The yellow metal’s pivot dreams could become a reality. But should it be celebrating the economic weakness?
While inflation hysteria has rattled the Treasury market for some time, we warned that the pricing pressures are old news and recession risks are the next fundamental catalyst. As a result, while gold exudes pivot optimism and assumes that lower interest rates are the new bull case, the fundamentals continue to align with our medium-term expectations. We wrote on Oct. 6:
No one was more bullish on inflation than us throughout 2021, as we warned that higher commodity prices, rental prices and consumer spending would push the headline Consumer Price Index (CPI) higher. However, with the leading data moving in the opposite direction now, the anxiety uplifting U.S Treasury yields is misguided…. So, while the crowd remains fixated on inflation, they’re likely behind the curve once again.
To that point, with the CPI missing across the board on Nov. 14, the economic cycle remains on schedule.
Please see below:
To explain, the inflation deceleration witnessed this week was far from a surprise. And while silver celebrated the weakness, investors believe that decent growth and subdued inflation make for a soft landing. However, that outcome is unlikely to materialize, and major downside should confront risk assets as the economic backdrop worsens.
Please see below:
To explain, the black line above tracks the real U.S. federal funds rate (FFR). The metric subtracts the year-over-year (YoY) percentage change in the headline CPI from the FFR. And if you analyze the right side of the chart, you can see that it’s gone from deeply negative to north of 2%. Moreover, with the rise poised to continue as disinflation occurs, higher real interest rates should boost the USD Index and make their presence felt in the real economy.
Job Losses
While the crowd ignores the medium-term ramifications, continued unemployment claims rose for their eighth consecutive week on Nov. 16. Furthermore, we warned that higher long-term interest rates would suffocate consumer spending, and the employment weakness should intensify in 2024.
Please see below:
To explain, continued jobless claims have been on a straight line higher recently, and the metric tallies the number of Americans that file for unemployment benefits more than once. And while crude oil has crashed along the way, the PMs should feel the pain as bad news becomes bad news once again.
As further evidence, the recent rise in unemployed persons is reaching a threshold that aligns with historical recessions. Remember, the labor market is typically the last shoe to drop, and layoff headlines have been plentiful recently. As such, while soft landing optimism is always present prior to recessions, we believe a meaningful economic contraction is in the cards.
Please see below:
To explain, the black line above tracks the YoY percentage change in unemployed persons, while the vertical pink bars represent recessions. If you analyze the horizontal black line, you can see that U.S. recessions were triggered when the metric exceeded 10%. And with a reading of 7.7% on the right side of the chart, it shouldn’t be long until the >10% threshold is reached. Consequently, the PMs’ pivot optimism is likely living on borrowed time.
Overall, the fundamentals continue to follow our medium-term roadmap. We warned that inflation, a hawkish Fed, and higher interest rates were the bear case in 2021/2022. Now, those catalysts have passed, and a recession should cause the next Minsky Moment that crushes the S&P 500. Remember, a recession is far from priced in, and a shift in sentiment should lead to meaningful drawdowns for several risk assets.
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Alex Demolitor
Precious Metals Strategist