Gold Stands Tall Despite Its Shortcomings

While the yellow metal remains uplifted, silver and mining stocks’ relative weakness highlights the ominous fundamental backdrop.

Gold has basked in the glory, as geopolitical conflict increases its appeal. However, silver and mining stocks have not been as fortunate, and the latter’s underperformance continues to support our short position. Moreover, with the domestic fundamental outlook continuing to deteriorate, mining stocks should remain under pressure, and gold should follow them lower over the medium term. 

For example, we’ve warned on numerous occasions that this cycle should end with a recession. And with lousy economic data poised to sink sentiment, several assets should suffer in the months ahead

S&P Global released its U.S. Manufacturing PMI on Nov. 1, and while the headline index “stabilized during October, thereby ending a five-month sequence of decline,” job losses occurred for the first time since July 2020.

Please see below:

Gold Stands Tall Despite Its Shortcomings - Image 1

Likewise, while we warned that inflation was old news, the report added:

“Efforts to remain competitive and drive sales reportedly constrained pricing power. Although output charges rose at the quickest pace in six months, the rate of increase was much slower than the peaks seen in the last two years.”

As further evidence, the ISM also released its Manufacturing PMI on Nov. 1. And with the results bearish for economically-sensitive metals like silver, an excerpt read:

“ISMs Employment Index registered 46.8 percent in October, 4.4 percentage points lower than the September reading of 51.2 percent…. Attrition, freezes and layoffs to reduce head counts increased during the period, with layoffs the primary tool, indicating a more urgent need to reduce staffing.”

Timothy R. Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, added:

“The past relationship between the Manufacturing PMI and the overall economy indicates that the October reading (46.7 percent) corresponds to a change of minus-0.7 percent in real gross domestic product (GDP) on an annualized basis.

So, while the crowd will celebrate the economic deceleration initially due to the prospect of a more dovish Fed, the medium-term ramifications are material. History shows that inflation rarely subsides without a recession, and soft-landing hopes always emerge as the economy slows down.

However, while the consensus believes growth will settle back to a normalized range, the reality is that too-hot economies (2021/2022) often turn too cold when long-term interest rates rise. And with another iteration poised to unfold in 2024, pivot optimism should turn to pessimism, which is bullish for the USD Index

Don’t Look Down

While we’ve been rightfully bearish on the Eurozone economy and the EUR/USD, the latter’s plight has been a boon for the USD Index. And with the U.S. continuing to outperform Europe, the Oct. 31 data further supports our thesis.

Please see below:

Gold Stands Tall Despite Its Shortcomings - Image 2

To explain, Eurozone GDP growth underperformed expectations and went negative on a quarter-over-quarter (QoQ) basis. As such, crude oil remains in the crosshairs, and a continuation of the trend is also bad news for silver. Moreover, while the crowd may think the U.S. is invincible, the weakness should eventually spread to America.

To that point, the U.S.’ neighbor to the north also has a sputtering economic backdrop.

Please see below:

Gold Stands Tall Despite Its Shortcomings - Image 3

To explain, Canadian GDP growth also underperformed expectations on Oct. 31, with flat activity present in the region. Similarly, S&P Global released its Canada Manufacturing PMI on Nov. 1. Paul Smith, Economics Director at S&P Global Market Intelligence, said

“It was another disappointing month for the Canadian manufacturing sector, with output and new orders continuing to fall amid reports of underwhelming market demand. Sales to both domestic and international customers were again lower, and firms remain engaged in a cycle of destocking, seeking to cut any excess inventory that built up during the pandemic.”

Thus, while the mood music on Wall Street may seem sanguine, the troublesome macro outlook should bite in the months ahead.

Gold Stands Tall Despite Its Shortcomings - Image 4

Overall, the S&P 500 rallied on Nov. 2, as bad news is good news right now (dovish pivot). But, when bad news becomes bad news, risk assets should suffer as volatility spikes and Treasury bonds and the U.S. dollar become the primary safe-havens. In contrast, silver and mining stocks should experience the largest drawdowns. 

For more timely results, subscribe to our premium Gold Trading Alert. We closed out our 11th- straight profitable trade recently, and our 12th is currently in the green. Moreover, the fundamentals require time and patience to produce profits, while the technicals are much greater timing tools. In other words, technical analysis allows us to profitably trade the market as we await the fundamental developments highlighted above.  

Alex Demolitor

Precious Metals Strategist