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Available to premium subscribers only.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

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Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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As long as gold is priced in the U.S. dollar, it’s critical to keep the latter in mind. And last week, something epic happened in the forex market.

Namely, the EUR/USD closed the week below the all-important 1 level.

For the first time in almost two decades!

When this level was first approached weeks ago, I wrote that a rebound was likely, but I also added that I expected this level to be broken after the rebound. That’s exactly what we just saw.

This. Is. Huge.

This is something that the media will catch on to and is likely to trigger action from the investing public. This is where the early part of panic could start in the forex market, and it could then catch on in other markets – stocks, gold, silver, mining stocks, etc. This is the “oops, the unthinkable is happening” moment.

Those of you who have been profiting from how this situation develops practically throughout the entire year (like my subscribers), will likely be happy to know that the above indicates (I’m not making any guarantees, of course) that the biggest gains (based on mining stocks’ declines) are likely just ahead.

Moving back to the USD Index, it had recently moved slightly below its 50-day moving average, and then it moved back above it. After that, it started to rally, and it has continued to rally until this moment.

This move is in tune with what we saw at previous local bottoms. The RSI moved slightly below 50, which used to accompany bottoms in the previous months.

So, the scenario in which the USD Index has already bottomed seems quite likely. In fact, we already saw a breakout to new highs in today’s (Aug. 29) pre-market trading.

Please note that back in June/July, gold was initially reluctant to decline. It moved sharply lower after it was already clear that the USDX was moving to new highs. Consequently, we might see a sizable short-term decline in gold very soon.

Let’s zoom out.

I previously wrote the following about the USD Index’s long-term chart:

There’s also the possibility that the USD Index keeps declining until it reaches the very strong support at about the 104 level – the previous long-term highs (…).

Last week, the USD Index bottomed at about 104.5, which was very close to the above-mentioned 104 level. If traders had expected the USD Index to bottom at this level, then some of them might have bought at higher levels in order to maximize their odds of catching the bottom, thus actually creating the bottom at higher levels.

As the USDX moved to the upper border of my previous downside target, it seems that the short-term bottom is already in.

This, in turn, likely means that the peak for precious metals is already in.

Please note that the USD Index is currently rallying in an approximately mirror image of how it declined in 2002. Based on this, it seems that one shouldn’t be surprised by a rather quick move from the current levels to about 120 – the USD Index’s long-term highs. Of course, the implications for the precious metals market are profoundly bearish.

If you can’t or don’t want to profit from declining mining stock prices, I also have good news. Please note that the decline is not likely to take place forever. Based on how the precious metals sector declined in 2008 and 2013, and based on multiple other indications, it seems that we’ll see a major bottom this year. While higher prices are encouraging, please note that there are two moments that determine a given trade’s or investment’s profitability – it’s not just the exit price, but also the entry price.

Thanks to declines and lower prices, one can get in at much lower levels and thus greatly increase the profits (again, I’m not guaranteeing any profits or market performance – nobody can guarantee it) from the entire huge rally that’s likely to take place in the following years.

The “mother of all buying opportunities” in the precious metals sector is likely not here yet, but it’s likely to present itself in the not-too-distant future. Stay tuned!

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

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Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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On the eve of the Fed's boss's speech, officials suggested a more hawkish central bank policy. But even if Powell's words trigger a rally, they won’t help the gold market in the long run.

With the S&P 500 rallying by 1.41% on Aug. 25, the late-afternoon surge was likely a short-covering rally in advance of Powell’s Jackson Hole speech. In the process, gold rose by 0.56%, silver by 1.13%, the GDX ETF by 0.85% and the GDXJ ETF by 0.65%. Conversely, the USD Index declined by 0.17% and the U.S. 10-Year real yield also retreated.

Therefore, while volatility should be amplified today, the PMs’ medium-term technical and fundamental outlooks are profoundly bearish. As a result, Powell’s words should have little impact on their prices in the months ahead.

