Gold, Mining Stocks Weather Fed Interest Rates Hike Cycle / Commodities / Gold and Silver Stocks 2023

Fed hawkishness hasbeen the rankling thorn in gold’s side for 18 months now.  Since the Fed started this monster rate-hikecycle, every material gold and gold-stock selloff has been driven by the threatof more rate hikes.  Those boost the US dollar,triggering gold-futures selling.  But theFed’s hawkish spell over traders is waning. Gold and the miners weathered this week’s latest hawkish FOMC meetingpretty well.

The Federal Open MarketCommittee catapulted its federal-funds rate up an extreme 525 basis pointsoff zero in just 16.3 months into late July!  That blasted the FFR to a lofty 22.4-yearsecular high of 5.38%.  And this scorchingrate-hike cycle was even more violent internally, with over 4/5ths of ithappening in just 9.0 months into mid-December! The Fed has never before hiked so big and fast from such low levels.

The resulting higher USyields ignited a parabolic moonshot in the US dollar.  In just 6.0 months into last September, thebenchmark US Dollar Index skyrocketed 16.7%! The leveraged gold-futures speculators who dominate gold’s short-termprice action closely watch the dollar’s fortunes for their trading cues, and dothe opposite.  So gold plummeted 20.9%in 6.6 months on heavy and relentless gold-futures dumping!

The mean-reversionrebounds out of those extreme anomalies were fierce, with gold fully recoveringin a powerful 26.3% upleg over the subsequent 7.2 months into early May.  Since then gold has drifted lower in a stubbornpullback fueled by dollar bear-market rallies.  My essay last week analyzed this whole Fed-dollar-gold dynamic indepth if you need to get up to speed.  Thelatest FOMC meeting this week builds on that.

After eleven rate hikessince mid-March 2022 including four 75bp behemoths, the FOMC wasn’t expected tohike again Wednesday with futures-implied odds near zero.  The FOMC statement itself released after thatmeeting was virtually unchanged from the prior one in late July.  Traders were far more interested in top Fedofficials’ federal-funds-rate projections, which are published quarterlyafter every-other FOMC meeting.

This latest Summary ofEconomic Projections proved very interesting and somewhat contradictory.  In just one quarter since their last forecasts,these elite Fed guys more than doubled their 2023 US GDP-growth outlook to2.1%.  With the economy strong, their expectedunemployment rate this year retreated from 4.1% to 3.8%.  They even saw core PCE inflation excluding energyand food moderating from 3.9% to 3.7%!

With continuingdisinflation forecast despite a stronger US economy, you’d think top Fedofficials would soften their uber-hawkish stance.  They could project fewer additional ratehikes, or not holding the FFR as high for as long.  But they did neither, with the 2023-year-endFFR forecast staying at the prior dot plot’s 5.63%.  The FOMC views the FFR as a 25-basis-pointtarget range, so dots are the midpoint average.

That implied one more25bp hike later this year, at either the early-November or mid-December FOMCmeetings.  Traders had long expectedthat, since the mid-June dot plot also showed a 5.63% FFR exiting 2023.  Traders weren’t looking for more-hawkish dots,as the USDX slumped 0.4% that day leading into that latest SEP.  Gold really outperformed, with nice 0.8%intraday gains to $1,947 before that FOMC decision.

But despite no ratehike and no change to year-end-2023 projected FFR levels, Fed officials stillmanaged to pull a hawkish rabbit out of their hats.  Their year-end-2024 FFR forecast surged 50bpfrom 4.63% in mid-June to 5.13% this week! So the previous 100bp of rate cuts implied next year were slashed in halfto 50bp.  I didn’t expect that tochange at all, though consensus was for trimming one of those cuts to 75bp.

As far as dot-plotsurprises go, that was fairly mild.  Top Fedofficials’ FFR projections have long been notorious for proving wrong, as theFed chair himself often emphasizes in his post-FOMC-meeting press conferences.  So depending on the tenor of major economicdata like jobs, GDP, and inflation during the coming few months, the next dotplot in mid-December will likely change again.  Projections are always in flux.

There are many examplesof dots being far from subsequent reality. A recent one is the mid-March-2022 SEP accompanying the Fed’s maidenrate-hike of this cycle.  Then top Fedofficials expected to see the FFR leave 2022 and 2023 at 1.88% and 2.88%.  Yet merely nine months later thefederal-funds rate was actually running far higher at 4.38% leaving last year,and is again just 25bp away from 5.63% exiting 2023!

So the currency andgold-futures speculators who closely watch the dots should know better than toput too much stock in them.  They’ll lookdifferent next quarter and continue to greatly diverge from the actualFFR trajectory like usual.  Yet startingwith Wednesday’s SEP, sizable US-dollar buying erupted fueling gold-futuresselling.  The USDX reversed sharply, staginga 0.7% intraday surge into a new rally closing high.

