Gold News

Gold, Silver and the Fed: Easter Week Chart-Fest

5 charts, no conclusions on rates, oil, gold, silver...
GOLD is butting up against record highs in all major currencies, writes Adrian Ash at BullionVault, rising through $2000 for the only the 3rd time ever.
Silver is meantime running close to $25 per ounce, also hitting 12-month highs in spot-market trade and surging 25% from this time last month.
What's up? Besides gold and silver, that is.
Let's start with the US yield curve...
US yield curve, from Fed Funds to 30-year Treasurys. Source: BullionVault
This chart shows you the rate of interest for overnight loans against the rate of interest offered by US government bills and bonds.
That overnight rate is set by the US Federal Reserve for banks to borrow from each other. The other rates are set in the Treasury debt market, where banks and investors trade bills and bonds due to mature in 1 month's time, or 2 months, or 3 months...
...all the way out to 5 years, 10 years or even 30 years.
And say what you like about zero-interest rate policy.
At least it kept the yield curve positive, putting long-term interest rates above short-term rates, as it did this time last year, back at the end of March 2022...
...rather than flipping the yield curve inverted...
...and screaming 'Recession!' like it does today.
Short-term rates now sit as much as 2 percentage points above long-term yields.
That really messes with the banking industry's model of borrowing short-term money to lend longer-term and pocket the difference.
Cue the collapse of Silicon Valley Bank and the final undoing of Credit Suisse as the world's worst-run major lender.
Whether or not more banking casualties are now just waiting to be found naked as the tide goes out, gold since March's record-high month-end last Friday has jumped another $50 in just the first 3 trading days of April, thanks to US jobs vacancies plunging, driving longer-term bond yields lower once more, and sending speculators wild for very leveraged bets on the price of the giant GLD gold ETF.
To repeat: The inverted curve says that the bond market expects short-term interest rates to fall much lower than they currently stand. And that in turn says 'Recession!' looks certain.
Which is, in fact, the plan.
Fed Funds rate vs. US GDP growth and core PCE inflation. Source: St.Louis Fed
"Reducing inflation is likely to require a period of below-trend growth and some softening in labor market conditions."
So said Fed chairman Jerome Powell last month, talking to journalists after the US central bank raised its key overnight interest rate in the face of the Silicon Valley and then Credit Suisse banking crashes.
Naturally the stock market loves it, rallying almost 5% since then. Because bad news is great news when you're pepped up on cheap credit, and 'weak GDP' plus 'rising job losses' will mean interest-rate cuts, right? Who cares what they do to sales or profits?
Read what Powell said again. Then note that, as our chart above shows, the Fed has now raised its overnight rate far above the pace of economic growth and also now above the pace of inflation.
"We have to bring inflation down to 2%," Powell went on in his March press conference.
"There are real costs to bringing it down...but the costs of failing are much higher."
Bottom line?
"Rate cuts are not in our base case, and, you know, that's all I have to say."
With that, the press conference ended. But gold's uptrend didn't.
Chart of gold priced in US Dollars, Euros, Sterling and Japanese Yen, all rebased to 100 = January 2013. Source: BullionVault
Gold just finished March 2023 with record-high quarterly and monthly closes in terms of almost all currencies.
That includes the US Dollar and the world's other reserve currencies (the Euro, Yen and UK Pound).
It also includes gold's major consumer market currencies of the Chinese Yuan, Indian Rupee and Turkish Lira...
...but not the precious metal's 2nd to 4th producer-nation currencies of the Russian Rubles, Aussie Dollars or Canadian Loonies.
Between them, Russia and Australia and Canada account for 60% of gold's top 5 mining countries' output. And while Chinese and US miners might well be racing to bank some of the precious metal's big gains by selling future production at today's prices, the middle 3 won't have the same urgency to hedge.
Not unless they're worried about their energy costs.
One ounce of gold priced in barrels of oil. Source: BullionVault
"A severe recession is the only thing that can temper price and wage inflation, but it will make the debt crisis more severe, and that in turn will feed back into an even deeper economic downturn."
So says the ever-cheerful Nouriel Roubini, finance author, economics professor and all-round "Dr.Doom" as the media love to say.
"Since liquidity support cannot prevent this systemic doom loop, everyone should be preparing for the coming stagflationary debt crisis."
But isn't inflation already easing back? Isn't it set to halve or more even here, in the benighted UK, as if by magic?
Not if Opec can help it.
"This is a precautionary measure aimed at supporting the stability of the oil market," said the Opec+ cartel of producer nations Monday morning, announcing a cut to their joint output of 1 million barrels per day.
Cue instability in the oil market of 8% as the week's Asian trade opened, with a little more instability cutting that jump to 4.5% by lunchtime in Europe.