Gold and the Central Bank Effect

With the Qatar Central Bank increasing its gold purchases in the second quarter, Krishan Gopaul, Senior European and Middle East Analyst at the World Gold Council, tweeted on Aug. 23:

“The Central Bank of Qatar added 14.8t of #gold to its official reserves in July 2022 - appears to be the largest monthly increase on record (back to 1967), although early data is patchy. Gold reserves now stand at 72.3t, the highest on record.”

Thus, you may be curious about how central bank activity influences gold. Well, the reality is that central banks are steady purchasers of the yellow metal, and all things considered, their activity has an immaterial impact on the gold price.   

For example, the World Gold Council released its Gold Demand Trends Q2 2022 report on Jul. 28. An excerpt read:

“The LBMA Gold price PM averaged US$1,871/oz in Q2, 3% above the Q2’21 average. However, this comparison conceals the 6% decline in the price during the most recent quarter, pressured by rising interest rates and the rocketing value of the U.S. dollar.”

However:

“Central banks continued to buy gold. Global official gold reserves grew by 180t in Q2, taking H1 net purchases to 270t.”

Please see below:

To explain, the red bars above track the gold purchases of central banks and “other institutions.” If you analyze the symmetry, you can see that net flows tend to stay in a relative range of 200 to 300 tons per six-month period.

Furthermore, while H1 2022 purchases were less than H1 2021 and exceeded H1 2020, the data shows that central banks aren’t the best market timers.

Please see below:

To explain, the candlesticks above track the gold futures price, while the vertical gray lines represent the six-month (H1) periods in 2020, 202,1 and 2022. If you analyze the left side of the chart, you can see that the gold futures price ended the six-month period higher, even though central bank purchases were near the low end of the historical range (204.50 tons on the first chart above).

Likewise, central banks purchased 325.25 tons of gold in H1 2021, only to watch the gold futures price end the six-month period lower than where it started. Moreover, central bank purchases fell to 269.62 tons in H1 2022, and the gold futures price was roughly flat throughout the period.

All in all, headlines about central bank gold purchases often garner a lot of excitement from the permabulls. However, their activity doesn’t provide much insight into where gold is headed, let alone where the GDXJ ETF is headed.

In contrast, the technicals, the USD Index, and real interest rates are much better predictors of gold’s short-and-medium-term movement. In addition, with the junior miners influenced by the behavior of the general stock market, the S&P 500 is another critical metric.

Powell’s Prayer

With Fed Chairman Jerome Powell set to speak at the annual Jackson Hole summit today, investors went from front-running a hawkish hammer to front-running a dovish pivot. However, while investors’ manic mood swings have become the norm in an era of easy money, Powell’s words can’t shape the medium-term fundamentals. 

Furthermore, with gold, silver, and mining stocks underperforming the S&P 500 on Aug. 25, the PMs have been relatively weak. Therefore, while Powell could ignite a pump or a dump today, his deputies’ messaging on Aug. 25 signals more hawkish surprises to come. 

For example, St. Louis Fed President James Bullard said that if the Fed doesn’t front-load interest rate hikes, “a baseline would be that probably inflation would be more persistent than what many on Wall Street expect and that’s going to be higher for longer. That’s a risk that’s underpriced in the markets today.”

As a result, he stressed that the Fed needs to raise the U.S. federal funds rate (FFR) quickly to show it's “serious about inflation fighting.”

Please see below:

Source: Bloomberg

Likewise, Kansas City Fed President Esther George said on Aug. 25 that the central bank has “more work to do” with regards to interest rate hikes, and that “we are trying to get back to 2% inflation as quickly as we can, without doing damage to the economy.”

"So July looked like there was some easing in those price pressures, but certainly not enough that you would say, we're in the right direction," George said. "So I think we have more data to see. And I think we have more work to do, to begin to see that trend move down."

