Precious Metals Under Pressure as Interest Rates Surge
The fundamentals and technicals have performed as expected, with the PMs coming under heavy pressure in recent weeks.
Initially, the crowd assumed that a higher U.S. federal funds rate (FFR) was a recipe for an immediate recession. However, we warned numerous times that long-term interest rates created demand destruction and were too low to upend American consumers.
Yet, long-term interest rates have risen dramatically, and it’s likely only a matter of time before an ominous economic event unfolds (which has been the case throughout history). So, while gold remains relatively uplifted, the GDXJ ETF and silver have been significant underperformers, and we believe more downsides should commence before potential relief rallies unfold.
Stubborn Fundamentals Keep a Lid on Gold
While the crowd assumed a new bull market was underway, we warned that higher interest rates and a stronger USD Index would remain a thorn in gold’s side. And while the yellow metal has demonstrated relative strength, other areas of the precious metals market haven’t been so lucky.
For example, silver and the GDXJ ETF have dramatically underperformed, and the latter’s weakness has boosted the profits from our short position.
Please see below:
To explain, the gold line above tracks the GDXJ ETF, the gray line tracks the silver futures price, and the red line tracks the iShares 20+ Year Treasury Bond (TLT) ETF. If you analyze their recent movement, you can see that lower TLT prices (higher long-term interest rates) have not been celebrated by the PMs.
And with the development unfinished, we believe more pain should confront the PMs before long positions are justified.
Please see below:
To explain, the black line above tracks the U.S. 10-Year real yield. And when nominal interest rates rise faster than inflation expectations, real interest rates increase, which is bearish for assets like silver and gold. Consequently, the surge on the right side of the chart is part of the reason why the GDXJ ETF ended the Aug. 14 session down substantially from its Dec. 31, 2020 close.
More importantly, while the U.S. 10-Year real yield hit a new cycle high of 1.83% on Aug. 3, more upside should occur over the medium term. The horizontal red line above marks the 2% level. And as you can see, the metric surpassed 2% numerous times from 2003 through 2008. Furthermore, those readings occurred when inflation was less problematic than it is now. As such, if (when) the U.S. 10-Year real yield hits 2%+, the PMs should come under immense pressure.
The USD Index is an important variable that has risen materially since bottoming in July. And while it’s still early, Europe’s economic underperformance should weigh on the EUR/USD and keep the USD Index uplifted in the back half of 2023. We wrote on Jul. 14:
While no one cares right now, investors’ appetite for European risk assets should come under immense pressure over time, and the USD Index should be a primary beneficiary.
Please see below:
To explain, the black line above tracks the monthly movement of the iShares MSCI Eurozone (EZU) ETF, while the red line above tracks the German ZEW Economic Sentiment Index. As you can see, when weak economic sentiment plagues Europe, its stock markets suffer mightily.
Yet, if you analyze the right side of the chart, you can see that the EZU ETF closed at a new 2023 high on Jul. 13, while the ZEW ESI has materially diverged. However, since 2009, the EZU ETF has not been able to prosper when the ZEW ESI crashes, and this time should be no different.
To that point, please turn your attention to the blue line at the bottom, as it tracks the USD Index. If you analyze the vertical gray lines, you can see that when the EZU ETF peaks and begins its descent, the USD Index bottoms and begins its ascent.
Thus, with the prediction proving prescient, the EZU ETF’s recent decline has coincided with a USD Index rally.
Please see below:
To explain, the black line above tracks the EZU ETF, while the blue line at the bottom tracks the USD Index. As you can see, the relationship has held, as expected, and we believe it will intensify as the Fed and the ECB continue to battle inflation and higher oil prices.
Overall, the fundamentals remain aligned with our expectations, as the USD index has rallied, and nominal and real interest rates have followed suit. Moreover, the weakness of gold, silver, and mining stocks has occurred alongside a relatively strong stock market. But, if the S&P 500 corrects, it should put downward pressure on the PMs and lead to even more profits for our short position.
Do you think the U.S. 10-Year real yield will hit 2%?
Silver Lost Its 200-Day MA
After bouncing off the key level in June, silver is now materially below its 200-day moving average. And with the metric a barometer of a healthy uptrend, the white metal’s price action aligns with its bearish fundamentals. Plus, gold has broken below its 50-day MA, and the technical damage should be concerning to the medium-term bulls.
Furthermore, with Fed officials hinting at more hawkish policy in the months ahead, higher-for-longer interest rates should continue to boost our GDXJ ETF short position. For example, Fed Governor Michelle Bowman said on Aug. 5:
“I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2% target…. We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled.”
Likewise, Richmond Fed President Thomas Barkin said on Aug. 3:
“Inflation remains too high,” and officials should be wary of declaring the “job done.”
