Gold market is waiting for next week's Fed meeting – StoneX's O'Connell

The gold market has been trapped in a three-week holding pattern and could continue to consolidate until next week's Federal Reserve monetary policy meeting, according to one market analyst.

The CME FedWatch Tool shows that markets see a more than 90% chance that the Federal Reserve will raise interest rates by another 50-basis points. The central bank has signaled that it could raise interest rates by 50-basis points at the next two meetings. Meanwhile, markets are pricing in three consecutive aggressive moves.

However, in her latest weekly analysis, Rhona O'Connell, Head of Market Analysis for EMEA and Asia at StoneX, said that gold investors should look past any potential knee-jerk reactions following next week's announcement and focus on the bigger picture.

Gold prices continue to trade around the $1,850 level. August gold futures last traded at $1,856.70 an ounce, up 0.25% on the day.

Even with the Federal Reserve's aggressive monetary policy stance, markets see interest rates hitting a high of 3.50% by the end of the year. However, inflation pressures will remain elevated.

"At present, U.S. two-year yields are 2.7%, while headline inflation is 8.2%, although there are still some dislocations to drop out of the year-on-year calculations. So, while the headlines about rate hikes are likely to generate knee-jerk reactions in the markets, the longer-term view should revolve around persistent negative real rates," said O'Connell.

Although markets continue to price in significant rate hikes during the summer, O'Connell noted that there is still a lot of uncertainty regarding how the central bank's plan to reduce its balance sheet will fit with current monetary policies.

Gold price remains chained to $1,850 as OECD lowers growth forecasts

This month Federal Reserve started to run down its balance by $47.5 billion. By September, it will begin reducing its balance sheet by $95 billion.

"Tightening gives a natural buoyancy to bond yields, and it is certainly possible that this could allow the Fed to be less aggressive in its interest rate hiking than the bond markets have been discounting," said O'Connell. "So, the essential financial parameters remain supportive for gold, but the professional markets are still not committing in any size."

Ahead of the Federal Reserve's decision is Friday's Consumer Price Index report. Economists are expecting the data to show that inflation pressures have peaked. The question remains, though, as to how fast it will take for prices to cool down.

According to consensus forecasts, economists are expecting annual headline inflation to rise 8.2%, down slightly from the March peak at 8.5%. Annual core inflation, which strips out food and energy prices, is expected to increase 5.9%, down from 6.2% in April.

By Neils Christensen

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Gold pricing consolidates above the 200-day moving average

As of 4:55 PM EDT gold futures basis, the most active August 2022 contract is fixed at $1854.40 which is a net gain of $10.70 or 0.58%. In fact, over the last 13 trading days, gold prices have remained and closed above a key technical study that indicates whether or not a stock or commodity is in a long-term bullish or bearish trend; the 200-day moving average. Currently, this key indicator is fixed at $1841.70. At the same time, it must be noted that gold has been trading in a narrow and defined trading range between $1821 and $1875 for over two weeks now.

When viewing gold prices through a Japanese candlestick chart traders focus on the "real body" which is a rectangle drawn between the open and closing prices. In a daily Japanese candlestick chart, the real body represents the open and closing prices for the trading day. The daily high and low are referred to as wicks and do not warrant the same attention as the real body.

Japanese candlestick theory believes that the most important component of a daily candlestick is the relationship between its opening and closing price. They view each trading day as a battle and the outcome of that battle is viewed through the real body of a candlestick to determine whether or not the bullish or bearish faction was able to dominate price action.

Therefore, the fact that over the last 12 consecutive trading days the real body on the daily Japanese candlestick has been above the 200-day moving average is significant. It indicates that a base has been forming at current pricing and although there have been four instances in which the lower wick has occurred below $1841.70 is not as important as the fact that the real body of the candlestick has remained above this moving average.

This puts the first level of technical support at $1840. The first level of technical resistance occurs at $1870 which corresponds to the closing price on Thursday, June 2, and the opening price on Friday, June 3. Major resistance occurs between $1889 and $1891 as these two price points represent the 50 and 100-day moving averages.

It is also important to note that gold prices have remained fairly stable defined by the $50 differential between recent daily highs and lows considering the recent dollar strength. Today’s moderate gains in gold were based upon bullish market sentiment as the dollar index was in essence unchanged on the day.
 