Thus, while George is on the more dovish side of the spectrum, she noted that the FFR may have to exceed 4% before it’s all said and done. For context, we expect inflation to be more problematic than the consensus realizes, and for the FFR to hit 4.5%+ in 2023.

Please see below:

Source: Bloomberg

Continuing the theme, Philadelphia Fed President Patrick Harker said on Aug. 25: “We don’t need to rush way up and then rush way down. We need to go up and sit for a while and let things play out,” adding that when rates are above 3.4%, they will begin to slow the economy.

As a result, while his FFR prediction is less hawkish than Bullard and George, he reiterated that curbing inflation is “Job One.”

Please see below:

Source: Reuters

Joining the fray, Atlanta Fed President Raphael Bostic said on Aug. 25 that he’s split between a 50 or 75 basis point rate hike in September. “At this point, I’d toss a coin between the two,” he said. “We all, as policymakers, understand that inflation is a big problem and is a challenge that we’re going to do all that we can to handle.”

Thus, while it’s quite coincidental that Powell sent out his minions the day before his Jackson Hole speech, I noted during our post-FOMC recap on Dec. 16, 2021 that Powell uses his deputies as messengers. I wrote:

As one of the most important quotes of the press conference, he admitted:

“My colleagues were out talking about a faster taper, and that doesn’t happen by accident. They were out talking about a faster taper before the president made his decision. So it’s a decision that effectively was more than entrained.”

And while Powell sounded a little rattled during the exchange, his slip highlights the importance of Fed officials’ hawkish rhetoric. Essentially, when Clarida, Waller, Bostic, Bullard, etc., are making the hawkish rounds, “that doesn’t happen by accident.” As such, it’s an admission that his understudies serve as messengers for pre-determined policy decisions.

Therefore, if Powell is up to his old tricks, the hawkish rhetoric from Bullard, George, Harker, and to a lesser extent, Bostic on Aug. 25 may have been a subtle hint at his Jackson Hole speech. Only time will tell.

However, what’s not up for debate is the deteriorating fundamental outlook that confronts financial assets. With unanchored inflation mixed with deteriorating growth, investors have way too much faith in the Fed’s ability to solve the economic conundrum. So while the consensus assumes that a recession is unlikely, the reality is that avoiding a recession under these circumstances has never occurred since 1954.

To that point, Greg Jensen, Co-Chief Investment Officer at Bridgewater Associates – the world’s largest hedge fund – warned on Aug. 25 that “inflation will be more stubborn” despite “the market pricing a decline in inflation to occur in a relatively stable economy.”

Furthermore, he added that long-only investors have nowhere to hide “to totally avoid this,” as the inflationary realities signal material downside for risk assets. Thus, while he’s one of the few that share our fundamental view, a realization is profoundly bearish for gold, silver, mining stocks and the S&P 500.

Source: Bloomberg

The Bottom Line

While Powell's rhetoric today remains a coin flip, his deputies' hints on Aug. 25 foreshadow more hawkish policy in the autumn and winter months. Moreover, with investors' inflation and rate hike expectations below the Fed's forecast and the Fed's projection below ours and Jensen's forecast, there is plenty of room for more hawkish re-pricing.

As a result, while Powell may spark a short-term rally today, please remember that we've been here many times. For example, several Powell press conferences over the last ~18 months have ended with a weaker USD Index, lower real yields, and a higher GDXJ ETF. Yet, the former forged ahead to make new highs, while the latter sank to new lows. As such, the important point is that the Fed's inflation fight supports a stronger USD Index and higher real yields, and that the environment is bearish for the PMs.

In conclusion, the PMs rallied on Aug. 25, as the S&P 500 ended the day higher. However, the GDXJ ETF underperformed the general stock market, even as the USD Index and the U.S. 10-Year real yield retreated. Therefore, our medium-term expectations are unchanged.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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In today’s globalized economy and interconnected financial markets, no market can truly move on its own. The context matters a lot, and two of the most important “external” markets from the point of view of precious metals investors and traders are the stock market and the currency market. In the case of the latter, it’s the USD Index that provides the greatest insights. Consequently, in today’s analysis, I’ll cover those two areas. Let’s start with stocks.

