Blog posts tagged with 'inflation'

Gold is consolidative just below the midpoint of the May-June range as the market assesses the implications of last week’s Fed rate hike and better-than-expected economic data. The yellow metal ends July with a gain of 2.4%, breaking a 2-month losing streak.

Last week the Fed hiked rates by 25 bps, and it was widely accepted it would be the last one for some time. However, on Thursday Q2 advance GDP came in at 2.4%, above expectations of 1.9%. In addition, durable goods orders surged 4.7% in June, well above market expectations of 1.8%.

These robust data are evidence that the U.S. economy continues to hum along at a respectable pace, despite the marked rise in interest rates over the past 16 months. More hawkish members of the Fed could now conceivably argue there is room for another rate hike. Fed funds futures are currently showing a 20% probability for a 25-bps hike in September.

While the Fed’s favored measure of inflation cooled to 4.1% in June, versus 4.6% in May, there are lingering worries in the market that a second wave of inflation could be in the offing. The national average for a gallon of regular gas jumped 13¢ last week reaching an 8-month high.

I’m often asked why gold didn’t fare better during this inflationary period. The answer lies in the Fed’s aggressive response in raising the Fed funds rate by 525 bps in just over a 1-year period. During that time, gold only corrected 22%, from $2070.63 (just shy of the all-time high) to $1614.92.

Most of those corrective losses have already been retraced, so I would argue that gold held up remarkably well in the face of the most aggressive tightening campaigns in recent history.

The long-term trend remains bullish with the market trading less than $110 off the all-time high. Setbacks into the range are likely to be viewed as buying opportunities.

Silver

Silver closed down more than 1% last week, weighed by persistent concerns that the health of the Chinese economy, and an uptick in the probability of another Fed rate hike in September.

A firmer tone emerged over the past two sessions on the heels of strong U.S. and Japanese data. While the Chinese economy continues to show signs of weakness, the government announced supports for light industry on Friday and then measures to boost consumer spending on Monday.

Such stimulus offers support for both precious and industrial metals. If the Chinese economy continues to struggle, additional (and larger) stimulus would be likely, providing underpinning for the metals.

I like that the 20-day SMA successfully contained the downside last week. Renewed tests above $25 would bode well for a retest of the high from July 20 at $25.27. Penetration of the latter would clear the way for a challenge of the highs for the year at $26.09/14.

PGMs

Platinum fell 2.8% last week, notching a second consecutive lower weekly close. A fresh 2-week low was set on Monday before the market snapped back to close nearly 2% higher on the day.

The outside day with a higher close bodes well for upside follow-through on Tuesday. Strong economic data from the U.S. and Japan, along with Chinese stimulus are supportive factors.

The longer-term supply and demand dynamics remain broadly supportive. Dips into the range are likely to be viewed as buying opportunities.

Palladium has been corrective to consolidative over the past several weeks. While a short-term bottom may be in place at $1185.18, the trend remains bearish.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.

Gold’s focus this week is squarely on the FOMC meeting. The two-day meeting begins on Tuesday with the policy announcement and Chairman Powell’s press conference set for Wednesday.

 In the eyes of the market, a 25-bps rate hike is a foregone conclusion. Fed funds futures reflect a probability of 98.3%. That is largely the result of the ongoing tempering of U.S. inflation data.

June CPI data showed a full-point drop in annualized consumer inflation to 3.0% from 4.0% in May. June PPI fell to 0.1% y/y, versus a downward revised 0.9% y/y in May.

The market is widely anticipating that Fed will pause after this week’s hike. The target rate is then most likely to remain at 5.25% – 5.5% into Q1-2024. However, the policy statement will undoubtedly state that the rate path will be data-dependent.

What comes next though? Arguably growth risks remain in light of the rather dramatic series of rate hikes over the past 16 months. On the other hand, Vincent Deluard of StoneX believes we “should brace for second and third inflationary waves, as was the case in the 50s and 70s.”

The yellow metal set a 9-week high last week shy of the $2000 level, buoyed by a weaker dollar. The dollar index tumbled to a 15-month low on the belief that the Fed is on the verge of pausing, while other major central banks will continue their tightening campaigns.

While gold and the dollar have adopted corrective tones in more recent sessions, I see this as primarily associated with position squaring ahead of the Fed decision. If the policy statement is in line with expectations ­– without an over-the-top emphasis on data dependency – the dominant trends should resume.

Silver

Silver closed down 1.3% last week. It was the first lower weekly close in four.

A key reversal did form on Thursday last week, so it was not surprising to see downside follow-through late last week and into Monday. Here too, we suspect some profit-taking ahead of the FOMC meeting.

Heightened growth risks may be putting some pressure on the more industrial metals as well. Preliminary US manufacturing PMI for July came in better than expected at 49, but the indicator appears on track for a third consecutive month of contraction.

Meanwhile, services PMI slumped to 52.4, well below expectations of 54. It was the sixth straight month of expansion, but the slowest pace since March.

According to the report: “The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That’s down from a 2% pace signaled by the survey in the second quarter.”

While economic growth slowed in July, there are plenty clinging to the notion of a soft landing. Let’s just say that my confidence in the Fed’s ability to orchestrate such an outcome is not particularly high.

