Between a Rock and a Hard Place
This week HAI is traveling, with family, from the Western U.S. to see more family in the Eastern U.S. It’s been a very long day, so HAI will be extremely brief.
Last week HAI discussed the possible fundamental significance of the combination of Warsh’s contradictory hawkish tough talk (as compared to his unwillingness to actually hike rates) along with the U.S. Treasury Department’s aggressive intervention in currency markets to strengthen the Japanese yen and weaken the U.S. dollar.
HAI argued that that combination offered very compelling evidence that the recent temporarily gold-bearish Warsh doctrine (anti-debasement narrative) is now, again, beginning to run into an overriding, more dominant, and larger-scale gold-bullish trend fundamentally driven by an inescapable government need for full-fledged currency debasement.
This week, precious metals prices moved sharply higher. In doing so, they provided strong bullish confirmation that the metals complex might just be through the worst of its corrective phase and may now be ready to resume the primary bull-trend higher.
In short, gold is showing increasing signs that it may finally be waking up again. The speculative froth has been washed out thoroughly, but the growing structural bid (much discussed by HAI for years) hasn’t gone anywhere.
With Warsh now underachieving, Bessent intervening, the dollar weakening, and Chinese buying increasing; gold is in one of its most interesting (both fundamental and technical) bullish setups in months.
Gold is now breaking above the downtrend line that’s been in place since the January all-time highs. The metal is posting its strongest bullish weekly candle since January. It’s closed above the 50-day moving average for the first time since March, and the precious metals miners are unabashedly confirming the bullish turn with a resounding 21%+ move on the week.
Adding an additional fundamental tailwind to the metals, the Labor Department said on Friday that the U.S. economy unexpectedly shed 23,000 jobs in July—well below expectations for an +85,000 jobs increase. Now, while the unemployment rate fell to 4.1%, below expectations of 4.2%, that was entirely because another 264,000 people left the labor force entirely (not healthy), pushing the participation rate to a near 5-1/2-year low of 61.4% (again, not healthy). Furthermore, June’s jobs number was also revised down by 37,000 jobs.
Importantly, this means that if Kevin Warsh is quietly reluctant to hike rates in September (something he would very much be if the interest expense component of the booming Federal deficit was on his mind), then he now has the excuse he needs to credibly not hike in September. Accordingly, market based CME FedWatch odds for a September rate hike fell from 67% a week ago down to 44% today.
In HAI‘s view, if Warsh doesn’t hike rates in September, then the entire Warsh-driven hawkish countertrend narrative of a brand new inflation-fighting sheriff in town is effectively dead. Accordingly, as rate hike odds drop, that perceived headwind to metals dissipates, and gold, silver, and miners respond to the upside (as we saw this week).
Now, if the script flips, and suddenly Warsh does start an aggressive rate hike campaign, it would likely hit metals initially. However, HAI is fully convinced that the precious metals will eventually surge much higher on that news. That’s because, importantly, there is ultimately nothing more fundamentally bullish for precious metals than for the issuer of the global reserve currency and global reserve asset to get caught in a runaway debt spiral. That’s what Warsh and the U.S. face if they want to meaningfully jack rates to fight inflation.
In other words, Warsh and company are firmly caught between a rock and a hard place. In HAI‘s view, precious metals are going to break out again to the upside. It’s ultimately: heads, precious metals win; tails, precious metals win. The only question is timing. Will precious metals break out higher sooner or later? To be clear, as HAI sees it, the last two weeks argue for sooner.
Weekly performance: The S&P 500 was up 3.58%. Gold was up 7.36%, silver gained 10.31%, platinum gained 5.97%, and palladium was up 7.88%. The HUI gold miners index surged 21.91%. The IFRA iShares US Infrastructure ETF was up 0.92%. Energy commodities were volatile and down on the week. WTI crude oil lost 8.98%, while natural gas was off 2.76%. The CRB Commodity Index was down 1.11%. Copper was up 1.95%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 0.71%. The Vanguard Utilities ETF was down 1.23%. The dollar index was off 0.20% to close the week at 99.60. The yield on the 10-yr U.S. Treasury was down 9 bps on the week, closing at 4.65%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
