lumpy. But it's track it higher and our debt just going to keep going higher as well.

This is a window of opportunity, I think, to continue to accumulate gold while it's under $2,000 an ounce.

[00:16:23] Silver following gold higher

Let's look at silver. The silver chart is mirroring the gold chart, setting higher highs and higher lows since last fall.

You can see how when SVB bank failed, silver, which had bottomed at that point in time at about $20.50, rallied all the way to $26.25. It eased back down as the steam went out of the equation following those bank failures.

But now that the dollar has broken support, silver has jumped again [by] $2, a sharp gain on the back of this weaker inflation report. And it has held support right at its 200-day moving average, where the blue trend line is. And now silver, in addition to gold, has also punched above its blue 50-day moving average, which technically is another bullish sign.

So despite the summer bringing a quieter physical precious metals market, the metals prices are holding up rather well for very fundamental reasons.

We're going into a phase now where the greatest Fed rate-hike cycle in a generation may be finally materially felt in the US economy, to the point where if the Fed has to ease and bond yields fall, precious metals will catch a real tailwind. I've never seen a more perfect setup for this in my 43-year career than I'm watching right now.

I strongly advise you to continue to accumulate while silver is under $30 an ounce, and while gold is under $2,000 an ounce. The setup is perfect for substantially higher prices sometime in the next six months to a year, and it may sneak up on us and catch us fast. Who knows?

In any case, thank you for your time today. We appreciate it. We appreciate your business, your loyalty, and your support. Without you, we wouldn't have a business and we know that. So we hope everyone has a great rest of their summer. We'll look forward to the fall season and, once again, thank you.