As we predicted in an article penned many months ago, Gold has shone in an interest rate hiking environment against a backdrop of fundamentals that said it shouldn’t have.
When Gold bottomed around $1620/oz in October 2022, The Fed was well into a rhythm on rate hikes, and the mainstream media were penning headlines about Gold losing its status as a safe haven asset and declaring it dead in the water. A couple of years ago, Jim Cramer proclaimed Gold was dead. We penned an article saying it was a buying opportunity, and two days later, the rally commenced. We love a media-driven contrarian indicator.
Fast forward to today, and despite Gold rising over 25% from the October bottom, some will still have you believe that this $400 rally is bearish. Gold, it seems, is a favorite for commentators with a no-compromise view in one direction and will never accept it can move in either direction. We are nudging all-time highs, and some still believe its going back to $1600 because they trade emotionally and not intelligently.
So why is Gold rallying against a backdrop of fundamentals that say it shouldn’t. Rate hikes, higher yields on the treasury notes than we have had for years, inflation dropping from its highs of last year, and money supply reducing. The Fed even stating they do not see them reducing rates in 2023 wasn’t enough to see Gold plummet.
The answer is simple. All of the above are coming to an end, and Gold has sensed that and is pricing this in for a future rally.
Historically, every tightening period The Fed has carried out has led to something breaking. We have had several banks that have failed, one to a greater extent than anything for the last 15 years. We have had bailouts – some forced upon. (read UBS takeover of Credit Suisse) The derivatives markets are so highly correlated these will be hurting elsewhere, not one-off events. It is merely a matter of time before another falls over.
When something big does break, (and the banking sector is far more susceptible to this with their historic bond purchases yielding highly negative against current rates) it will be a domino effect. When we consider the actions of the now trapped Federal Reserve historically when this has happened, they have always resorted to two things to rapidly kick-start the economy: QE and tanking interest rates.
This is the end of the cycle and will cause the markets to rally with their newfound free money and the dollar to tank causing commodities to sky rocket in value. The chief recipients for this in the past have been the precious metals. We see this as no different this time around and expect Gold to lead the way and Silver to play catch up, eventually setting new all-time highs.
So how close are we to this? Reuters recently reported that US 5 year credit default swaps are at their highest levels for 12 years and spreads on U.S. five-year credit default swaps widened to 51 basis points, data from S&P Global (NYSE:SPGI) Market Intelligence showed. This is more than double the level they stood at the start of the year. There are always signs that we are near, and this has proved to be an excellent measure in the past. So we are close is the answer.
Michael Burry famously said when investing heavily in credit default swaps against the mortgage markets that “he may have been early, but he wasn’t wrong”. We believe anyone that has accumulated physical Gold and Silver, or mining stocks at record lows over the last few years, like Michael Burry said may have been early, but won’t be wrong.