As mentioned in this column on December 6, gold remains caught in a medium-term corrective cycle, while long-term price charts and macro fundamentals still firmly favor the safe-haven metal going higher once an extended correction has run its course.
Gold volatility increased within a now 8-week symmetrical triangle over the past 7-days. Following a brief move above $2750 last week, Gold Futures quickly reversed $160 on the back of a surprising statement from the Federal Reserve late Wednesday.
As expected, the U.S. central bank lowered the Fed Funds rate to a range of 4.25% to 4.50%. But after the Fed suggested a slower path in its easing cycle through 2025 in Wednesday's monetary policy statement, February Gold began to move down towards support at $2600.
The selloff in gold increased after Fed Chairmen Jerome Powell began the post-FOMC meeting press conference by emphasizing that the Federal Open Market Committee’s vote in favor of a 25-basis-point rate cut was a close one, but he and other members believed it was the right decision.
Powell reinforced a “cautious” stance, emphasizing the need for further progress on inflation before making additional cuts. “I think from here it’s a new phase and we’re going to be cautious about further cuts," the Fed Chair said.
This hawkish tone triggered a sharp reaction across the board as historically high valuations faced renewed pressure from higher borrowing costs and cautious Fed commentary. Equity markets, unprepared for fewer rate cuts, experienced significant selloffs and the Dow Jones Industrial Average quickly erased all its post-Trump victory gains.
As the USDX rose sharply to a 2-year high, Treasury yields surged Wednesday as well, pushing the 10-year yield above 4.50% despite another Fed rate cut.
The Dow tumbled 1,176 points mid-week, extending its historic losing streak to 10 days. Wednesday’s 2.7% decline by the Dow completed the longest losing streak by the index since 1974 - a year that included the Watergate scandal and the lingering economic impact of the oil embargo.
Meanwhile, the S&P 500 rose to just 0.3% off its all-time high to begin the week as it extended its streak of negative breadth, more stocks falling than rising, to a 13th day by Wednesday. That has not happened since Dow Jones Market Data records began in 1999.
Post-Fed, the S&P 500 followed suit to join the Dow going lower by reversing sharply with the Nasdaq to fall 3.23% Wednesday. Even Bitcoin crashed after Powell stated the central bank had no desire to be involved in any government effort to stockpile cryptocurrency.
The Fed's major issue is they cannot control government fiscal spending during a sovereign debt crisis. The central bank was forced to lower rates by 1% and cave on inflation, while jawboning it will come down after previously stating it was transitory, only because government spending is exploding.
Meanwhile, China’s central bank (PBOC) restarted gold purchases in November after a six-month pause, and the world's second largest economy will likely continue to build up its bullion reserves ahead of President-Elect Donald Trump’s trade wars.
In October, China bought 55 tonnes in the London OTC market, which is striking since the official number reported by the PBOC was one-tenth that, or just 5 tonnes. And despite the increase, gold still only represents 6% of China’s total bullion reserves.
Trump's proposed high import tariffs will not prevent a further widening of an already troublingly large trade deficit. The Commerce Dept’s Bureau of Economic Analysis said on Wednesday that the current account deficit, which measures the flow of goods, services, and investments into and out of the country, increased $35.9 billion, or 13.1%, to an all-time high of $310.9 billion last quarter.
A ballooning budget deficit and a record public debt level during an untenable sovereign debt crisis, coupled with a widening trade deficit, is bound to be an invitation for the return of the bond vigilantes and for our biggest foreign creditors to begin offloading their large bond holdings. The fact that the U.S. is the world’s largest creditor nation makes it especially vulnerable to a dollar crisis.
That in turn could be highly unsettling for the financial markets and bring on an economic recession following the EU, UK, and Japan who are already in recession.
For a recent warning that markets could lose faith in the U.S. dollar and the government bond market on the fear of another inflation surge, one might look at the U.S. bond market’s recent performance. Over the past three months, the 10-year U.S. Treasury bond yield has spiked from around 3.6 % to 4.5%, while the Fed has lowered the Fed Funds rate by 1%.
As the marketplace heads into 2025 on a downward path, the bond market is signaling the Fed being caught between a rock and a very hard place. The world's most powerful central bank now realizes that raising rates will not reduce inflation, while it cannot control unlimited fiscal spending during an unsustainable sovereign debt crisis.
The central bank’s "modern problem" is that Keynesian Economics was born during the Great Depression, when the U.S. had a balanced budget. Today, they raise rates, and interest expenditures for the world's largest economy explodes to a trillion dollars, then the U.S. must pay interest on that trillion next year.
Moreover, much of the debt currently on the books was financed at very low rates before the Fed started its rate-hike cycle. Every month, some of that super-low-yielding paper matures and must be replaced by bonds yielding much higher rates.
On the heels of a conflicted Federal Reserve, a stopgap U.S. government funding deal fell apart Wednesday following opposition from President-elect Trump, increasing the likelihood of a government shutdown.