So gold dropped from$1,947 leading into the FOMC to a flat close of $1,931.  That still wasn’t bad, much better than othergold plunges after other FOMC hawkish surprises in the past 18 months orso.  Gold weathered Fed officials implyinghigher-for-longer with half the previously-projected rate cuts in 2024 well.  And gold-stock traders didn’t freak out, withthe leading GDX gold-stock ETF climbing 1.1% to $29.71 that day.

The USDX’s post-dots reversalextended its relentless gains since mid-July to 5.7%, which is gigantic for amajor world currency!  Yet gold continuedto overcome the dollar as it only slumped 1.5% in that same span.  Gold shows relative strength when fallingless than the dollar surges during its material rallies.  Often post-FOMC price trends aren’t apparentuntil the following day, after foreign traders have a chance to react.

Both gold and GDX wereweaker Thursday morning as I penned this essay, dragged down by stock marketsfalling on higher-for-longer fears.  Butagain those latest dots shouldn’t be taken too seriously.  All it will take for top Fed officials topencil in more rate cuts in 2024 is weaker-than-expected jobs reports orcooler-than-expected inflation ones.  Weshould see some before mid-December, pushing the dots back lower.

No matter what the Feddid this week, gold wasn’t likely to plunge because speculators’ gold-futurespositioning remained quite bearish. This chart is updated from my gold-shorting-spike-bullish analysis as September dawned.  Total speclongs remained relatively-low while total spec shorts stayed relatively-highleading into this latest FOMC meeting, leaving way more room for gold-boostingbuying than selling.

The weekly Commitmentsof Traders reports current to Tuesday closes aren’t released until late Fridayafternoons.  So the latest data beforethis essay was published was current to Tuesday the 12th, a week before the FOMC.  Then total spec longs and shorts were running282.4k and 137.6k contracts, leaving massive room to buy back futures.  Those bearish collective bets were bullishfor gold on mean-reversion buying.

The first month of theUSDX’s recent big surge into mid-August shook loose huge gold-futures shorting.  That left total spec shorts at their highestlevels since early November 2022, early in this large 26.3% gold upleg’s life.  Excessive shorts guarantee proportionalnear-future buying to cover and close those risky leveraged downside betson gold.  Spec shorts averaged 94.1kcontracts from late March to early August.

To mean revert backdown to those levels would require 43.5k contracts of short covering, the equivalentof 135.4 metric tons of gold.  Had topFed officials not changed their 2024 federal-funds-rate outlook this week, biggold-futures short covering likely would have ignited.  That quickly becomes self-feeding, as the resultingsurging gold prices pressure more shorts into buying offsetting contracts toclose out their bets.

But since spec longswell outnumber spec shorts, they are proportionally more important for drivingshort-term gold trends.  Over the past 52CoT weeks, longs have run 2.4x shorts on average.  Spec longs have a well-defined seculartrading range, with lower support near last September’s 247.5k contracts thatbirthed this strong gold upleg.  Upperresistance in recent years has run near 413.0k, implying buying exhaustion.

In that latest pre-FOMCCoT, total spec longs were running just over 1/5th up into that probablegold-upleg trading range.  That left roomfor 4/5ths of potential buying, another 130.6k contracts equivalent to amassive 406.1t of gold!  Along withlikely short-covering buying that adds up to 541.5t, to easily catapult gold wayhigher.  That buying will likelyaccelerate soon as the FOMC’s ability to hawkishly surprise vanishes.

Again the Fed hasalready hiked its FFR 525 basis points in the last 18 months or so.  Fed officials still see another 25bp at best,before cuts later next year.  So for all intentsand purposes this monster rate-hike cycle is over, 19/20ths finished!  Surprisingly-hot inflation reports couldtease out the threat of more hikes, but they’re unlikely.  These multi-decade FFR highs already riskdestabilizing the US government.

This week its total nationaldebt crossed $33,000b for the first time, a staggering record!  Higher rates due to Fed rate hikes force thegovernment to issue new Treasuries at higher yields, paying more interest.  At the 0.13% FFR where this monster hiking cyclestarted, that makes for just $41b of interest annually.  But at the current 5.38%, that skyrockets to$1,774b per year!  That would be thesingle-largest expense by far.

That dwarfs the biggestspending category of social-security transfer payments at $1,240b, and defenseat $736b.  And the longer the Fed keepsthe FFR high, the greater the likelihood the US economy rolls over into aserious recession.  Top Fed officials suredon’t want to get blamed for that heading into a key election year.  They have little hiking firepower left, soFed-hawkish surprises will give way to Fed-dovish ones.

