All Eyes on Gold
On the eve of both a very consequential election and a critical Fed FOMC meeting next week, HAI will keep it brief this week.
The big economic news of this past week came in the form of labor market data. First up was the JOLTS job openings survey, a measure of labor demand, which firmly disappointed estimates. According to the JOLTS survey for September, U.S. job openings fell to the lowest level in more than three and a half years in September, while data for the prior month was revised significantly downward. Taken together, this suggests a notable deterioration in labor market conditions. JOLTS job openings as of the end of September dropped by a massive 418,000 to 7.443 million, marking the lowest level of job openings since January of 2021. These findings fell far short of Wall Street estimates, and were viewed as supporting evidence for another Federal Reserve rate cut at next week’s FOMC policy meeting.
Just a day later, however, according to the private payrolls survey by ADP and despite fears of temporary disruptions from hurricanes and worker strikes, U.S. private payrolls growth surged in October. According to ADP, private payrolls increased by a whopping 233,000 jobs last month after rising by an upwardly revised 159,000 in September. Economists polled by Reuters had forecast private employment increasing by a much more modest 114,000 positions after a previously reported gain of 143,000 in September. So JOLTS said the job market is surprisingly weak, but ADP said the job market is strong and re-accelerating. In short, more mixed and confounding data.
Then on Friday, adding even more mind-numbing complexity to any attempt at labor market analysis, the market was hit with a truly ugly October non-farm payrolls report. On Friday, the Bureau of Labor Statistics’ non-farm payroll Establishment Survey reported a paltry 12,000 payrolls added in October. The 12,000 print was a far cry from the expected 110,000 average analyst estimate, and was a massive plunge from the 254,000 reported the previous month. All told, according to the non-farm payrolls Establishment Survey (the mother of all employment reports), October was the weakest month for job growth since December of 2020. Making matters worse, the BLS also revised August and September nonfarm payroll estimates down by a substantial combined 112,000, indicating a much weaker labor market than previously reported.
Some market analysts are downplaying the significance of the weak non-farm payroll report due to distortions stemming from the impact of hurricanes and worker strikes. Fair enough. According to BofA, the negative impacts to the labor market from hurricanes and strikes likely accounted for 50,000 of the month-over-month drop-off in payroll growth. That number, however, was meaningfully offset by an estimated 25,000 one-time payroll bump attributed to election workers. So when net adjusting for distortions, payrolls may have been closer to 37,000 for the month, but that’s still flat-out weak and a mile short of estimates.
What should we make of a very weak JOLTS report, a very strong ADP private payrolls report, and the weakest non-farm payrolls report since the pandemic? If you’re scratching your head, you’re not alone.
Whether the weak non-farm payrolls report was just noise or a telling signal of accelerating deterioration in the labor market remains to be seen. That said, what is certain—in the wake of the non-farm payroll data specifically—is that Jay Powell and the Fed just received all the excuse they need to cut the fed funds rate again at next week’s FOMC meeting. In HAI’s view (given the fiscal crisis), the Fed will likely take any excuse it can get.
Critically, however, as we have seen in the aggressive surge higher in U.S. 10-year Treasury yields since the Fed cut the fed funds rate by 50 basis points in September, bonds don’t care. They appear to be rejecting Fed policy regardless of whether it stays higher for longer or cuts aggressively. In HAI’s view, investors are beginning to understand the dilemma: a Fed policy that’s too loose will drive a sell-off in bonds because of reinvigorated inflation concerns stemming from compromised monetary policy, but so will the continuation of a deficit-busting higher-for-longer interest rate policy.
HAI has highlighted this expected “damned if they do; damned if they don’t” Powell pickle dynamic repeatedly over the last year. With the Fed seemingly losing control over the long end of the Treasury curve while the MOVE bond market volatility index is spiking north of the 130 danger-zone level, it appears that the trap has finally sprung on Chair Powell and the Fed.