Also, while Philadelphia Fed President Patrick Harker wants to “hold rates steady” on Aug. 8, he added:
“We will need to be there for a while. The pandemic taught us to never say never, but I do not foresee any likely circumstance for an immediate easing of the policy rate.”
So, with even cautious participants advocating to hold the FFR where it is, a lack of dovish policy should hurt silver in the back half of 2023. Remember, as inflation comes down and the FFR remains constant, it pushes up short-term real yields.
For context, real interest rates should be analyzed by subtracting breakeven inflation rates from their identical nominal yield. However, since the FFR is a current metric, we can compare it to the current headline Consumer Price Index (CPI).
Please see below:
To explain, the black line above subtracts the year-over-year (YoY) percentage change in the headline CPI from the FFR. If you analyze the right side of the chart, you can see that the metric has gone from deeply negative to materially positive.
Yet, like the U.S. 10-Year real yield still has an upside, in our opinion, the metric above hit 3.84% in 2006, which is well above the current reading of 1.82%. Therefore, while problematic inflation could usher the FFR higher, an ominous economic event or further disinflation could also help it reach the 2006 highs. Thus, we still expect more upside for short and long-term real interest rates, and that’s bullish for the USD Index and bearish for the PMs.
On top of that, the QT liquidity drain remains on schedule, and a continuation of the theme is also bearish for gold, silver, and mining stocks.
Please see below:
To explain, the black line above tracks the Fed’s balance sheet. If you analyze the right side of the chart, you can see that new cycle lows have become the norm, and this is unlikely to stop unless (until) the U.S. economy falls off a cliff. So, while we believe this cycle ends with a recession, when it finally hits, history shows financial market sell-offs are well underway before the Fed can stop the bleeding.
While the recent CPI print met expectations on Aug. 10, month-over-month (MoM) readings of 0.20% would be celebrated by the Fed if they continued. But, the CPI numbers did not reflect the recent surge in commodity prices.
Please see below:
To explain, the energy component of the headline CPI only increased by 0.10% MoM in July. However, crude oil prices have rallied hard since the end of June, as has the S&P GSCI (commodity index). As a result, these input pressures should put upward pressure on inflation in the future.
To that point, the Cleveland Fed expects the headline CPI to rise by 0.77% MoM in August, which reflects the recent commodity rally.
Please see below:
So, with base effects ending in June and higher commodity prices poised to filter into the CPI in the months ahead, it creates a bullish backdrop for inflation. And with higher interest rates and continued QT also part of the cocktail, volatility should rise dramatically relative to H1 2022. As such, several financial assets should suffer crises of confidence as the weather turns.
Overall, the outlooks for the PMs remain bearish because the outlooks for real yields and the USD Index remain bullish. Moreover, the higher long-term interest rates go, the greater the chance of an ominous economic event unfolding. Thus, with the GDXJ ETF closing below $35 and increasing the profits from our short position, the S&P 500 should be the next casualty. As such, we expect the junior miners to head lower and produce further gains on the short side in the weeks ahead.
Do you think the liquidity drain will create more problems for financial assets in the fall and winter months?
The Bottom Line
Hawkish realities have reigned recently, as the bond market has begun to price in the economic fundamentals. In other words, lower long-term interest rates are stimulative, and positioning for a recession often prevents it from occurring.
Conversely, with rates ratcheting higher, mortgage loans, auto loans, and other financing products have become more expensive. And as higher borrowing costs reduce Americans’ disposable incomes, a Minsky Moment should strike the financial markets when investors realize what it takes to eradicate inflation.
In conclusion, the PMs declined on Aug. 14, as higher interest rates and a stronger U.S. dollar undermined their performance. And with the gambit poised to continue, we anticipate further weakness before a short-term buying opportunity emerges.
What to Watch for This Week
With more U.S. economic data releases next week, the most important are as follows:
- Aug. 15: U.S. retail sales, New York Fed Empire Manufacturing Index
While it will take time for rising Treasury yields to disrupt the U.S. economy, consumption should suffer as higher interest rates eat away at Americans’ disposable income. Thus, monitoring retail sales will provide important clues.
In addition, the New York Fed’s regional survey will clarify how manufacturing firms in New York State feel about higher borrowing costs.
- Aug. 16: FOMC Minutes
While Fed officials have been united in their hawkish stance, the FOMC Minutes should showcase their rate-hike expectations in the months ahead.
- Aug. 17: Philadelphia Fed Manufacturing Index
Similar to the New York Fed’s survey, the Philadelphia Fed’s results will provide an early look at how the recent rate rise impacts Pennsylvania businesses.
All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see higher employment and inflation, the Fed should keep its foot on the hawkish accelerator. If that occurs, the outcome is profoundly bearish for the PMs.
