Gold Is Entering Nirvana – Part II

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Last week, I spoke with Jordan Roy-Byrne of The Daily Gold and laid out my thoughts on what it will take for gold to enter nirvana. Today, the FOMC held the Fed Funds Rate steady at 5.50% and published an updated set of dot plots that still shows a consensus for 3 rate cuts in 2024:

During his press conference, Chairman Powell maintained a fairly dovish tone that was consistent with his testimony to Congress earlier this month. Powell also noted that it would be appropriate to slow the pace of asset runoff from the Fed’s balance sheet fairly soon.

To translate all of this, it means that a rate cut in June is likely (odds are back above 70%), and the commencement of tapering QT (quantitative tightening) is likely to begin in the next couple months (May/June).

Tapering of QT is something that I predicted back in January at the Metals Investor Forum in Vancouver.

Overall, a dovish tone from the Fed.

Reviewing some of my gold bull thesis that will result in nirvana, we can see that a full admission that the Fed is trapped is the key driver for the next leg higher above $2,200:

  • Deficits matter and the US is running a gargantuan deficit in 2024.
  • Gold market is skating to where the puck is going.
  • Election year pandering is sure to lead to an even larger deficit. Biden proposes a $7.3 trillion budget ($6.1 trillion budget in 2023 while $4.5 trillion were collected in taxes), meanwhile, Trump wants to cut taxes.
  • US debt rises by $1 trillion every 100 days.
  • Interest payments on national debt are now over $1 trillion per year.
  • China stimulus required in order to stoke reflation. Chinese consumers and PBoC continue to be big buyers of gold.
  • Powell is emphasizing that rate cuts are coming, and had a dovish tone to his testimony in front of Congress. Biden confirmed in his recent comments that he expects interest rates to fall.
  • There is no easily attributable driver for the gold rally from ~$2050 to $2200 – the strongest rallies are usually the ones that begin under-the-radar.
  • Powell was dovish in his testimony, even though it’s evident that inflation is sticky near 3% – gold is sniffing out that the Fed is trapped.
  • Employment is weakening even if the headlines don’t indicate it – downward revisions continue.

Gold has responded to the Fed’s dovish tone by decisively breaking-out from a falling wedge pattern that it had formed since the $2,203 all-time high on March 8th:

Gold (4-Hour)

Silver also finds itself on the cusp of a major breakout on the weekly/monthly time frames. $26.00 has been a tough nut to crack for silver. However, at this point I feel like it is not a matter of if, but when.

Silver (Monthly)

In yesterday’s original version of this post, I concluded by saying:

“I believe today was a tacit admission by the Fed that they are comfortable easing monetary policy even with CPI inflation not back to target.

Gold is entering nirvana.”

Today, a tweet by portfolio manager Craig Shapiro helped to fully elucidate the situation in which we find ourselves:

“…if interest rates are not going to be allowed to move higher to bring inflation back down to 2%, the US$ is going to be the outlet, weakening considerably against hard assets (gold, oil, commodities, BTC, etc) until the point when the Fed starts to feel uncomfortable that this re-acceleration of inflation is getting out of control again.

Clearly, after yesterday, we are not close to that point so I would expect these assets to rip higher in coming weeks/months forcing the Fed into that uncomfortable situation later this year.” 

From a market standpoint, it is clear there was some front-running of yesterday’s Fed dovishness. For example, oil stocks have been on an absolute rip higher in recent weeks. Even S&P 500 components like Caterpillar (NYSE:CAT) appear to be turning parabolic:

CAT (Daily)

At some point, all the asset price appreciation will trickle down into a rebound in consumer price inflation. However, for now it appears that the supply side is responding well, and everything is coming up Goldilocks in Mr. Powell’s final year as Federal Reserve Chairman…


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