| Few prisoners were taken on Tuesday, as indications of rising wage inflation took down every major asset class.
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| The Dow plummeted 570 points...bonds were taken to the woodshed as Treasury yields jumped...oil lost 1.3%...
...And gold fell nearly $50.
All of this market mayhem came because in this crazy day and age higher inflation implies hawkish Fed policy...and that is the one factor that overrules everything else.
And thus, it all was reversed the next day, as the Fed stood pat and Chairman Powell comforted investors by saying any rate hike was “unlikely.”
Gold jumped $30 in response. So much for all the doom and gloom that pundits were spitting out the day before.
Most of the metals analysts I read took Tuesday’s sell off not as a market-wide event, but rather as something specific to gold and silver. Thus, reading their charts labeled with alpha- or numeric- peaks and valleys, they almost universally declared that this rally is over and the expected decline/correction cycle has begun.
That may turn out to be the case. But after a few decades in this business watching, reading and talking with many of the most brilliant market analysts, I can tell you this: No one knows what will happen.
Or at least in the short term. And that’s why I haven’t made this a trading service. My humility and cynicism won’t allow me to make such predictions with any degree of confidence.
Of course, the long term is another matter entirely. In that regard, I can express high confidence that we’re going to want to own gold going into what lies ahead.
Looking ahead, we see that the Fed — despite their inaction yesterday and comment that “in recent months, there has been a lack of further progress toward the Committee's 2% inflation objective” — will have to pivot at some point. The reason is illustrated in two charts that I’m featuring in my upcoming presentation tomorrow at Kai Hoffman’s Deutsche Goldmesse conference in Frankfurt.
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| Note from the chart above that I finally found a U.S. Treasury data series on the average interest rate paid on U.S. Treasury securities (I’m not sure if this is a new data series or just sufficiently buried that it escaped my discovery for years).
Importantly, note that the average rate is now 3.28%. That’s a lot — with the federal debt now totaling $34.7 trillion and rising rapidly, that implies an annual debt-service cost of $1.13 trillion! But with rates across the Treasury yield curve hovering around 5%, that average rate paid is going to soar as more and more debt resets. Which brings me to our second chart....
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| In a recent X post, Samantha LaDuc shows that even if the Fed enacts six quarter-point rate cuts in the weeks ahead, the annual debt service cost will soar to $1.2 trillion by this time next year. And if they don’t start cutting rates dramatically, it will run to $1.7 trillion.
This is why the Fed simply must pivot, and relatively soon.
As it stands, the dream scenario for gold bulls is taking shape: The Fed pivoting without having whipped inflation.
Now consider that gold has gained about $350 before the major catalyst of a Fed pivot...and has risen about $700 (40%!) during what has been arguably the harshest Fed rate-hiking cycle in history.
So how will gold perform once the Fed pivots? Probably much better.
Perhaps that’s what the investors around the world, particularly China, are considering as they’ve been buying gold hand over fist. For whatever the reason, though, we’ve gotten a considerable head start in this bull market well before the fundamentals have turned in our favor.
Thus, looking at the long term, we want to own gold, silver and mining stocks.
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| Brien Lundin
Publisher, Gold Newsletter
CEO, the New Orleans Investment Conference
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| CLICK HERE to watch interviews by Brien Lundin and Kai Hoffmann with many of today's most exciting junior mining companies on the
Gold Newsletter Youtube channel.
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