Dovish to Hawkish Fed: Sounds Bearish for Gold / Commodities / Gold and Silver 2021
With a more hawkish Fed disposition,non-commercial traders remaining dollar-strong, and the EUR/USD sinking, itdoesn’t bode well for the metals.
With U.S. Treasury yields continuingtheir ascent on Sep. 28, the mini taper tantrum pushed the NASDAQ 100 over acliff. And with the USD Index loving the surge in volatility, the greenbackfurther cemented its breakout above the neckline of its inverse (bullish) head& shoulders pattern. And looking ahead, the momentum should continue. Casein point: Fed Chairman Jerome Powell testified before the U.S. Senate BankingCommittee on Sep. 28. In his prepared remarks, he said:
“Inflationis elevated and will likely remain so in coming months before moderating.As the economy continues to reopen and spending rebounds, we are seeing upwardpressure on prices, particularly due to supply bottlenecks in some sectors. These effects have been larger and longerlasting than anticipated, but they will abate, and as they do, inflation isexpected to drop back toward our longer-run 2 percent goal.”
Furthermore, while I’ve been warning formonths that Powell remains materially behind the inflation curve, his prepared remarks didn’t havea single mention of “base effects” or “transitory.” Instead, the Fedchief’s new favorite buzz word is “moderating.”
In any event, while I warned on severaloccasions that the composite containerrate has gone from $6.5K to $8.1K to $8.4K to 9.4K, Powell finally admittedthat the supply chain disruptions have “gotten worse:”
“Look at the car companies, look at theships with the anchors down outside of Los Angeles,” he said. “This is really amismatch between demand and supply, we need those supply blockages toalleviate, to abate, before inflation can come down.”
For context, the composite container rate is now at $10.4K (the blue linebelow):
To that point, with inflation surging andthe Fed materially behind the eight ball, eventhe doves have turned hawkish since Powell unveiled his accelerated taper timeline on Sep. 22.
New York Fed President John Williams toldthe Economic Club of New York on Sep. 27:
“I think it’s clear that we have madesubstantial further progress on achieving our inflation goal. There has alsobeen very good progress toward maximum employment. Assuming the economycontinues to improve as I anticipate, a moderation in the pace of assetpurchases may soon be warranted.”
Likewise, Fed Governor Lael Brainardadded that labor-market conditions may “soon” warrant a reduction in the Fed’sbond-buying program:
“The forward guidance on maximum employmentand average inflation sets a much higher bar for the liftoff of the policy ratethan for slowing the pace of asset purchases,” Brainard told the NationalAssociation for Business Economics on Sep. 27. “I would emphasize that nosignal about the timing of liftoff should be taken from any decision toannounce a slowing of asset purchases.”
For context, she tried to calm investors’nerves by separating rate hikes from tapering. However, with “a much higherbar” for “liftoff” implying a much lower bar for tapering, QE is likely on itsdeathbed.
Rounding out the hawkish rhetoric,Chicago Fed President Charles Evans also told the National Association forBusiness Economics on Sep. 27 that “I see the economy as being close to meetingthe 'substantial further progress' standard we laid out last December. If theflow of employment improvements continues, it seems likely that thoseconditions will be met soon and tapering can commence.”
And why are these three voices soimportant?
Well, with Powell ramping up the hawkishrhetoric on Sep. 22 and his dovish minions following suit, their messaging ismuch different than the hawk talk that we normally hear from Bullard, Kaplanand Rosengren. For context, the latter two actually resigned for ethicalreasons after their questionable day trading activity became public.
Please see below:
To explain, the graphic above depictsBank of America’s FOMC dove-hawk spectrum. From left to right, the blue areascategorize the doves, while the red areas categorize the hawks. If you analyzethe third, fourth and fifth columns from the left, you can see that Evans,Powell, Brainard and Williams are known for their dovish dispositions. However, with all four materially shifting theirstances in the last week, the hawkish realignments are bullish for U.S.Treasury yields, bullish for the USD Index and bearish for the PMs.
