7/5/2024

Gold and silver surge to 4-week highs on Fed rate cut expectations
 
OUTSIDE MARKET DEVELOPMENTS: The Labour Party scored a historic victory in UK elections, ending a 14-year Tory Party reign. Incoming Prime Minister Keir Starmer says "change begins now."

He is likely referring to the homefront, where he plans to tackle the cost-of-living crisis, illegal immigration, crime, and long NHS wait times. Foreign policy is expected to remain largely unchanged, including continued robust military support for Ukraine.

Labour views Russia as a threat to Europe and their manifesto favors NATO membership for Ukraine. NATO on its border is a red line for Russia and that threat arguably played a significant role in Putin's decision to invade.

The latest polling in France suggests Marine Le Pen's National Rally party which made strong gains in the first round of voting may still fall short of a majority in the National Assembly. There has been increased violence in France during the election process including attacks on candidates. Prime Minister Gabriel Attal called on the French people to "reject the climate of violence and hatred that's taking hold."

Iranians voted between hardliner Saeed Jalili and reformist Masoud Pezeshkian in a runoff presidential election. Regardless of the winner, Supreme Leader Ayatollah Ali Khamenei will still have the final say on just about everything of consequence.

Widespread apathy and calls for a boycott to protest the regime led to low voter turnout in the first round. A Jalili win would likely bend policy toward closer ties with Russia and China and a push forward in nuclear weapons development. It's doubtful that Pezeshkian has the wherewithal to develop a more moderate tone toward the West.

The Nikkei 225 continued to set record highs on Thursday, led by heavy buying in tech and automaker shares. The breakout above the previous record high set in 1989 initially occurred in March and gains have been mounting since, driven largely by the AI frenzy that is also lifting U.S. equities.

U.S. nonfarm payrolls rose 206k in June, above expectations of +200k, versus a negative revised +218k in May (was +272k). While the headline number was good, private payrolls were just +136k, below expectations of +175k, versus a negative revised +193k (was +229k).

The unemployment rate ticked up to 4.1% on back-month revisions, weak civilian employment, and an uptick in the labor force participation rate to 62.6%. Hourly earnings were up 0.3% in line with expectations. The average workweek was steady at 34.3 hours.

Hints of weakness in the jobs report give further confidence to the sooner-than-later-rate-cut camp. The prospects for a September rate cut have jumped to 71.8% based on Fed funds futures. Additionally, the FOMC minutes released on Wednesday revealed that policymakers saw "modest further progress toward the 2% inflation goal," a gradually cooling economy, and policy as restrictive.

Nonetheless, the FOMC is still displaying enough uncertainty as to the appropriateness of current policy and the tack of incoming data to cast doubt on a September rate cut. Proximity to the November election may be a Fed consideration as well.

Fed Chairman Powell's monetary policy testimony before the House and Senate next week may provide additional clues to the Fed's intentions. I expect him to maintain his cautious tone and maybe even come off a little hawkish to temper the recent market reactions.

GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: +$7.86(+0.33%)
5-Day Change: +$38.05 (+1.64%)
YTD Range: $1,986.16 - $2,449.34
52-Week Range: $1,812.39 - $2,449.34
Weighted Alpha: +24.65

Gold has surged to 4-week highs on mounting expectations that the Fed will cut rates twice this year, despite persistent words of caution from Fed policymakers. The yellow metal is poised for a second consecutive higher weekly close.



An upside breakout of the symmetrical triangle pattern that formed since the record high was set on 20-May at $2,449.34 bodes well for a continuation of the dominant uptrend. However, sustained gains above $2400 may be difficult initially due to the current overbought condition.

Former resistances at $2,367.22 and  $2,364.17/$2,361.88 now define initial support levels.

Ole Hansen, Head of Commodity Strategy at Saxo Bank remains bullish on gold based on persistent geopolitical risks, strong retail demand in China, ongoing central bank demand, rising debt-to-GDP ratios among major economies (most notably the U.S.), and higher rate cut expectations. Hanson's year-end gold forecast is $2500.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: +$0.212 (+0.70%)
5-Day Change: +$1.455 (+4.99%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +38.93

Silver is adding to gains having broken out above channel resistance earlier in the week. Heightened expectations of a September rate cut are helping the cause. 



The white metal is up more than 6% this week and is currently trading at 4-week highs. The 61.8% retracement level of the corrective decline from $32.379 has been negated at $30.942 lending considerable credence to the notion that the corrective low is in place at $28.618.

The next level to watch on the upside is $31.516 (07-Jun high) which corresponds closely with the 78.6% retracement level at $31.574. A push through this level may prove difficult initially given the developing overbought condition, but short-term setbacks are likely to be viewed as buying opportunities.

Former resistances at $30.78/82 and $30.622/56 now mark the first two tiers of support.

Saxo Bank's Hansen is sticking with his year-end target of $35.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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