Those will hammer the still-too-highUS Dollar Index, extending its mean-reversion bear.  A weaker dollar will unleash that pent-upgold-futures buying, rekindling gold’s powerful upleg.  Interestingly its technicals remain greatdespite recent months’ lingering pullback fueling bearish sentiment.  Gold is climbing again, rallying off majorsupport at its 200-day moving average.  Withsome futures buying, it will be off to the races.

Gold’s stalled uplegreigniting will fuel big gains in the gold miners’ stocks.  Since their earnings amplify gold pricetrends, the majors dominatingGDX tend to leverage material gold moves by 2x to 3x.  Like gold, GDX has suffered a considerableselloff in recent months.  But thisstrong gold-stock upleg is still grinding higher on balance, ready to meanrevert back up into its uptrend channel as gold prices recover.

Following gold, GDXalso broke down below its uptrend’s support line on recent months’ massive USDollar Index rally.  But the major goldstocks’ 200dma failed, which would be ominous if they didn’t just mirror and amplifygold.  Once the yellow metal turnsdecisively higher on that gold-futures buying, the gold stocks will followleveraging that upside.  Within a coupleweeks, GDX will shoot back into its upleg’s uptrend.

When gold reverses outof mid-upleg pullbacks on gold-futures buying, the gold stocks justskyrocket.  That last happened not longago, when GDX soared 34.4% in just 1.2 months into mid-April!  A similar mean-reversion surge from thisleading gold-stock ETF’s latest interim low in mid-August would catapult itback up near $37.  That would be way upinto its uptrend channel, nearly challenging upper resistance.

Gold blasted 12.6%higher in that same late-February to mid-April timeframe on big gold-futuresmean-reversion buying.  So GDX leveragedits gains over 2.7x, making for a profitable ride.  Another is coming on the same Fed-dovishdollar-hitting gold-futures-buying dynamic, likely soon.  While gold and the miners are plagued withbearish sentiment now, that will dissipate fast as gold resumes powering higheragain.

After this week’s Fed-hawkish-surprise2024 dots, gold again closed at $1,931.  Thatwas 2.2% above its dollar-surge-fueled latest interim low of $1,889 inmid-August, before gold resumed overcoming the dollar.  Few traders seem to realize gold’s nominalall-time-record closing high of $2,062 from early August 2020 is alreadywithin striking distance.  Regainingit would merely require a total 9.2% mean-reversion rally.

That’s considerablysmaller than its spring one following this upleg’s prior healthy pullback,which actually extended to 13.2% into early May.  Once gold challenges then surpasses newnominal records, that changes everything for gold and gold stocks.  Bullish financial-media gold coverage willexplode, fueling widespread interest in chasing its gains!  Capital inflows will soar as traders flockback, accelerating the upside.

Ever since this goldupleg was born a year ago, I’ve argued it should ultimately best 40%.  Up 26.3% at best so far, it is already thebiggest gold upleg by far since a pair of mighty 42.7% and 40.0% ones bothpeaking in 2020.  40% gains would carrygold way up near $2,275, way into new-record-high territory that wouldradically increase gold’s attractiveness to traders.  GDX should rally 80% to 120%+ in that scenario.

Again at best its upleghad surged 63.9% in mid-April, but has slumped back to mere 35.8% gains as ofmid-week.  To hit 120%, GDX would have tosoar over $48 which is another 62% higher from current levels!  That’s a lot of potential upside, well worthpositioning for.  The fundamentally-superior smaller mid-tier and juniorgold stocks we have long specialized in would see much-bigger gains thanGDX like usual.

So anyone with acontrarian bone in their body should be salivating at this opportunity to buygold stocks cheap before everything changes. The Fed is done or almost done hiking, so both the USDX and gold are dueto mean revert sharply.  Higher goldprices will fuel big gold-stock gains, particularly as traders start to focuson new record highs in gold.  Great goldstocks could easily double or triple as this plays out!

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The bottom line is gold and its miners’ stocks just nicely weatheredanother hawkish FOMC surprise.  Top Fedofficials slashed their 2024 rate-cut outlook in half, extending the US dollar’smassive bear rally.  Yet gold onlyretreated modestly, with speculators’ gold-futures positioning already quitebearish.  Those gold-price-dominatingtraders have way more room to buy than sell, which is very bullish for gold andgold stocks.

With the FOMC effectively done hiking, hawkish surprises will soongive way to dovish ones.  Traders will belooking for cuts, increasingly interpreting economic data as justifyingthem.  That will hit the lofty US dollar,unleashing big gold-futures buying driving gold much higher.  As gold stocks amplify its gains, sectorexcitement will mount with new record highs in sight.  That will attract lots of capital,accelerating the upside.

Adam Hamilton, CPA

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