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Gold loses early gains as greenback, U.S. Treasury yields push higher

Gold prices are modestly down in midday U.S. trading Monday, while silver is holding mild gains. Both metals lost altitude in morning trading as the U.S. dollar index rallied to its daily high, while U.S. Treasury yields resumed their upward advance. The yield on the 10-year U.S. Treasury note is now fetching 3.02%. August gold futures were last down $4.70 at $1,845.50. July Comex silver futures were last up $0.212 at $22.115.n ouces

Global stock markets were mostly up overnight. U.S. stock indexes are higher at midday. Trader and investor risk appetite is a bit keener to start the trading week, amid easing Covid restrictions in China.

Two key data points of the week are the European Central Bank’s regular monetary policy meeting Thursday, at which the central bank is expected to lay out plans for tightening its monetary policy. On Friday the U.S. consumer price index report for May is set for release. The CPI is expected to be up 8.2%, year-on-year, after a rise of 8.3% in April.

Emerging market central banks represent new demand for gold as they de-dollarize – Société Générale

The key other outside market today sees Nymex crude oil prices a bit weaker and trading around $118.50 a barrel.

Technically, August gold futures bears have the overall near-term technical advantage but the bulls are still working on a fledgling price uptrend. However, they need to show fresh power soon to keep it alive. Bulls' next upside price objective is to produce a close above solid resistance at $1,900.00. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,800.00. First resistance is seen at today’s high of $1,861.20 and then at $1,875.00. First support is seen at last week’s low of $1,830.20 and then at $1,825.00. Wyckoff's Market Rating: 3.5

July silver futures bears have the overall near-term technical advantage. However, the bulls are working on a fledgling price uptrend on the daily chart. Silver bulls' next upside price objective is closing prices above solid technical resistance at $23.00 an ounce. The next downside price objective for the bears is closing prices below solid support at $21.00. First resistance is seen at today’s high of $22.565 and then at $23.00. Next support is seen at $21.785 and then at last week’s low of $21.41. Wyckoff's Market Rating: 3.5.

July N.Y. copper closed down 375 points at 443.40 cents today. Prices closed near mid-range today. Prices have backed well down from last Friday’s five-week high. The copper bulls still have the overall near-term technical advantage. A three-week-old price uptrend is in place on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 465.00 cents. The next downside price objective for the bears is closing prices below solid technical support at last week’s low of 425.90 cents. First resistance is seen at 450.00 cents and then at last week’s high of 457.70 cents. First support is seen at today’s low of 443.65 cents and then at 435.00 cents. Wyckoff's Market Rating: 6.0.

By Jim Wyckoff

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Russia's Gold Standard a "Pipe Dream"; Why a Gold Standard Is Not Happening – Jeff Christian and Gary Wagner

According to Jeff Christian and Gary Wagner, Russia did not return to a gold standard after the Ukraine war. And even if they had, a gold standard won't work.

Jeff Christian is the Managing Director of CPM Group, while Gary Wagner is the Editor of TheGoldForecast.com. They spoke with David Lin, Anchor and Producer at Kitco News.

Monetary Policy and Gold

Central banks around the world have been hiking interest rates. The Bank of Canada recently increased its key policy target to 1.5 percent. However, gold's price has remained relatively flat despite such monetary tightening.

Christian is unsurprised that the price has not moved much.

"You still have historically low interest rates," he said. "… And you also have negative interest rates on an inflation-adjusted basis… In addition to that, the increase in interest rates reflects concerns about inflation, which are positive for gold prices."

He remarked that increasing "volatility and uncertainty" are bullish for gold.

Wagner added that the Federal Reserve's asset sales would affect the demand for gold, "They're reducing their balance sheet. Both [higher interest rates and asset sales are] putting a strong effect on the demand side because it's more expensive to do business, more expensive for goods."

Russia's Gold Fix

In March of 2022, the head of Russia's parliament Pavel Zavalny said that countries can pay for Russian resources with gold. Yet the claim that this implies a return to a gold standard is a "Russian pipe dream," according to Christian. "… The reality is that nobody is actually paid in gold, or in fact in rubles, for the most part."

Christian opined that Russia's rhetoric around gold was a "face-saving" measure, and that the Russian energy company Gazprom was simply accepting payment in Euros and converting them to rubles.

 Is global 'slavery' coming? Gold guards against 'total control' – Bob Moriarty

He added that the purported peg of 5,000 RUB to 1 gram of gold is "inaccurate." In the early days of the Ukraine conflict, said Christian, "there was a tremendous demand for gold from investors within Russia, and they were paying a premium to the world price. The 5,000 ruble per gram was a discount to the world price. So the refiners were saying, why would we sell to the central bank at a discount… when we can get a premium by selling to investors? So after about a week or so, the central bank of Russia actually pulled back and said, no, we will buy gold from domestic producers and refiners at a negotiated price relative to the international price… there was no peg."

