Fundamentals Frighten the Gold Bulls

Is hawkish data enough to capsize the gold price?

Gold was under heavy pressure on Dec. 22, as a sell-off across U.S. equities helped upend the yellow metal. Moreover, while the negativity should accelerate as the Fed’s inflation fight intensifies in 2023, we warned on Aug. 12 that the bear market had plenty of room to run. We wrote:

While the consensus and the media want you to believe that the bear market is over, their lack of fundamental objectivity highlights why narratives are so destructive. Remember, if normalizing inflation and reducing its balance sheet were so easy, the Fed would have done it already. 

Think about it: the Fed was so cautious about tapering its asset purchases that officials waited until inflation was so unanchored that it couldn’t be ignored. But now, the Fed will hike interest rates to 3.4%, sell $95 billion in bonds per month and increase the U.S. unemployment rate to 3.7% (the Fed’s 2022 SEP projections) while the S&P 500 hits new highs? All the while, reducing the YoY headline CPI to 2%, even though it’s never been done since 1954 without the FFR coming within ~50 basis points of the cycle peak. Good luck.

So, with more hawkish data hitting the wire on Dec. 22, the S&P 500 remains on its back foot, and the fundamentals continue to unfold as expected.

Please see below:


To explain, U.S. third-quarter real GDP was revised upward again on Dec. 22, with the metric improving from 2.9% to 3.2%. The official press release stated:

“The ‘third’ estimate of GDP released today is based on more complete source data than were available for the ‘second’ estimate issued last month.  In the second estimate, the increase in real GDP was 2.9 percent…..

“Real GDP turned up in the third quarter, increasing 3.2 percent after decreasing 0.6 percent in the second quarter. The upturn primarily reflected accelerations in nonresidential fixed investment and consumer spending, a smaller decrease in private inventory investment, and upturns in state and local as well as federal government spending that were partly offset by a larger decrease in residential fixed investment. Imports turned down.”

Thus, while the crowd was fretting about a potential recession during the summer, the reality is that resilient inflation and a higher-than-expected U.S. federal funds rate (FFR) are the primary fundamental risks to asset prices. 

To that point, the release also showed that the GDP Price Index and the quarterly core Personal Consumption Expenditures (PCE) Index outperformed expectations (shown in the red box above). As such, while we’ve warned repeatedly that inflation should linger for much longer than the consensus realizes, its stubbornness should weigh heavily on the gold price in 2023

Furthermore, we’ve noted how the U.S. and Canada often have intertwined monetary policies; and with the latter’s Consumer Price Index (CPI) outperforming on Dec. 21, the hawkish ramifications are significantly underestimated. 

Please see below:


Likewise, while North American central banks were way off with their “transitory” claims in 2021, the crowd still has faith in their projections. Yet, with inflation not cooperating, interest rates should rise materially before it’s all said and done.

Please see below:

To explain, the white and blue lines above track the year-over-year (YoY) percentage changes in the Canadian median and trimmed CPIs. For context, both are adjusted metrics that use items near the 50th percentile of the CPI basket. 

If you analyze the right side of the chart, you can see that both are near 30+-year highs, and they re-accelerated in November, which highlights the challenging nature of inflation. In a nutshell: history shows that inflation tends to jump around after becoming unanchored, which contrasts the consensus belief in a smooth glide lower. 

Therefore, with the crowd highly uninformed about the economic weakness required to normalize inflation, more bouts of panic should confront the financial markets in the months ahead. 

In addition, the Kansas City (KC) Fed released its Tenth District Manufacturing Activity Survey on Dec. 22. The headline index declined from -6 in November to -9 in December, while “the monthly employment index fell from 3 to 0, its lowest level since 2020 but still indicative of flat employment for the month.”

More importantly, this month’s “special questions” revealed:

“In December, 43% of firms expected wages to rise faster compared to the past 12 months, while 23% of firms expected wages to rise at a similar rate and 35% of firms expected wages to rise more slowly.”

Please see below:

Source: KC Fed

To explain, the three blue bars furthest to the left show that 66% of KC manufacturing firms expect wages to increase significantly faster, faster, or in line with the current data, and the results are profoundly bullish for the FFR.

Moreover, notice how no respondents said that “wages are expected to decline?” This is highly inflationary. For context, we wrote on Dec. 21:

Wage inflation is the canary in the coal mine because Americans can afford price increases that much their salary increases; and if wages are running at 5%+, Americans can afford 5%+ output inflation. Consequently, the U.S. labor market imbalance does not support a 2% inflation rate anytime soon.

Continuing the theme, the KC Fed report also noted:

“About 27% of all firms facing higher costs (inputs and labor) were able to pass through 80 to 100% of increased costs, while a quarter of firms could only pass through 0 to 20%.”

Please see below:

Source: KC Fed

To explain, the blue bars in the middle show that roughly 65% of KC manufacturing firms are passing through 40% to 100%+ of their inflationary input costs. Thus, demand destruction has not materialized despite the FFR’s rapid rise in 2022, and the crowd is ignoring history at their own peril. 

Finally, the second piece of the liquidity puzzle surrounds quantitative tightening (QT); and with the Fed’s balance sheet hitting a new 2022 low on Dec. 21 (updated on Dec. 22), gold is severely mispriced given the fundamental backdrop that should arise in 2023.

Overall, the gold price suffered mightily on Dec. 22, though, despite the sharp sell-off, it’s still materially overvalued. Furthermore, the U.S. 10-Year real yield hit a new monthly high of 1.48%, which is a 40 basis point increase from its Dec. 2 close. As such, we expect considerable downside for the PMs in 2023.

Alex Demolitor
Precious Metals Strategist