With an assist from Friday’s non-farm payrolls data, it now appears that whether the bond market likes it or not, Powell will cut rates again next week. He’ll do that in spite of consumer price inflation (as reflected in core CPI) that remains over 3% for a 41st consecutive month. In HAI’s view, Powell is tipping his pitch in an environment where any move (including no move) is the wrong move. His priority seems to be gravitating toward an unstated third mandate of “ease the government’s crushing financing challenge” with interest expense-easing rate cuts.
As market analyst Luke Gromen said this week on the Grant Williams “Shifts Happen” podcast, “the Fed no longer has a choice other than do I want to lose the long end of the bond market by tightening, or do I want to lose the long end of the bond market by loosening? And then how quickly will I [the Fed] step in and cap those yields after I lose the bond market by whichever way I lose it? And that, I think, is the key moment we appear to be arriving at.” HAI couldn’t agree more.
And this back-up in medium- and long-term bond yields isn’t just a U.S. phenomenon that, if contained within the U.S., could perhaps be otherwise explained by market focus on potential U.S. election outcomes. As ex-Bridgewater executive Bob Elliott pointed out this week, “The selloff in U.S. bonds has sparked a global dump of developed world sovereign debt… Since U.S. yields started rising after the Fed meeting in September, global bond yields are higher while the dollar and gold are surging, reflecting an increasingly global debt contagion… Taken together this is a pretty acute move both out of these countries’ bonds but also out of their currencies, suggesting a pretty full scale withdrawal of capital from global sovereign debt markets and currencies, particularly if thought about in gold terms.”
Bob Elliott’s point is one made many times previously by HAI. If gold is rising against U.S. and global bonds, U.S. and global currencies, and oil and commodities (as it is now), it is highly suggestive of widespread capital flight out of paper financial assets into gold.
In HAI’s view, what we are seeing is likely the start of a major shift back to gold as the preferred global reserve asset of choice—a shift former Goldman Sachs Head of Commodity Research Jeff Currie refers to as “dollar recycling” transitioning to “gold recycling.” Furthermore, the early stage of this transition likely marks just the beginning of the material rise in the price of gold. HAI says “just the beginning” because, with roughly $780 billion in annual trade surpluses from BRICS nations, over $12 trillion in global dollar FX reserves, and further trillions of private wealth held in sovereign debt holdings likely seeking an exit from medium- to long-term Western sovereign debt (wealth that will all be bidding for just $265B in annual global gold mine production), one can only imagine how relentless the global bid for gold could be under the new rules of the “gold recycling” era. Assuming that many more Western investors will soon begin to grasp what is happening, current gold prices, even after the recent rally, almost certainly have a very long way to go yet before reflecting anything close to a reasonable fair market value clearing price.
HAI is not perma-gold centric. The longer-term case for hard assets more broadly is very tight. But rising global bond yields carry significant economic growth risks. Until we see economies handle those higher yields or see those global bond yields fall across the curve, the risk for economically sensitive commodities remains elevated. For now, HAI continues to keep all eyes on gold.
Weekly performance: The S&P 500 was down 1.37%. Gold was off 0.20%, silver was down 3.25%. Platinum was off 3.26%, and palladium sank by 7.81%. The HUI gold miners index was hit with a loss of 4.13%. The IFRA iShares US Infrastructure ETF lost 0.55%. Energy commodities were volatile and hit hard on the week. WTI crude oil lost 3.19%. Natural gas was crushed by 13.87%. The CRB Commodity Index was off 1.84%. Copper was nearly flat, up 0.02%. The Dow Jones US Specialty Real Estate Investment Trust Index lost 2.62%. The Vanguard Utilities ETF was off 2.76%. The dollar index was nearly flat, up 0.07%, to close the week at 104.20. The yield on the 10-yr U.S. Treasury was up 15 bps to close at 4.40%.
Have a wonderful weekend!
Best Regards,
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
