Gold Futures have rallied to fresh record highs three times over the past three weeks, topping $2500 an ounce with the potential to rise even further as the perfect storm of potential rate cuts, war fears, and rapidly rising debt levels continue to support record high prices.
The Federal Reserve’s insistence on keeping interest rates higher until the economy moves meaningfully towards its 2% inflation target has the federal government’s deficit swelling to $1.27 trillion in the fiscal year ending in June.
This shortfall was aided significantly by surging interest payments on the growing national debt, which surpassed $35 trillion this week. Servicing this exponentially rising debt is the largest cost of Washington’s debt crisis, as the U.S. government currently spends $2.4 billion in daily interest fees alone.
The federal government spent $658 billion on interest fees in 2023, a 38% jump from the $476 billion in servicing debt in 2022 which is 2.4% of the entire national GDP spent just on interest expenditures. See the alarming U.S Federal debt net interest payment to GDP trajectory chart here.
The gold price began moving higher to begin the week as Foreign ministers from Australia, India, Japan and the U.S. said on Monday they were seriously concerned about intimidating and dangerous maneuvers in the South China Sea and pledged to bolster maritime security in the region.
Just ahead of the Federal Open Market Committee (FOMC) meeting policy decision was announced on Wednesday afternoon, Gold Futures surged to end July at a monthly all-time high as continued safe-haven buying took December Gold $4 away from $2500 before closing at $2473.
Middle East tensions increased after the killing of Hezbollah's senior commander on Tuesday in Beirut, and Hamas leader Ismail Haniyeh was assassinated early on Wednesday morning in Iran. The reported deaths of two high-ranking Iranian officials drew threats of revenge on Israel in a region already shaken by the war in Gaza and a deepening conflict in Lebanon.
Meanwhile, protesters took to the streets across Venezuela, demanding that President Nicolas Maduro acknowledge he lost Sunday's election to the opposition, as a major international observer concluded the vote was undemocratic.
Later Wednesday, the Federal Open Market Committee held borrowing costs at a 23-year high of 5.5% for the eighth meeting in a row, while opening the door to the long-awaited “pivot” as soon as the central bank’s next meeting in September.
Gold Futures moved above the psychologically significant $2500 level in after-market trading late Wednesday afternoon, as Fed Chair Jerome Powell explained the central bank's decision to leave the policy rate unchanged at the range of 5.25%-5.5% and responded to questions in the post-meeting press conference.
After inflation data moderated in the second quarter, Fed officials have "gained greater confidence" price pressures are moderating in way that will open the door to a rate cut, Powell said.
Gold also saw more safe-haven buying on news that Israel is widely believed to have carried out the Ismail Haniyeh assassination. This news infuriated Iran and its proxy militant groups around the Middle East.
With the gold price moving higher after the news, the stock market reversed sharply during the last hour of Wednesday’s trading and continued with a sharp decline on Thursday as tensions in the Middle East increased.
Gold held most of Wednesday’s $40 gains as top Iranian officials met with the representatives of Iran's regional allies from Lebanon, Iraq and Yemen on Thursday to discuss potential retaliation against Israel after the killing of the Hamas leader in Tehran, five sources told Reuters.
Also on Thursday, The Bank of England (BoE) cut interest rates from a 16-year high after a narrow vote in favor from policymakers divided over whether inflation pressures had eased sufficiently.
This week’s rate cut puts the BoE easing monetary policy ahead of the Federal Reserve, which is expected to lower rates in September. The Fed is also behind the European Central Bank (ECB), Bank of Canada, and the Swiss National Bank which have already cut. China recently cut rates as well. Historically, both the BoE and the ECB have never cut interest rates before the Fed.
Previous Fed easing cycles over the last 20+ years have corresponded with higher gold prices. If the second phase of the 2024 breakout is equal in strength to the preceding $450 move in 9-weeks from the technically significant March breakout above $2100, a run towards $2800 to $3000 is possible by September.
