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To describe, with the Fed on a hawkish warpath to eliminate widespread inflation, JPMorgan CEO Jamie Dimon told CNBC on Jan. 10 that a resistant U.S. economy could prove problematic for the financial markets in 2022.
” The customer balance sheet has actually never been in better shape; theyre spending 25% more today than pre-COVID,” said Dimon. “Their debt-service ratio is better than its been because weve been keeping records for 50 years.”
As for inflation and the Fed:
” Its possible that inflation is even worse than they believe and they raise rates more than individuals think. If its simply four [I personally would be amazed rates of interest] increases [in 2022],” he added.
How would the financial markets respond?
The imminent rates of interest hike by the Fed is nearly specific. Are financiers concerns warranted and will it indicate problem for the valuable metals?
Source: CNBC
Singing a similar tune, the International Monetary Fund (IMF) alerted on Jan. 10 that the Feds rate walking cycle could slaughter emerging markets. Its report revealed:
” For most of last year, investors priced in a short-term rise in inflation in the United States provided the unsteady economic healing and a slow unravelling of supply traffic jams. Now belief has shifted. Prices are increasing at the fastest speed in almost 4 decades and the tight labor market has actually begun to feed into wage increases.”
Volatile Days Ahead
While I alerted for all of 2021 that inflationary pressures were bullish for the U.S. dollar and U.S. Treasury yields and bearish for the PMs, the IMF specified:
” Faster Fed rate increases in reaction might rattle monetary markets and tighten financial conditions globally. These developments could come with a slowing of US need and trade and might cause capital outflows and currency devaluation in emerging markets.”
As a result, even the IMF is anxiously bullish on the USD Index:
For a great reason. With September, July, June, and May all passed the wayside, now, the market-implied possibility of a Fed rate hike in March has actually risen to nearly 83%. For context, the probability of a March liftoff was less than 10% in early November.
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The market-implied likelihood of 4 rate walkings by the Fed in 2022 has increased to almost 87%. Again, the likelihood was less than 50% in early November.
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Why the product shift? Well, while Ive been alerting for months that rampant inflation would generate a hawkish about-face from the Fed, financiers are finally happening to this truth. With inflation still running hot, market individuals comprehend that prices pressures will not subside without policy actions from the Fed. As an outcome, the “temporal” narrative is dead, and financiers have lost one of their staunchest allies. This suggests that predicting silver and gold at greater levels in the medium term may not be the best concept.
To that point, Bank of Americas dove-hawk spectrum shows that the dovish brigade has actually lost a number of soldiers. With the hawks now on the offensive, the authorities preaching financial patience are scarce.
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For context, Bank of America still positions San Francisco Fed President Mary Daly in the dovish bucket. Nevertheless, I kept in mind on Dec. 23 that she has actually materially shifted her stance in current weeks:
Source: The New York Times
In addition, with inflationary pressures still bubbling, the Manheim Used Vehicle Value Index struck another all-time high of 236.2 in December, as “wholesale used car costs (on a mix-, mileage-, and seasonally changed basis) increased 1.6% month-over-month.”
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On top of that, the cost of shipping from Shanghai, China, is still increasing. With the U.S. importing more products from China than any other nation, the inflationary influence on the U.S. economy is product.
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While the GDXJ ETF benefited from the NASDAQ Composites intraday turnaround on Jan. 10, I cautioned on Oct. 26 that financial policy tightening up would eventually upend the junior miners. I wrote:
To discuss, the green line above tracks the GDXJ ETF from the beginning of 2013 to the end of 2015. If you analyze the left side of the chart, you can see that when Fed Chairman Ben Bernanke hinted at tapering on May 22, 2013, the GDXJ ETF decreased by 32% from May 22 till the taper started on Dec. 18.
The assault didnt end there. When the taper officially began, the GDXJ ETF delighted in a relief rally (comparable to what were witnessing now), as long-lasting interest rates declined and the PMs assumed that the worst was in the rearview.