Long-term, as this Bloomberg column suggests, this type of 'Cut supply and squeeze our customers!'...probably reflects weakness, not strength, for Saudi Arabia, Russia and the rest. Because they have to accept that the Age of Oil is ending, and so they should rush to grab what they can for their sticky toxic black gunk while the rest of the world still needs it.
But Opec is currently in a position to spike prices – sorry, "stabilize" prices – because US shale-oil output growth has been slowing, reducing the power of the cartel's low-cost American challengers to flood the market and undercut them as it did over the past decade or so. And that slowdown in shale growth, plus this week's Opec price-pop, will also complicate the US Government's task of refilling America's strategic petroleum reserve.
Refilling the SPR will already "take years" after Joe Biden emptied it in 2022 to the lowest in 4 decades to keep America tanked up and offset the price hike caused by Russia invading Ukraine. Private-sector stockpiles are also now seeing solid drawdowns. So maybe like Roubini says, stagflation is our future as a fossil-fuel energy crunch keeps input cost-inflation high despite an economic recession.
Very long term, however, the real returns to drilling and selling crude have already been drifting lower for a decade and a half, with the price of gold in terms of oil breaking new ground on an underlying basis, as shown by the 5-year average of the Gold/Oil Ratio on our chart above.  
Yes, that comes in large part because of gold's new strength...
...pretty much averaging $1800 per ounce across the 3 years since the Covid pandemic first broke, and establishing what is starting to look like a very solid floor of central-bank as well as jewellery-consumer demand at this new, higher level.
But it also replays the early 1970s' devaluation shock which saw the US Dollar unpegged from gold, letting the greenback fall hard in terms of the precious metal and supporting if not spurring the oil-price hike and crisis of 1973.
$80 a barrel ain't what it used to be, in short. And talking of ratios...
Gold/Silver Ratio, daily London benchmarks. Source: BullionVault
Gold priced in the Dollar jumped 8.5% across March.
But the price of silver acted to type and, as usual, went nuts by comparison...
...leaping by 16.4%.
That took silver to 3-month highs and helped pull down the Gold/Silver Ratio of the 2 formerly monetary metals below 83 ounce of silver to one ounce of gold.
Pretty much the lowest value for gold in terms of silver so far this year, that marked a steep retreat from the peak above 91 hit as the Western banking scare suddenly blew up in mid-March.
Cue chart-watching tips from technical analysts, claiming either that gold and silver are both now going to leap, with the ratio falling further as silver runs ahead...
...or prophesying that the ratio has completed its correction and so silver is fated to fall relative to the price of the yellow metal.
Look, because BullionVault is a trading exchange, not a tipster, we shan't offer a guess either way. But as with crude oil...only more's worth noting both that the current level of the gold-to-silver ratio is historically high (perhaps suggesting that silver is due to catch up with gold, driving the ratio lower) but also that silver has steadily dropped versus gold (driving the ratio higher) across the last few decades.
Indeed, the current level – holding around 82 – is so high, it was hardly seen in almost a quarter-century between March 1995 and February 2018.
Between those dates, the Gold/Silver Ratio topped today's reading on only 56 trading days in total, less than 1.0% of the time. Those peaks coincided with such gloomy events as the stock market's early 2003 nadir during the DotCom Crash, and then late 2008's banking crash, and then the rebound in gold prices spurred by the UK calling a referendum on Brexit in early 2016.
Across the last 5 years, in contrast, gold has traded at today's silver value of 82 ounces or more on 763 trading days...
...fully 59.0% of the time...
...with fresh all-time records struck above 120 during the gloom-for-the-ages we plunged into as the first-wave Covid lockdowns began 3 years ago.
Again, I won't guess where the ratio heads from here. But if you're looking to trade precious metals this week or next...
...using BullionVault to buy or sell as you choose 24 hours any day of the year...
...then beware that most Western financial markets will be shut on Good Friday, including wholesale London bullion as well as the CME's Comex precious metals derivatives in New York.
Most Western-world exchanges will stay shut next Monday for Easter, except for the return of the US. By when, the Shanghai gold market – and the Shanghai Futures Exchange – will have returned from today's Qingming holiday.
All told, this could make things pretty spicey either side of Easter weekend if Friday's monthly US jobs data badly miss or overshoot what analysts think they will say.
Either way, gold now costs twice what it did in US Dollars at Easter 2008, back when the collapse of Bear Stearns first saw it cross above $1000 per ounce.
The money-lenders didn't get thrown out of the temple that week, and the US Fed instead cast a blanket over the banking sector. Pretty much like we just saw again, 15 years later, with Silicon Valley Bank and Signature. Maybe this time there won't be a Lehmans and AIG crisis to follow in 6 months' time. 

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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