The above ends today’s analysis, at least its part dedicated to markets. The following is – once again - info about the inaugural RISE session and the direction in which this is all going. If you have already read it, feel free to skip it – I simply want to make sure that everyone has a chance to read it because the effects were so profound. (I’m going to keep quoting this text until the end of this week).
In short, the first Regain Inner Strength Experience session was a tremendous success. Before the key part of the session, I asked the participants about their overall wellbeing on a scale from 1 to 10, and the average was 6.1. I asked the same question after the key part of the session (about 30 minutes later), and it jumped to 8.1.
As far as I know, nobody’s financial status or anything else in their lives changed during those 40 minutes, and yet, due to the internal process that they went through, people were able to substantially increase their wellbeing. People moved from where they were halfway to the max! In 40 minutes! If that’s not how a spectacular success looks like, I don’t know what it would be.
Before the session, I had my own expectations regarding the session; and I considered a move up by one point on that scale to be a success. We got twice as much.
And it actually gets even better!
I asked for more detailed feedback at the end of the session, and it turned out that there was only one person, whose wellbeing decreased from 10 to 8, but it came with an extra info: “the experience is still growing in me”, which is actually perfect. After some reflection, this person could move “beyond 10” thanks to insights that they will get. If we take the above into account, the real increase in wellbeing would be even greater! One final number – the record increase in wellbeing was from 4 to 9.
One of the questions in the survey was what people appreciated the most about the session, and here are some of the replies (I’m putting in bold the parts that I find key and that I particularly like):
- That it worked
- that it helps how to find more certainity and solution to my issues by myself
- I liked PR’s hands-on approach. No wasting time with anything. This tells me that I need more of these exercises, but rarely someone provides them, let alone for free. I imagine myself doing an exercise in the morning as well.
- Move forward. The experience is still growing in me
- Direct and insightful
- Your presentation is very honest and right from your heart.
- Practical meditation
You can watch the recording over here (in the description of the event), you can watch it also below (but please use the above link if, for whatever reason the embed video function doesn’t work), and you can sign up for the RISE #2 session over here (Aug. 22 – 11 AM EST / 5 PM CET).
Now, while I’m experienced in working 1-on-1 during the Mastering Multidimensional Wealth | 1:1 Coaching Experience, and Reiss Motivational Profile® sessions, facilitating an online session was something new for me, and I didn’t manage to do everything that I had planned even though I added extra 30 minutes to the hourly session.
Next time, I will plan it better, and I will introduce the key exercise in a separate video.
To make watching the recording easier and more pleasant for you, here’s the breakdown:
- 0:00 – 17:15 – welcoming participants and introducing myself
- 17:15 – 36:40 – theory behind the transformation exercise
- 36:40 – 59:21 – the transformation exercise along with the extra intro
- 59:21 – 1:20:35 – summarizing the exercise; survey
- 1:20:35 – 1:28:55 – final quick exercise regarding sharing positive wishes (plus a surprise in the second half of the exercise, which I don’t want to spoil; check it out) and the ending
Using the YT link might be most convenient as it then automatically takes you to the right part of the video (just click “more” on YT to expand the video’s description, and then you’ll see the breakdown of chapters).
If you’re short on time and you trust the process (there’s a lot of science behind it, and as you can see above, I talked about it for quite some time), you can skip the intros and move right to the transformation exercise.
One person in the feedback form wrote (in addition to writing that they found the session to be helpful) that they are wondering what is the ultimate goal of these sessions. In case you’re also wondering, here’s a (long, but probably worth reading) reply:
The increase in wellbeing that you saw in the session IS the ultimate goal of these sessions. This assists people in breaking out of the loss-stress cycle regardless of whose analyses their follow, because ultimately everyone will lose money at some point or will be holding on to a position that’s in the red for some time, before it becomes profitable. And that’s not pleasant. In the loss-stress cycle, the above causes stress (and all sorts of unpleasant emotions: fear, anxiety, shame, guilt, sadness, anger, frustration are the most common), which in turn makes it more difficult for one to remain objective about the situation, and they take worse investment decisions next time, perhaps making emotional decisions to increase their positions / leverage, or to drop those positions entirely. The irony here is that many tend to drop the positions right before the situation turns around and they become profitable, because it is at the price extremes that emotions are at their highest.
And as people make those less-objective decisions, the chances for more losses increase. Which increases stress, which decreases profits, which causes stress, and so on. Capital, health, and wellbeing in general all are negatively impacted.
What is the default way in which people can try to self-regulate? Some people will engage in sport activities, meditate, engage in their non-market hobbies etc., but some will want to vent their frustration publicly. While this is understandable, it’s also harmful for others, because some of those “other” might have been on the verge of panic, and they wouldn’t have panicked if left alone, but when they see someone else panicking or venting, they will probably be pushed to react in the same way, thus exacerbating the stress-loss cycle.