Closures starting after midnight Eastern time later this evening is looking increasingly likely after an embarrassing number of House GOP rebels bucked Donald Trump Thursday night. With the deal now on life support, Polymarket is putting the chances of a shutdown at 69% as of this morning.
While most investors thought that Trump 2.0 would bring a raging bull market, Fed officials have dampened expectations for rate cuts next year from 4 to 2 as they recognize that Trump's tariff policies may take the world into a depression.
Powell also articulated the uncertainty with Trump coming to power about the economic policies moving forward when he said, "It's kind of common sense that when the path is uncertain, you go a little bit slower." Powell added, "It's not unlike driving on a foggy night or walking into a dark room full of furniture." Powell and other Fed officials have stressed they are not going to react to Trump policies that are yet to be enacted.
With a U.S. recession on the horizon, the Fed expects borrowing costs to fall by only another half percentage point in 2025. Less than three months ago, they projected a full percentage point of further rate reductions next year. Huge deficits in the face of higher interest rates will drive more bankruptcies as consumer and business debt becomes less and less manageable.
U.S. large bankruptcies are now up to 634 year-to-date, the highest in 14 years and already at previous recession levels. In November alone, 69 large firms filed for bankruptcy, the second-highest monthly total since July 2020. And 44% of all bankruptcies have been recorded in the consumer discretionary, consumer staples, industrial or healthcare sectors.
Overall, expectations for gold in 2025 are positive but it will not be a straight-up move. Over the past 25 years, in years gold has gained 20% or more, the safe-haven metal has increased 12% on average in the following year, occurring five times with only one down year (2021).
Gold had rallied 54% since the February low into its late October peak at $2800 without correcting more than 3%, so it was overdue for some healthy profit-taking. The weekly chart shows a parabolic advance of over 70% from the 2022 low.
Parabolic advances end with sharp corrections, which can sometimes be severe. In the case of gold, a sideways digestion process is required to dampen the angle of ascent. A breakdown below $2600 would signal a test of gold’s 200-day moving average, now at $2485 and set to hit $2500 before year-end, and a technically reasonable correction in any bull market.
On the upside, initial resistance is at $2700, while a weekly close above $2750 would signal a beginning of the next up-leg. 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.
With President-elect Donald Trump set to take control of the U.S. economy on January 20, plans for tariffs, tax cuts, and immigration crackdowns has brought a cautious, wait-and-see approach from the Fed, and uncertainty into an historically overvalued stock market.
The stock market selloff into year-end could be warning us that the world is headed into a significant economic crisis in 2025. With the dollar climbing higher, this will cause emerging markets and Europe to default on sovereign debt denominated in U.S. dollars.
Simply stated, “The arithmetic of the U.S. fiscal deficit is inescapable,” 50-year veteran resource investor Rick Rule told an investor breakfast during The Northern Miner’s International Metals Symposium on Dec. 1. “At some point, the purchasing power of the dollar will reflect that reality, and gold will be the beneficiary,” Rule added.
As traders brace for volatility with a record $6.5 trillion in options due to expire in Friday’s “triple witching,” the best major index performer of the year has been the NASDAQ up 30%. Gold and silver have outperformed all the others, being up roughly 28% each.
Yet, silver continues to lag as do precious metals related equities, represented by the Gold Bugs Index (HUI) and the TSX Gold Index (TGD). Silver is currently down about 40% from its all-time high in mid-2011, while the gold price made 40 new all-time highs in 2024.
The HUI remains down over 50% from its all-time high at 638, and the TGD is still down around 25% from its all-time high at the same time in September, 2011, when gold peaked at $1925.
Meanwhile, the junior sector remains unloved and under-owned. The TSX Venture Exchange (CDNX), which is made up of roughly 50% junior mining companies, remains down an astounding 82% from its all-time high seen in 2007 when gold was being capped at $1000. The CDNX is even down nearly 50% from its 2021 high, despite both gold and silver's impressive 2024 performance.
The current sentiment and lack of retail participation in this tiny sector mirrors the late 1990s, when tech was all the rage and junior mining stocks were unloved and under-owned as well. By 2000, the rebound was underway and the next seven years saw the CDNX rise 433% from its humble beginnings in 1999.
However, the mining sector may need to find a way to attract some of the US$750 billion invested in crypto-currencies before we can expect a similar outcome. People earning money from crypto must put their new wealth somewhere, and the extreme undervaluation of quality juniors in relation to the gold price presents an opportunity for younger generations to invest in mining.
When reflecting on this week’s Fed induced marketplace damage as we head into the new year, seasoned investors are reminded of the old Wall Street axiom - "If Santa Claus should fail to call, bears may come to Broad and Wall."
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Wishing you and your family a safe, healthy, and prosperous holiday season, and a Golden New Year!
