Technically overbought Gold Futures began the week with more healthy profit taking from last Thursday’s record high above $2700. This is also a “Golden Week” holiday in China that will end on Monday.
As one of the world’s most important economies, this extended shutdown can significantly impact the international supply chain. Most dealers and stores are closed, while the lull in demand often sees a modest dip in the gold price during the Chinese holiday.
However, gold still managed to post the biggest quarterly gain in more than eight years on the back of geopolitics, a global debt spiral, and the U.S. Federal Reserve beginning its highly anticipated rate-cut cycle. Bullion rose 14% in Q3, its best since January 2016.
Gold was up nearly 6% in September, after reaching a record high of $2708.70 last week, fueled by the Fed's half-percentage-point cut, China's initiation of stimulus measures, and escalating conflict in the Middle East.
As we begin the historically volatile month of October, the marketplace is very concerned the Middle East is on the verge of all-out war between Iran and Israel that could envelope the U.S. and maybe even other major military powers heading into a chaotic U.S. election.
Following the escalation in the Middle East, the Bank of England released a study on Wednesday that stated a survey of its banks said a record number see geopolitics as a top risk, which could cause “sharp corrections” in the stock markets and other markets.
In the meantime, market participants and the Fed expect the Fed Funds rate to go a full two percentage points lower over the next 9 months, while ongoing wars in the Middle East and Ukraine/Russia are influencing funds to flee to the U.S. and being placed in the U.S. stock market.
This is happening with personal income and spending softening, along with the manufacturing indices faltering in recession territory. Although the September U.S. jobs report this morning showed nonfarm payrolls rising by a better-than-expected 254,000, manufacturing hires continued to show little change.
At current levels, the stock market has priced in little margin for risk at a time when risks seem even higher than usual. In fact, the S&P 500, which is the cornerstone of almost every 401(k), IRA and other retirement accounts, currently sells for a higher multiple of average earnings than at almost any time in history.
Although the U.S. stock market is extremely overvalued at these levels and most likely in a bubble has not crossed the collective minds of generalist investors. And if it has, they figure the Fed will come to the rescue as in the past with monstrous amounts of QE and ultra-low interest rates.
This assumption has market participants convinced the Fed will do whatever it takes to prevent a recession, as we saw in both 2008 and 2020. But with an untenable global sovereign debt crisis becoming more apparent, the soaring gold price may be signaling the Fed has run out of magic bullets.
Gold is telling us that the elephant in the room in the form of exponentially rising sovereign debt can no longer be ignored. On Tuesday. the U.S. national debt skyrocketed the very first day of the new fiscal year, jumping $204 billion in a single day to a new record of $35.669 trillion — reflecting ongoing fiscal challenges neither presidential candidate mentions, let alone has an answer for.
Moreover, the U.S. Treasury also had to draw down its cash balance by $72 billion, which is over $275 billion in the red. Continued borrowing at such high levels will lead to adverse effects on economic growth and investor confidence.
Rising gold prices to all-time highs in all major currencies is a sign that something is amiss, while the safe-haven metal responds to geopolitical tensions and the massive increase in money supply and debt payments forcing central banks to lower rates despite real inflation remaining sticky.
With rising interest payments increasingly consuming the beneficial effects of an increase in government spending, this is the most plausible rationale for Fed rate cuts as real inflation remains well above its mandated 2% target. Especially when considering that 70% of the national debt consists of accumulative interest expenditures.
U.S. inflation is up 70% from 2000 to 2024, while gold is up 679% to suggest that inflation is not the problem. Instead, it is monetary and debt growth that spawned a huge everything bubble. U.S. federal debt is up 644% since 2000, and it has taken $1.64 of new debt to purchase a $1 of GDP during this time.
The debt limit was suspended on June 3, 2023 under the laughably titled Fiscal Responsibility Act of 2023. This stopped the debt ceiling crisis at the time, but the suspension ends January 1, 2025, two days before the new congress is to be seated, five days before Congress tallies the results on January 6, 2025, and 19 days before inauguration day January 20, 2025.
Considering the above, it should be no surprise that gold has been rising in lockstep with the rise of U.S. debt and the so called debt limit by viewing this chart. It is interesting to note that gold topped in 2011 during the same period the U.S. was locked in a debt ceiling crisis and the S&P downgraded U.S. debt.
Total global assets are estimated at $1,630 trillion, with total global debt being over $315 trillion and sharply rising. All the gold in the world is roughly only $12.5 trillion, which makes gold less than 1% of global assets and a big reason why central banks continue to stockpile bullion at a record pace.
This suggests that the price of the safe-haven metal has a lot further to go, while both silver and the mining sector remain below the radar of generalist investors.
After providing 2x leverage to the gold price by rising 60% since a late-February major bottom, both GDX and GDXJ have been consolidating recent outsized gains around key multi-year resistance levels at $40 and $49, respectively, for the past three weeks.
Although the mining sector has been quietly outperforming the S&P 500 since bottoming in Q1, many quality junior issues have yet to catch the attention of investors and continue to present low-risk entry points.
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