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Precious Metals & Values
January 24, 2023

What Will Gold’s Awakening Do For Investors Sleep?

“Golden slumbers? Hardly. The precious metal has awakened in the past three months, quietly outperforming stocks since their mid-October lows.

That’s something that hasn’t happened in the half-century since the Bretton Woods monetary regime ended. Credit for flagging this goes to Strategas Research Partners’ technical and macro research team, headed by Chris Verrone. The Strategas crew pointed out in a Jan. 18 client note that the precious metal was up 14.6%, outpacing the S&P 500’s 11.8% gain, since equities’ Oct. 12 bottom.

That suggests a different sort of market leadership, the researchers further note. And their Strategas Washington policy colleagues, led by Dan Clifton, point to an array of policy developments that are positive for gold.

Yet sentiment toward gold remains lukewarm at best, or even negative. Symptomatic of the latter, Paul Krugman uses the tired “pet rock” put-down to describe the metal’s recent revival in his New York Times subscriber newsletter, crediting gold’s revival to the revulsion against cryptocurrencies.

However, while down sharply from their late 2021 peak, cryptocurrencies are up 29.2% since the turn of the year, trouncing stocks’ 4.7% gain, Bank of America’s strategists, led by Michael Hartnett, write in a research report released Friday. Clearly some of the faithful haven’t forsaken crypto.

So that can’t explain why gold has advanced for five straight weeks and in 10 of the past 12, according to our Dow Jones statistics trackers. Spot gold settled Friday on the Comex at $1,926.40 an ounce, the highest level since last April, though still 6.1% below the record $2,051.50 settlement on Aug. 6, 2020.

Remarkably, this is the first time in the past 50 years that the S&P has lagged behind the metal coming off a market bottom, Verrone’s team points out. From the March 2020 lows, stocks bested gold, rising 36.3% to the latter’s 13.2% over the next three months. From the December 2018 low, the gap was 20.6% to 2.1% in favor of equities. The closest spread was from the October 1990 lows, when stocks rose 6.2% to gold’s 1.7% in the subsequent three months.

Gold’s new shine seems more than happenstance. Clifton writes that his colleague Courtney Rosenberger remarked that she had heard more about gold from Strategas analysts in the past couple of weeks than she had in the previous eight years that she’d been with the firm.

Clifton attributes this to major political challenges and policy shifts. Atop his list is the prospect of a prolonged debt-ceiling battle in Congress. That’s followed by “the unleashing of a pile of liquidity” that will offset the Federal Reserve’s quantitative tightening, as discussed at length below. Clifton further points to the ratcheting down of forecasts on inflation and interest-rate increases by an array of Fed officials. The federal-funds futures market now puts a 99.2% probability of just a quarter-point increase in the fed-funds rate—rather than a half-point—at the central bank’s next policy meeting on Feb. 1, according to the CME FedWatch site. The fed-funds range is currently 4.25% to 4.5%.

Global factors are also boosting gold. The dollar’s preeminent role is less certain, with Clifton noting Saudi Arabia’s statement that it is willing to settle oil trades in other currencies. Finally, Russia’s war on Ukraine remains a risk factor, with Moscow continuing to talk of using nuclear weapons.

Ultimately, Clifton sees gold as a barometer of whether monetary policy is too loose or too tight, relative to inflation. Even as inflation was ramping up in the first half of 2022, gold was falling on the expectation, proved correct, that the Fed would tighten. Now that inflation is decelerating, gold is starting to take off, a sign that the market anticipates a more accommodative Fed policy, and possibly more inflation, he concludes.

Fed-funds futures are pricing in a final quarter-point hike in March and a peak of 4.75% to 5%, before looking for quarter-point cuts in November and December. In contrast, the most recent set of Fed projections from December point to a median fed-funds peak of 5.1% by the end of 2023. The sharp fall in bond yields, bringing the benchmark 10-year Treasury down from 4.25% last October to 3.48% by Friday, is also consistent with expectations of interest-rate cuts, starting late this year.

Gold’s outperformance, relative to stocks, suggests that the expectations of future Fed easing are less than bullish for equities, given the metal’s simultaneous message of continued inflation.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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