Going into what was arguably the most highly anticipated week of the year, and possibly the most pivotal moment in U.S. monetary policy history, the Federal Reserve began an expected easing cycle with a 50-basis point rate cut on Wednesday.
The Fed also projected lowering interest rates by another half point before the end of 2024, and the world’s most powerful central bank has two more policy meetings to do so.
The Fed’s “dot plot” indicated that 19 FOMC members, both voters and non-voters, see the benchmark fed funds rate at 4.4% by the end of this year, equivalent to a target range of 4.25% to 4.5%. The central bank’s two remaining meetings for the year will be held just after the Nov. 5 U.S. election, scheduled for Nov. 6-7 and Dec.17-18.
The marketplace cheered, as both equities and gold traded at all-time highs after the U.S. central bank officially caved on inflation that remains well above its mandated 2% target.
Even though inflation “remains somewhat elevated,” the Fed statement said policymakers chose to cut the overnight rate to the 4.75% to 5% range “in light of the progress on inflation and the balance of risks”.
The significance of this cannot be understated, especially when considering it was only a ten days ago that traders were pricing in an 18% chance of a half-point cut. With inflation still well above the Fed's mandated 2% target, the larger rate cut confirms that the central bank believes the economy is in trouble.
The yield curve shows that the Fed had no choice but to cut rates aggressively. Recession fears were amplified by the fact that the inversion between the U.S. 2 and 10-year Treasury yields recently turned positive for the first time in two years going into the FOMC blackout period the week of September 9.
When a dis-inversion begins, this is the key macro signal that has historically indicated weak growth ahead. This chart shows it's the dis-inversion the Fed is watching closely to signal the beginning of recession, not the initial inversion from Q1 2022 when the central bank began raising interest rates from zero. Historically, un-inversion has signaled the beginning of a recession.
As the Fed held rates steady at a 20-year interest rate peak of 5.25% - 5.50% since October, the last four quarters have experienced a move in gold like no other in history. The safe-haven metal has rallied from near the $1800 level to rise 45% and post 35 all-time daily closing highs, so far this year.
Historically, the precious metal has never scored multiple all-time-record highs in such a short period of time. With just six more Comex trading sessions left in Q3, Gold Futures stand a good chance of closing above $2600 on a quarterly basis.
With the Comex being closed for the day, Spot Gold whipsawed throughout Powell’s 50-minute press conference Wednesday, setting both a session and all-time high of $2600 per ounce before a "sell the news" reaction took the price back down to $2557, while the USDX flirted with closing below the critical multi-year support line at 100.
By Wednesday evening overseas, gold weakness was immediately bought as Israel bombed southern Lebanon a day after a second wave of exploding devices. The country's security services also said Thursday that they had arrested an Israeli citizen last month on suspicion of involvement in an Iranian-backed assassination plot.
Hezbollah, which has a massive battery of missiles, has vowed retaliation against Israel. Safe-haven buying whipsawed Gold Futures Comex traders to move bullion back above $2600 by Thursday morning.
With the precious metals sector rising concurrently with equities, it is somewhat surprising that the markets have chosen to focus on dovish global monetary policy and not reacted with keener risk aversion to increased geopolitical tensions in the Middle East, Eastern Europe, and the South China Sea. Not to mention a 5th of November U.S. election becoming more chaotic by the day.
Now that the Fed has officially reversed its monetary policy, while the U.S. government shows no signs of backing off from trillion-dollar deficits, the added prospect of war escalating in all three of these regions at once is keeping gold well bid.
Simply stated, gold is in a roaring bull market after an historic 13-year cup & handle breakout in March, so it is likely to move higher. The velocity of that move will depend on the degrees of escalation in war, Fed rate cuts, and U.S. election chaos going into Q4.
The Gold Futures cup & handle technical breakout target is $3000, and after reaching its first primary Fibonacci target at $2461, the next Fibonacci target is at $3336 based upon the depth of the 2011 to 2015 pullback. On the downside, gold under $2500 would be troublesome, while gold moving below $2300 could suggest the rally is over.
The bullish macroeconomic fundamentals and intermediate-term technical’s conspire that gold may be preparing for a plateau move towards $3000-$3300 before an extended correction takes place.
Meanwhile, gold stock ETFs have been bullishly flagging recent outsized gains this week at stiff, multi-year resistance levels. The GDX is consolidating around 4-year resistance at $40, while GDXJ is doing the same near 3-year resistance at $49.
A weekly Comex close this afternoon in Gold Futures above $2650 would set up a breakout above both critical resistance levels, targeting $50 in GDX, and $60 in GDXJ before year-end.
The $HUI:$SPX ratio has been breaking out of a 1-year inverse head & shoulders bombed-out bottom since mid-June as gold stocks continue to quietly outperform the S&P 500 with low volume.
Since the spike Covid related low in March 2020, both GDX and GDXJ average volume has nearly been cut in half as generalists chase over-priced equities trading at bubble valuations. And over the past two months in the Canadian TSX Venture exchange, which contains 50% junior gold stocks, trading volume is at its lowest ever.
The bad news for junior speculators is there is still not enough volume in the miner ETFs to indicate retail investors coming into the sector as they continue to buy weakness in general equities and crypto. The good news is silver and the miners have been leading the gold price above $2500, while best-in-class juniors continue to outperform.
Moreover, gold miners set to report their third consecutive blow-out quarter during earnings season in November would go a long way to lure generalist funds back into the mining sector since most exited over a decade ago.
In anticipation of another stellar earnings season, we need to see rising volume when the GDX breaks out above stiff 4-year stiff resistance at $40, along with the gold/silver ratio trending below 75. When both silver and the miners outperform gold consistently, investors looking for more leverage to the gold price will move down to the higher-risk junior sector.
Over the past few years, the Junior Miner Junky real-money portfolio has been accumulating shares in several late-stage developer take-over candidates with 3x-10x upside potential from severely depressed levels. Although several 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.
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