LAWRIE WILLIAMS: Gold, equities, bitcoin – all open new month on the up.
Investors are having a positive start to the Christmas holiday season and to the other religious holidays that take place at this time. Some slightly comforting words from Fed chair Jerome Powell yesterday boosted U.S. markets across the board and the optimism that ensued around the world affected other bourses positively too. In short, Powell seemed to confirm that the Fed was likely to start slowing its spate of highly aggressive interest rate increases at the December FOMC meeting, now less than 2 weeks away. This had been widely anticipated, but this apparent confirmation from Powell, despite some decidedly more hawkish statements from some of his colleagues, was a welcome departure from some of the more recent downbeat commentary. However, as usual. Powell’s statement was a little ambivalent, but perhaps less so than usual. Fedspeak interpreters certainly took it as an indicator of a likely policy easing.
As a result, the Chicago Mercantile Exchange’s Fedwatch Tool which tries to predict market sentiment regarding the next Fed interest rate increase, which had fallen back to only 65:35 in favour of the 50 basis point increase widened dramatically to around 82:18 in favour of the 50 point rise at this month’s meeting. How much difference a day can make in perceived sentiment. Today’s release of the Bureau of Economic Analysis’s Personal Consumption Expenditure Index (PCE) inflation rate announcement did at least confirm that inflation may, at long last be peaking. It is probably doubtful if Powell would have made his recent statement if he had not been privy to some advance information on this so this should come as no surprise.
Even a 50 basis point increase in interest rates will leave year-end levels at around 4.5% - unpredictable at the beginning of the year when rates were around zero and the forecast of 4.5% would have sent equities into freefall. Now markets have become inured to higher rates and continuing high inflation levels and probably recognise that the Fed’s supposed target 2% inflation level is unachievable probably for a couple of years yet. Many commentators are anticipating a Fed climb-down in setting a 3 or 3.5% interim inflation level target as being more realistic. They are also assuming interest rates may well not peak below 5% or higher which would likely drive the U.S. economy into a deep recession with vulnerable companies unlikely to survive and unemployment to start to increase.
If this is indeed the future that awaits the U.S. economy, and that of much of the rest of the world too, then dollar strength continues to be suspect (the dollar index has been falling quite sharply today) and precious metals, gold and silver in particular, could come into their own as continuing safe haven investments.
Be that as it may. The combination of the Powell statement and the latest PCE data drove the gold price up above $1,800 for the first time since it hit that level very briefly in August and silver to over $22.60, its highest level since the beginning of May. Equities and bitcoin also traded higher, but both still well below their early-year levels and they remain overshadowed by recession fears, as they should be. They continue to be vulnerable to global economic downturn in the U.S. and globally as above average inflation levels do not look like being brought under control quickly, and certainly not as long as global energy and food prices remain adversely affected by the Russia/Ukraine war. They have started o decline again though once U.S. markets opened - perhaps they rose too far too fast initially!
We remain, therefore, relatively positive on the gold price moving forward, although not quite so as we were at the beginning of 2022, and we suspect silver will catch a bid too despite it being more of an industrial metal nowadays. Even so it still seems to have a propensity to move pari passu with the gold price. We are not so confident on the prospects for pgms as they are almost entirely dependent on economic growth for their demand – palladium more so than platinum perhaps, and if there is a global recession ahead, which we think likely, growth will contract. Likewise most equities and cryptos look vulnerable to us, with the probable exception of gold and silver stocks. The former in particular seem to have underperformed of late and the major gold producers in particular should all be making excellent profits at current gold prices. Its an ill wind.....