Nevertheless, as the liquidity drain reached the junior miners over the medium term, the GDXJ ETF decreased by another 36% from when the taper was revealed on Dec. 18, 2013 until completion of 2015.
To that point, with part one currently on the books, the 2nd act will likely unfold as soon as the Fed officially begins its taper in “either mid-November or mid-December.” Therefore, history indicates that the GDXJ ETF still has a lot of downside left.
While the junior miners ETF has decreased by more than 11% because Oct. 26, Goldman Sachs has actually happened to our way of thinking.
Please see listed below:
To explain, Goldman Sachs told its clients last week that the yellow metal has actually been following its ominous path given that 2013/2014 (as you might recall, Ive been writing about the 2013-now analogy for months). For context, the red line above tracks golds cost action from July 2010 until December 2014, while the blue line above tracks golds rate action from July 2019 till now.
You can see that the pair have been in sync for some time if you evaluate the in proportion overlay. If you focus your attention on the red lines predicament as time passes, its clear why Goldman Sachs is warning its clients about “additional drawback risk”.
To that point, with the financial investment bank forecasting a real (inflation-adjusted) rate of interest regime modification in 2022, gold is poised to suffer along the method.
Well, while Ive been warning for months that widespread inflation would elicit a hawkish about-face from the Fed, investors are lastly coming around to this truth. With inflation still running hot, market individuals comprehend that prices pressures wont decrease without policy responses from the Fed. With the PMs suffering from a similar basic condition– as both the PMs and technology stocks are extremely allergic to increasing interest rates– volatility is likely here to remain. As an outcome, the Fed should continue to break investors hearts over the medium term.
With interest rates poised to rise and the USD Index still underestimated, more headwinds ought to challenge mining, gold, and silver stocks in the coming months.
To describe, the numerous bars above track golds month-to-month returns when the genuine U.S. Federal Funds Rate (dark blue), the real U.S. 5-Year Treasury yield (green), and the genuine U.S. 10-Year Treasury yield (light blue) begin with positive/negative worths and after that increase/decrease.
If you focus your attention on the bars furthest to the right, you can see that when the genuine U.S. 5-Year Treasury yield and the genuine U.S. 10-Year Treasury yield are unfavorable and after that increase, gold suffers its worst regular monthly efficiencies. With the current essential environment providing us with precisely that, similar results will likely materialize over the medium term.
The bottom line? While financiers desperately purchased the dip on Jan. 10, the more than 2% intraday swing in the NASDAQ Composite shrieked of monetary policy anxiety. With another hot inflation print poised to strike the wire on Jan. 12, the reprieve will likely be short-lived. With the PMs suffering from a similar essential affliction– as both the PMs and innovation stocks are exceptionally allergic to increasing interest rates– volatility is likely here to remain. As a result, the Fed ought to continue to break investors hearts over the medium term.
In conclusion, the PMs rallied on Jan. 10, though their essential outlooks remain profoundly bearish. With rates of interest poised to rise and the USD Index still undervalued, more headwinds ought to face mining, gold, and silver stocks in the coming months. As a result, long-lasting purchasing opportunities are likely still a ways away.
Thank you for reading our totally free analysis today. The latter includes numerous premium details such as the targets for gold and mining stocks that might be reached in the next couple of weeks. If you d like to read those premium information, we have excellent news for you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & & Care
By checking out Przemyslaw Radomskis, CFA reports you completely concur that he will not be held responsible or accountable for any choices you make relating to any information offered in these reports. Investing, trading and speculation in any monetary markets may include high threat of loss. Przemyslaw Radomski, CFA, Sunshine Profits employees and affiliates as well as members of their families might have a long or brief position in any securities, including those discussed in any of the reports or essays, and might make extra purchases and/or sales of those securities without notification.
Updated on Jan 11, 2022, 11:38 am