Looking further out, after reaching its first primary Fibonacci target at $2461, the next Fibonacci target in gold is at $3336 based upon the depth of the 2011 to 2015 pullback. There is key support at $2300, with short-term resistance at $2500.
As the Dow has reversed sharply to shed over 1000 points following Fed-speak late Wednesday, the gold price has moved above the key $2500 level after disappointing U.S. employment data released this morning. U.S. nonfarm payrolls rose by just 114,000 last month, missing consensus estimates of 176,000.
At the same time, unemployment, rose to 4.3% from 4.1% and hit the highest level since October 2021. The jobless rate has risen steadily from an extremely low 3.4% nearly 18 months ago.
Additionally, poor earnings from top tech stocks and growing evidence of a faltering U.S. economy are reducing the valuation gap between bonds and equities, indicated in this chart from MacLeod Finance. The S&P 500 declined 1.4% on Thursday as yields on 10-year Treasurys fell below 4%, their lowest level since February.
Exponentially rising U.S. debt interest payments, geopolitical uncertainties surrounding the conflicts in Europe and the Middle East, coupled with continuing hostility from China toward Taiwan and an increasingly ugly U.S. presidential election has gold being the safe-haven of choice.
Meanwhile, top producing major gold miners continue to report record profits, buoyed by all-time high gold prices. After sector bellwether Newmont Gold Corp (NEM) reported back-to-back blowout quarterly earnings last week, number two gold miner Agnico Eagle Mines (AEM) reported record net income and a third consecutive quarter of record free cash flow in Q2 on Wednesday.
Compared to the same period a year ago, Agnico’s net income was up 46% to $472M or $0.95 per share. Compared to the prior period, net income in the second quarter was up 36%. The average realized gold price per ounce for the company was $2062 in Q1, and gold averaged $2342 in Q2.
Top 10 gold miner Kinross Gold also reported this week that in Q2, net earnings increased by 40% to $210.9M for Q2 2024, or 17 cents per share, compared with reported net earnings of $151M, or 12 cents per share, for Q2 2023.
Kinross’ margin per gold equivalent ounce sold increased by 22% to $1313 for Q2 2024, compared with the Q2 2023 margin of $1076, outpacing the 19% increase in average realized gold price, noted the company.
Yet, as I have pointed out several times, gold stocks remain historically cheap relative to the gold price. The exposure to gold, including gold and silver mining stocks, is the lowest it's been in five years among financial advisers in the U.S. This lack of retail investment in gold stocks has delayed their expected mean reversion since the gold price broke out above 13-year major resistance at $2000 in March.
With the Magnificent Seven leading the tech sector down since peaking on July 10, big money traders and generalist fund managers can ill-afford to ignore a second consecutive quarter of major gold miners reporting record profits much longer.
These 7 bellwether equities have shed more than a combined $2 trillion over the past three weeks. As share prices soared, concerns grew over these companies' stretched valuations and comparisons to the dotcom bubble of more than two decades ago are becoming more frequent.
The Magnificent Seven have accounted for roughly a third of the S&P 500's 14% gain in 2024, as investors have begun to take massive profits off the table. The S&P 500 is trading near 22 times expected earnings, its highest in over two years, and well above its 10-year average of 18, according to LSEG data.
Once the cyclical bull market in gold mining stocks becomes more obvious to generalist investors, the desire to speculate in higher-risk/reward junior issues will also start to ramp up.
However, the recent price action suggests that the start of this speculative ramp-up by generalists may require the gold price moving above $2500, and silver maintaining a strong $30 floor.
With the gold price attempting to break out above the psychologically significant $2500 level, sentiment in the junior space is showing signs of turning more favorable. The financing window has opened wider recently, as several late-stage junior gold developers have announced favorable finance packages to fully fund de-risked mining projects.
Over the past few years, the Junior Miner Junky real-money portfolio has been accumulating shares in several late-stage developers with 3x-10x upside potential from severely depressed levels. Although some of these stocks have been outperforming the sector recently, there is still plenty of upside remaining as risk is now firmly to the upside in the quality issues.
If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