I’m also somewhat concerned about the ongoing lack of investor interest, despite the (near-perfect) 78.6% retracement of the May-June decline. ETF outflows last week totaled 6.4Moz, leaving net holdings down more than 2% YTD.

The longer-term supply/demand fundamentals remain broadly favorable, and setbacks are likely to be viewed as buying opportunities.

PGMs

Platinum fell 1.1% last week but not before establishing a 5-week high at $998.43. The inability of the market to regain $1000 leaves the upside limited while the market awaits the Fed’s decision.

Consolidative range trading persists. A rebound above $1000 would set a more favorable tone within the $564.70/$1339.35 range.

Palladium remains defensive near 4½-year lows.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.

Gold slid more than 1% last week, logging a second consecutive lower weekly close. The yellow metal is being weighed by heightened expectations for another Fed rate hike in May, while geopolitical and growth risks are limiting the downside thus far.

Focus is already on next week’s FOMC meeting, where another 25-bps rate hike is widely expected. The CME’s FedWatch tool places the probability at 92%. The odds for an additional 25-bps hike in June continue to edge higher and now stand at 24.1%.

The Fed seems to think they have more to do on the inflation front, even as the market’s expectations for inflation continue to moderate. The index of common inflation expectations fell to 2.22% in Q1, the lowest level since Q2-21.

Meanwhile, incoming data continue to suggest the economy is slowing. The minutes from the March FOMC meeting revealed that even the central bank’s staff believe a mild recession will begin “later this year, with a recovery over the subsequent two years.”

In addition, job growth slowed in March and is forecast to come in weaker yet in April. Median expectations for nonfarm payrolls are +175k, down from +236kn in March.

A recession would certainly knock inflation lower, as would slower jobs and wage growth. However, the market seems to believe the Fed won’t wait for any of that to happen and will instead remain aggressive in battling price risks. That strategy does not bode well for a soft landing.

With gold trading less than 4% off its all-time high of $2075.28, the yellow metal is arguably well positioned to push to record highs if the Fed (and other central banks) are put in the position of having to reverse course and start easing policy. My first significant technical objective would be $2194.58 based on a Fibonacci projection.

Last week I suggested short-term downside potential was to $1959. So far, the market has traded as low as $1969.30. There is scope for further tests of the downside until the next policy announcement on May 3^rd, particularly if prospects for a June rate hike continue to increase.

Silver

Silver ended last week with a 1.1% loss, but a firmer tone prevailed on Monday. Thus far, the white metal is holding its 20-day moving average.

While the trend remains favorable, rising economic growth risks warrant a measure of caution. Silver ETFs saw significant outflows last week, suggesting that investors may lack confidence in the fundamentals needed to push silver back to the critical $30 zone.

A recession later in the year could result in a significant retracement of the March-April rally, but I also suspect the Fed will be quick to start cutting rates in reaction. That would help limit downside potential as will the more favorable economic prospects for China as the world’s second-largest economy continues to recover from COVID lockdowns.

Last week, the Silver Institute highlighted that “all major demand categories achieved record highs in 2022.” Total silver demand jumped 18% y/y to a record 1.242 billion ounces.

Amid this strong demand environment and a marginal contraction in mine output, the supply deficit reached 237.7 Moz in 2022. The Silver Institute called it "possibly the most significant deficit on record."

The Silver Institute is projecting that the silver market will remain out of balance in 2023, to the tune of 142.1 Moz. If confirmed, it would be the third consecutive annual supply deficit, which should help underpin the market.

Renewed probes about $26 would return focus to the $26.95 high from March 8, 2022. The latter is seen as the trigger that would put the key COVID-era highs at $29.86/$30.14 in play.

On the downside, a violation of the 20-day SMA at $24.83 would shift attention to congestive support around $23.70, which corresponds with the 38.2% retracement level of the rally from $19.90. Short-term losses are still seen as corrective in nature.

PGMs

Platinum surged nearly 8% last week, establishing a 13-month high at $1143.25. It was the sixth consecutive higher weekly close.

However, platinum had become quite overextended, the most since December 2020. Corrective pressures emerged on Monday, resulting in a loss of 3.6%.

At this point, I’m viewing this week’s setback as corrective.  While mounting growth risks do have the potential to take the wind out of platinum’s sails, supply and demand fundamentals are likely to limit the downside.

Persistent power issues in South Africa should keep supply tight. The deficit is expected to reach 556 koz this year.

On the demand side of the equation, global light vehicle sales are expected to increase by 6.2% in 2023 to 86.1 million units. The China Association of Automobile Manufacturers (CAAM) is projecting a 3% bump in Chinese sales to 27.6 million units. That would be nearly a third of projected global sales.

CAAM is anticipating that demand for “new-energy” vehicles will increase by 35% to 9 million units. That will do more for silver and copper than platinum.

While auto sector supply chain issues are still likely to be a problem, ongoing platinum for palladium substitution and increased loading in catalytic converters should help to underpin platinum.

Despite 6-weeks of gains in palladium, the chart suggests the gains were corrective in nature. Recent probes above the 100-day SMA could not be sustained and palladium retreated more than 4% on Monday.

A retreat below $1489/87 would return a measure of credence to the dominant downtrend, returning focus to the $1329.18 low from March 9^th.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.