Gold And The Jackson Hole Pivot Point

Introduction

The latest meeting of the world’s central bankers at Jackson Hole, Wyoming gives us a glimpse of what’s in store for monetary policy for the remainder of this year. The Federal Reserve chair Jay Powell stressed that “downside risks” to the labor market had increased, and it was time to begin lowering interest rates.

“The time has come for policy to adjust, and the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

So there we have it, the long awaited ‘pivot’ point has arrived. The next meeting of The Federal Open Market Committee is scheduled for 17-18 September, 2024. In general, expectations are for a 25-bp cut, although a 50-bp cut is not off the table just yet.

The following graphic is courtesy of Reuters based on data from the London Stock Exchange Group plc (LSEG) and highlights some of the metrics that will be considered before the monetary policy decisions to be announced on the 18 September 2024.

My view is that the Fed will take it slowly with a 25-bp cut, allowing them to cut further over the remainder of this year if the economic data is to their satisfaction. We should also note the rhetoric that surrounds the forthcoming announcements on monetary policy as it should be indicative of the road ahead with as many as four rate cuts this year. Unemployment in the US has risen to 4.3% and so a boost to economic activity via the easing of borrowing costs is considered necessary to alleviate the pressure on job creation, rightly or wrongly.

The following charts of the US Dollar and Gold clearly show them both heading in different directions, which suggests that their inverse relationship remains intact for now. Logic suggests that a rate cut will lead to a weakening of the US Dollar and therefore a strengthening of the price of gold. Assuming that we do get a rate cut, don’t to be too disappointed if gold doesn’t respond immediately with a strong rally, as this could already be baked into the cake as an easing of monetary policy has been anticipated by some investors. The downside to a rally in gold could be that the Fed decides to sit tight and rates remain unchanged, such a disappointment could invoke some selling pressure and take the froth off the gold price.

The One-Year Chart of the US Dollar

Support at the 100 mark is now being tested as the shadow of rate cuts loom.

These three indicators, RSI, MACD, and the STO, suggest that the USD has been oversold, so a technical bounce could be on the cards, but don’t count on it. A break below the 100 level could trigger further selling, which would drive the Dollar down significantly.

The One-Year Chart of the price of Gold

Gold has put in a stellar performance since March 2024 and is now perched on the $2,500.00/Oz level, as the chart below indicates:

The MACD, RSI and the STO suggest that gold is currently overbought and therefore could be in need of a breather. However, the fundamentals will rule the day and gold’s fortunes are to some extent in the hands of the Federal Reserve as their stance on monetary policy shifts to support the Labor market.

The One-Year Chart of the Gold Bugs Index (HUI)

The HUI has gained more than 50% in the last 5 months, reflecting the strength of gold and possibly some renewed interest from investors

The MACD and the STO are a tad Toppy suggesting that the stocks might now take a breather. Also note that the 50dma and the 200dma are moving up in parallel, which is a good sign

Should The Fed implement a series of rate cuts, thus weakening the US Dollar and propelling gold to higher ground, then the gold producers will generate sparkling results. These results should catch the eye of investors who have yet to enter this sector of the market, driving producer stock prices higher and maybe an attempt at a new all-time high.

If you are new to this sector of the market, then the top-quality large caps such as Agnico-Eagle Mines Limited (AEM) would be a place to start your portfolio of gold stocks. You will also need to allocate some of your time to do your own “Due Diligence” and satisfy yourself that you are making the right acquisitions for your unique personnel requirements

Conclusion

The Federal Reserve has signaled their intent to relax monetary policy via a series of interest rate cuts.

The Feds action should see the US Dollar fall and gold rise due to its inverse relationship to the US Dollar.

The gold producers are lagging their underlying commodity gold, which presents us with a bargain buying opportunity, so take it with both hands.

Those readers who follow me are aware that I am Long both physical silver and gold and that I own a portfolio of gold, silver and uranium mining stocks in the precious metals space, including but not limited:

Mega Uranium Limited (MGA)

Laramide Resources (LAM)

Denison Mines Corp (DNN)

Wheaton Precious Metals Corp. (WPM)

Agnico Eagle Mines Limited (AEM)

SSR Mining Inc. (SSRM)

Endeavour Silver Corp (EXK)

Fortuna Silver Mines Inc (FSM)

First Majestic Silver Corp. (AG)

IMPACT Silver Corp. (IPT:CA)

Pan American Silver Corp. (PAAS)

Sandstorm Gold Ltd. (SAND),

Silvercorp Metals Inc. (SVM)

If you have a comment, please fire it in as they are very much appreciated by our readers and me as they add some semblance of balance to these publications, and I will attempt to address each one of them.

Thanks, Bob K