Now, I’m doing my best with my analytical part, but I can only do so much – I’m human after all, and neither I nor anyone else can be reasonably expected to pick all the tops and all the bottoms (I did pick the 2020 bottom, though). So, I’ve been thinking if there’s something else that I can do for you in the one-to-many arrangement, where I can assist multiple people at the same time. I’ve been thinking about it for a long time, and I finally realized that if I can make people break out of the stress-loss cycle (whether they are following my analyses or someone else’s analyses) then this will be the ultimate game-changer. The true success always comes within, anyway.
Also, I have a deep conviction that we’re living in times that are so difficult on many fronts, but in particular relating to mental health (and I don’t mean illnesses, but being on top of the mental game – happy, relaxed, and fulfilled) that the basics, or at least a large part of them should be available either for free or at a price that’s affordable for everyone. With 1-on-1 services it’s different, because it fully engages the provider and makes them unavailable to do anything else.
I’ve been collecting insights from various sources (believe me, what’s in RISE is the tip of the tip of the iceberg of what I learned and tested in the previous years) and in cooperation with the Stanford School of Medicine (and others), I came up with the idea to provide the Regain Inner Strength Experience sessions for free, and also to provide a course with key insights and exercises for next to nothing (probably $5 per month). This course, entitled “From Fear to Fortune” is currently in the making. This way, everyone will be able to enjoy their lives more, make more money on their trades, and make Golden Meadow a better, more supportive platform – everybody wins.
All this will also serve as an intro to many other courses (and then newsletters), some with basics of finance and investing, some aimed at more advanced areas in finance and wellbeing (you’d be surprised how much can be done with just breath – and yet very few people discuss that). We’ll greatly expand investment and financial scope of what’s available but also on the front where those “other” important things are – like communication, relationships, memory, preventing neurodegenerative diseases, increasing life quality in general, and many more.
As I said, I experienced quite a lot (I’m working in the markets, I’m a CEO, and I dedicate less than 1h total per week to workouts, and yet when doctors look at my bloodwork, they ask if I’m a professional athlete – how? Research and efficiency in what I’m doing – it’s all connected), and it’s really surprising to me how underutilized the synergy between finance, wellbeing, and self-development has been up to this point.
So, the long answer to the question is that this is leading to increased wellbeing of everyone, who participates, increased profitability (of course, no guarantees, but you know very well how one thing leads to the other) and building a platform that will allow for enormous scaling of this effect. To make the world a better place and become happier and wealthier while doing so. Also, while I’m at it, I’d like to mention two things:
- I re-introduced my 1-on-1 service because it was previously described in a manner that didn’t really emphasize what it is that I can do. The new and up-to-date name of the service is Mastering Multidimensional Wealth | 1:1 Coaching Experience . I have only 4 seats available because I assume that this will be an ongoing weekly experience for those, who enter into this engagement. That’s where the biggest benefits can be reaped. However, it might be best to start with 30 minutes at first to just get to know me in this sort of work (it’s priced at a fraction of the regular session’s value), and we’ll both see if we’re a good match. If so, I’ll likely have some ideas for you even during those 30 minutes, and you’ll see if my approach makes sense for you, and whether you want to go into a longer engagement – where a true transformation can (and likely would) happen. If you feel that this is something that could be helpful to you at this stage of your life, you can book your seat here.
- The above has only 4 seats available even though there are 5 workdays in a week (I plan to have one of those sessions per day), because the fifth session will be reserved for someone, who will have a priority due to the specific nature of the cooperation. Namely, I would like to enter into a partnership with someone (just one person) – a visionary investor who seeks to leave a profound mark on the world, and I plan to use all my insights to make sure that this person’s wellbeing will increase as much as possible thanks to our cooperation.
I can and will do all the above work related to Golden Meadow, anyway, but a partnership would speed things up substantially. I described what my plan and motivation are, and if you share my passion and are moved by the work that I’m undertaking, please consider this a call to action.
I’d like to welcome a strategic investment of $1M from a single individual who is not only driven by financial potential but also by the profound impact that can be achieved. It isn't just an investment in numbers, but an investment in a vision that encompasses collective well-being. By partnering with me, you'd not only be enriching your financial journey, but also contributing to the betterment of the world.
If you resonate with the deep resonance of this vision and want to explore the extraordinary potential that this investment partnership offers, please reach out today. Also, I’ll be in California in about a month, and I’ll be happy to meet to discuss the vision for the company with this person. This is your chance to ignite transformation not only within your wealth portfolio but on a global scale. Let’s start a conversation that has the power to shape not just your future, but the world's.
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Przemyslaw K. Radomski, CFA