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.”
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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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Toolsfor Effective Gold & Silver Investments - SunshineProfits.com
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All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.
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