Declining stock prices would only add fuel to the bearish fire (after all, gold stocks are… just stocks) and that’s exactly what’s likely to happen.

The technical picture in the case of world stocks remains extremely bearish, and my previous comments on it were just confirmed. Here’s what I’ve been writing about the above chart for quite a few weeks now:

World stocks have already begun their decline, and based on the analogy to the previous invalidations, the decline is not likely to be small. In fact, it’s likely to be huge.

For context, I explained the ominous implications on Nov. 30. I wrote:

Something truly epic is happening in this chart. Namely, world stocks tried to soar above their 2007 high, they managed to do so, and… failed to hold the ground. Despite a few attempts, the breakout was invalidated. Given that there were a few attempts and that the previous high was the all-time high (so it doesn’t get more important than that), the invalidation is a truly critical development.

It's a strong sell signal for the medium - and quite possibly for the long term.

From our – precious metals investors’ and traders’ – point of view, this is also of critical importance. All previous important invalidations of breakouts in world stocks were followed by massive declines in mining stocks (represented by the XAU Index).

Two of the four similar cases are the 2008 and 2020 declines. In all cases, the declines were huge, and the only reason why they appear “moderate” in the lower part of the above chart is that it has a “linear” and not a “logarithmic” scale. You probably still remember how significant and painful (if you were long, that is) the decline at the beginning of 2020 was. 

All those invalidations triggered big declines in the mining stocks, and we have “the mother of all stock market invalidations” at the moment, so the implications are not only bearish, but extremely bearish.

World stocks have declined below their recent highs, and when something similar happened in 2008, it meant that both stocks and gold and silver mining stocks (lower part of the chart) were about to slide much further.

The medium-term implications for mining stocks are extremely bearish.

However, let’s get back to the short- and medium-term points of view.

Stocks rallied recently, but since they corrected approximately to their previous June highs and March lows, the rally might be over, or very close to being over.

Especially since the RSI had just moved above 70, and then it declined back below this level. This indicated local tops many times in the past.

As I had indicated previously, interest rates are likely going up, which is a bearish factor for the stock market, and the recent rally was likely due to the market’s misinterpretation of the importance of Powell’s speech. The S&P 500 wanted to correct (based on emotional = technical reasons) and it used Powell’s seemingly dovish comments as an excuse to do so. However, what materially changed? Nothing. Interest rates are likely to be raised, as inflation remains the key political issue right now, and the markets are likely to respond by declining.

Most interestingly, though, such a decline would likely have a devastating effect on the prices of mining stocks (especially junior mining stocks) and silver. There might be some impact on gold, too.

The above would also be in tune with an extra rally in the USD Index. After all, less competitive exports are not that favorable for the U.S. economy.

The USD Index had recently moved slightly below its 50-day moving average, and then it moved back above it.

After that, it started to rally, and it has continued to rally until this moment.

This move is in tune with what we saw at previous local bottoms. The RSI moved slightly below 50, which used to accompany bottoms in the previous months.

So, the scenario in which the USD Index has already bottomed seems quite likely.

I previously wrote the following about the USD Index’s long-term chart:

There’s also the possibility that the USD Index keeps declining until it reaches the very strong support at about the 104 level – the previous long-term highs (…).

Last week, the USD Index bottomed at about 104.5, which was very close to the above-mentioned 104 level. If traders had expected the USD Index to bottom at this level, then some of them might have bought at higher levels in order to maximize their odds of catching the bottom, thus actually creating the bottom at higher levels.

Since the USD Index is already (at the moment of writing these words) back above the 107.5 level, it could be the case that the short-term bottom is already in. Actually, there were only five sessions this year when the USD Index closed at levels that were higher than the current USDX value.

This, in turn, likely means that the peak for precious metals is already in.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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