For example, the U.S. 10-Year Treasuryyield has risen by 19% over the last five trading days. What’s more, the U.S. 5-Year Treasury yield has risen by24% over the last seven trading days and ended the Sep. 28 session at a new2021 high. For context, the last time the U.S. 5-Year Treasury yield closedabove 1% was Feb. 27, 2020.
Please see below:
Source: Investing.com
On the opposite end of the double-edgedsword slashing the goldprice, the USD index is also reasserting its dominance. And with thegreenback’s fundamentals also uplifted by higher U.S. Treasury yields, thecurrent (and future) liquidity drains support a stronger U.S. dollar. For one, after 83 counterparties drained more than$1.365 trillion out of the U.S. financial system on Sep. 28, the Fed’s dailyreverse repurchase agreements hit another all-time high.
Please see below:
Source: New York Fed
To explain, a reverse repurchaseagreement (repo) occurs when an institution offloads cash to the Fed inexchange for a Treasury security (on an overnight or short-term basis). Andwith U.S. financial institutions currently flooded with excess liquidity,they’re shipping cash to the Fed at an alarming rate. And while I’ve beenwarning for months that the activity is the fundamental equivalent of ataper – due to the lower supply of U.S.dollars (which is bullish for the USD Index) – as we await a formalannouncement from the Fed, the U.S. dollar’s fundamental foundation remainsrobust.
Second, non-commercial (speculative) futures traders, asset managers and leveraged funds’allocations to the U.S. dollar remain strong.
Please see below:
To explain, the dark blue, gray, andlight blue lines above represent net-long positions of non-commercial(speculative) futures traders, asset managers and leveraged funds. When thelines are falling, it means that the trio have reduced their net-long positionsand are expecting a weaker U.S. dollar. Conversely, when the lines are rising,it means that the trio have increased their net-long positions and areexpecting a stronger U.S. dollar. And while asset managers and leveraged funds’allocations (the gray and light blue lines) remain slightly below their 2021highs, non-commercial (speculative)futures traders’ allocation to the U.S. dollar has now hit a new 2021 high. As a result, a continuation of the theme should uplift the U.S. dollar andnegatively impact the performance of the gold and silverprices.
Finally, with the EUR/USD accounting fornearly 58% of the movement of the USD Index, the currency pair has sunk below1.1700 once again. And with the Fed’s inflationary conundrum dwarfing Europe’spredicament, I warned on Jul. 20 that the dichotomy is bullish for the U.S.dollar.
I wrote:
Notonly is the U.S. economy outperforming the Eurozone, but the Fed and the ECB are worlds apart.
Pleasesee below: 
Toexplain, the green line above tracks the year-over-year (YoY) percentage changein the Eurozone Harmonized Index of Consumer Prices (HICP), while the red lineabove tracks the YoY percentage change in the U.S. HICP. If you analyze theright side of the chart, it’s not even close. And with the U.S. HICP rising by6.41% YoY in June and the Eurozone HICP rising by 1.90%, the Fed is likely totaper well in advance of the ECB.
To that point, with the rhetoric aboveguiding the Fed down a hawkish path, the ECB is heading in the oppositedirection. For example, ECB President Christine Lagarde said on Sep. 28 that there are “no signs that thisincrease in [Eurozone] inflation is becoming broad-based. The key challenge isto ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term…. Monetarypolicy should normally ‘look through’ temporary supply-driven inflation, solong as inflation expectations remain anchored.”
As a result:
The bottom line? With U.S. Treasury yieldsand the USD Index firing on all cylinders, the PMs remain caught in thecrossfire. And with both variables still having the fundamental wind at theirbacks, the Fed’s hawkish shift should help underwrite further gains over themedium term.
In conclusion, the PMs declined on Sep.28 and the gold miners continued their underperformance. And with the Fed’sinflationary anxiety sparking a mini taper tantrum, the PMs remain stuck in noman’s land. Furthermore, with the general stock market also feeling the heat, asharp correction could accelerate the ferocity of the PMs’ current downtrend.As a result, their medium-term outlooks remain quite bearish.
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Founder, Editor-in-chief
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