8/22/2024

Gold and silver corrected as 50 bps rate cut bets ebb

OUTSIDE MARKET DEVELOPMENTS: Minutes from the last ECB meeting revealed acceptance of the need to review the policy stance in September with an "open mind." While the 'data dependency' qualifier remains, recent signs of growth risks have the market leaning toward another rate cut in September. The ECB cut rates for the first time in nearly five years in June.

On Wednesday, ECB Governor and Banca d'Italia President Fabio Panetta hinted that another rate cut was in the offing. "It is reasonable to think that we are going toward a phase of loosening of monetary policy," said Panetta.

Earlier in the week, Olli Rehn, ECB Governor and Bank of Finland President was a little more forthright. "The recent increase in negative growth risks in the euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September, provided that disinflation is indeed on track," said Rehn.

Minutes from the Fed's July FOMC meeting revealed "several" members could have supported a rate cut at that meeting based on slowing inflation and the rise in the unemployment rate. While that didn't happen, expectations for a September rate cut have been reinforced.

"The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting." – FOMC minutes

A rate cut has been fully priced in by the market for some time, but the absence of anything overly dovish in the minutes saw prospects for a 50 bps cut wane to 28.5%. I don't think Powell's speech in Jackson Hole tomorrow will offer anything new.

ZeroHedge asks that we speculate on what will happen to record-high asset prices once the Fed starts easing. It'll be great fun for the owners of such assets...at least initially, but it has the potential to end badly. 

This is all quite fascinating in light of the tax policies being bandied about at the DNC. The Harris campaign has endorsed the tax policies espoused within the Biden-Harris administration's fiscal year 2025 budget proposal.

“Together, the proposals would increase the top marginal rate on long-term capital gains and qualified dividends to 44.6 percent,“ according to the budget. It also includes a proposal for a 25% tax on unrealized capital gains for individuals with income and assets exceeding $100 million.

Such changes to the tax code would require the consent of both houses of Congress. Arguably the buffer is the GOP's razor-thin majority in the House.

It's also worth noting in the wake of yesterday's revelation that payrolls were likely overstated by 818,000 for the 12 months ending March 2024, the Fed was still raising rates during that period to the tune of 50 bps. The FOMC hiked by 25 bps in May 2023 and another 25 bps in July 2023.

Would weaker jobs data at the time have altered those decisions? That's hard to say, but the BLS payrolls guidance certainly reinforces the notion that the Fed is behind the curve. When half of your mandate is "maximum employment," it's really helpful to have good data.

Initial jobless claims for the week ended 17-Aug rose 4k to 232k, below expectations of 235k, versus a revised 228k the previous week. Continuing claims rose 4k to 1,863k, just below the 32-month high of 1,871k at the end of July.

U.S. S&P Flash Global Manufacturing PMI fell 1.6 points to 48.0 in August, the weakest print since December. Services PMI rose 0.2 points to 55.2, versus 55.0 in July.

The Chicago Fed National Activity Index fell to -0.34 in July, versus a revised -0.09 in June (was 0.05).

U.S. existing home sales rose 1.3% in July to 3.950M, above expectations of 3.910M, versus an upward revised 3.900M in June. Sales remain weak amid limited supply as owners are reluctant to leave their existing homes in the current high mortgage rate environment. Persistently tight supply leaves affordability near historic lows.


GOLD
OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$6.65 (-0.26%)
5-Day Change: +$45.45 (+1.85%)
YTD Range: $1,986.16 - $2,527.10
52-Week Range: $1,812.39 - $2,527.10
Weighted Alpha: +32.29

Gold has fallen back below the $2,500 level, as diminished prospects for a 50 bps rate hike bolster yields and the dollar. However, downticks are seen as corrective within the well-established uptrend.


The move to new lows on the week leaves Friday's low at $2.451.50 vulnerable to a challenge. The 20-day moving average comes in at $2,445.74 today, lending import to this support zone.

Chinese gold imports fell 24% in July to 44.6 tonnes. Economic weakness and record-high prices conspired to drive imports to the lowest level since May of 2022. However, as I wrote about yesterday, the PBoC providing higher import quotas to commercial banks may indicate expectations for higher demand.

A short-term move back above $2,500, particularly on a close basis, would bode well for further attacks on the upside. A breach of Tuesday's record high at $2,529.57 would keep the yellow metal on track for tests of previously established objectives at $2,539.77 and $2,597.15/$2,600.00.

SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.003 (-0.01%)
5-Day Change: +$1.144 (+4.03%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +25.06

Silver breached initial support marked by Tuesday's low and the 50-day moving average at $29.240/209. The white metal ticked briefly below the 100-day moving average and the $29 level before rebounding into the range.



The inability of silver to reclaim the 30-handle so far this week and today's retreat leaves the medium-term tone neutral. However, I still think the corrective low is in place at $26.524 (08-Aug low).

That could certainly change if incoming U.S. and/or Chinese data signals heightened growth risks. In that case, industrial demand destruction worries could overwhelm safe-haven interest and put silver back on the defensive.

I continue to watch resistance at $30.00/14, penetration of which would return focus to the highs for the year at $32.254/379. Tuesday's 5-week high at $29.877 provides a good intervening upside barrier.

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