Categories: Precious Metals
Topics: Gold Stocks

This Will Make the Fed Pivot and Send Gold Higher

Publisher’s Note: Please enjoy this excerpt from my monthly premium research newsletter called Foundational Profits. It takes a look at the current macro picture and why it will ultimately culminate in a changing of policy to accommodate as layoffs increase, with the Fed abandoning its inflation target to save jobs. That ultimate reversal will be doubly-good for precious metals, commodities, and emerging markets because of lower rates and a resultant weakening of the dollar. Get the full issue, including how we’re currently positioned, here.

Enjoy,
—Nick

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It’s worth reiterating that we are still in a broad bear market and economic contraction that is likely to last another quarter or two. 

The surest sign is a still inverted yield curve, with the short end remaining stubbornly high. The US10 Year - US02 Year is -0.62 as of this writing. 

And the US10 Year - US03 Month is even worse — and more indicative of recession — at -1.66. That is a cycle low, more inverted than it was ahead of the dot-com or real estate crashes.

Remember, high yields on the short end portend higher Fed rates ahead. And lower rates on the longer end foretell economic sluggishness. 

Indeed, while hope sprang forth for US Q1 GDP estimates from the Atlanta Fed, that forecast has quickly diminished from 3.5% a few weeks ago to 2.2% as of April 10 on a seasonally adjusted annualized basis. Blue Chip consensus is between 0.4% and 2.4%, and I’d look for it to come in closer to the low end of that range.

It’s a similar story with corporate earnings. There’s a long way to go in earnings season, but if early signs are any indication, it’s going to be another quarter of contraction. With 22 of the S&P’s 500 companies reporting Q1 numbers before this issue went to press, earnings growth was -20%. Even worse for the NASDAQ 100, with -72% earnings growth after six companies reporting.  

Perhaps summer will bring a more bovine bounty. 

Looking at a wider array of economic data confirms what this letter has been saying for months: that despite ongoing rallies in the stock market we remain in a bear market and need to get through the coming recession before that changes. On April 5, Reuters, in a note that included in its title “recession fears take center stage,” stated that: 

The ADP National Employment report showed U.S. private employers hired far fewer workers than expected in March. That followed Tuesday's weak job openings data.

As well, the Institute for Supply Management's (ISM) survey showed the services sector slowed more than expected last month on cooling demand, while a measure of prices paid by services businesses fell to a near three-year low.

Earlier this week data showed falling factory orders and soft manufacturing activity.

That ISM manufacturing purchasing manager’s index (PMI) data was particularly bearish on several fronts. A reading below 50 indicates contraction. The headline number was 46.3 for March, down from 47.7 in February. Employment was down to 46.9 from 49.1. And New Orders fell to 44.3 from 47. It was the first time since 2009 that all subcomponents of the manufacturing PMI fell below the 50 threshold.

Service sector PMI was slightly better, but the direction is still down — falling to 51.2 last month from 55.1 in February, and leading Reuters to say:

The [services] PMI remains above the 49.9 level which the ISM says over time indicates growth in the overall economy. Nevertheless, the softer-than-expected reading, coming on the heels of continued weakness in manufacturing activity last month, increases the risk of a recession this year.

The services sector is being supported by consumers switching spending from goods, which are typically bought on credit. The survey's gauge of new orders received by services businesses dropped to 52.2 last month from 62.6 in February.

The switch is likely because that credit is close to maxed out. 

Credit card balances are now at record highs of $986 billion according to the Federal Reserve Bank of New York, with consumers adding $61 billion in Q4 of 2022. And those balances come with an average annual percentage rate of 20.4%, the highest since Bankrate began tracking them in the mid-1980s. 

The direction of the data is not indicative of economic growth. 

That fact will ultimately culminate in a changing of policy to accommodate once the layoffs increase, with the Fed abandoning its inflation target to save jobs. 

The ultimate reversal will be doubly-good for precious metals, commodities, and emerging markets because of lower rates and a resultant weakening of the dollar. 

See how we’re positioning in the full issue here.

Nick Hodge
Publisher, Resource Stock Digest