A Gold Standard Comeback?

Wagner said that a return to a gold standard would be a "hard to an impossible task." He added, "Can we go back to some kind of modified gold standard? Possibly. But an actual gold standard? I don't believe that any country has the ability to back their currency dollar-for-dollar with gold. That would take way too much gold, when you look at the amount of currency in the system."

Christian added, "Let's say I go to a gold standard, and I make my currency convertible," said Christian. "What's happened in the past? Well in the 1960s, the U.S. lost 60-70 million ounces of gold at a fixed price. Prior to that, there were runs on the Bank of England when they had a gold standard."

To find out Christian and Wagner's views on whether a gold standard would tackle inflation, watch the above video.
 

By Kitco News

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

What's next for gold price after May's U.S. employment surprise?

Despite an impressive two-day rally, gold is ending the week flat after the upbeat U.S. May employment report managed to keep the doom and gloom projections about the economy's future at bay.

The gold market hit new daily lows Friday as markets digested U.S. nonfarm payrolls rising 390,000 versus the expected 328,000.

"The May jobs report is showing moderation in economic momentum. However, the sharp declines anticipated by the market recently don't seem to be materializing," TD Securities global head of commodity strategy Bart Melek told Kitco News. "On the margin, this implies that the market may well increase rate expectations. Indeed, rates (nominal and real) across the curve rose following the report. This helped to drive the yellow metal below $1,860/oz at the time of writing, down from around $1,863-66/oz before the report was released."

For gold, the upbeat employment numbers mean that the Federal Reserve can stay aggressive with its planned 50-basis-point rate hikes in June and July, which weighs on the precious metal.

"Markets may have been a little premature to make the assumption that the Fed is not going to be as aggressive. We won't know that for quite some time. So far, economic data is okay," Melek said. "We judge that this report, along with any additional future data showing a steadfast economy, should pull prices back down to the 200dma ($1,842). If data stays firm for a prolonged period, wages remain bid, the yellow metal is likely to fall below $1,800/oz."

Inflation is also very stubborn, forcing the Fed to stay on its hawkish path with QT and interest rates.

"Price pressures are manifesting in services, which are picking up inflation with a lag. As such, input costs from energy to labor costs will manifest. Prices index will remain stubbornly high for a period," warned Melek. "From a central bank perspective, they have to keep that tightening policy ongoing."

The more optimistic data are taking the safe-haven trade away from gold, but the doom and gloom predictions will weigh on risk-on sentiment in the long-term, said OANDA senior market analyst Edward Moya.

"Gold prices edged lower after a robust nonfarm payroll report sent the dollar higher. Traders expected to see a stronger deceleration with job growth, making the Fed pivot away from a half-point rate hike in September (June and July are now widely expected to be 50bps hikes each). The economy is not softening quickly, and that took away the need for safe havens today," Moya said. "Growing doom and gloom calls, however, should keep the precious metal supported over the short-term."

High inflation will support gold prices this summer as investors choose to get rid of "bad money" and buy into "good money," according to Gainesville Coins precious metals expert Everett Millman.

"This week, $1,850-65 flipped from stubborn resistance levels to key support levels for the gold price. The rising global demand for gold reflects a well-established economic principle, Gresham's Law — bad money drives out good money. If you have bad money that is losing its value, you want to spend it as quickly as possible. Gold is good money, hard money, and there is an incentive to keep it," Millman told Kitco News. "Gold is proving to be the preferred store of value given the selloff in stocks and crypto."

However, the Fed's aggressive stance still poses a downside risk to gold, noted Millman. "We can't rule out that QT and rising interest rates will push gold down in the near term," he said. "$1,900 is the next key level for gold to break through. If gold fails at $1,900, it will continue to trade in the mid-$1,800 for the rest of the summer."

Tennessee removes sales tax on gold and silver, only eight states to go

Recession warnings are keeping gold in that mid-$1,800 level, Millman added. "The Jamie Dimon economic 'hurricane' comment, Yellen admitting that she was wrong about inflation. These are not the type of comments that happen when the economy is strong. In any kind of recessionary environment, when people are worried about losing jobs or the value of their wealth, gold is the logical place for money to preserve value."
 

Next week's data

Thursday: ECB rate decision, U.S. jobless claims

Friday: U.S. CPI

By Anna Golubova

Time to buy Gold and Silver on the dips

Tim Moseley

A strong jobs report supports continued monetary tightening by the Federal Reserve

A Bloomberg survey of economists indicated that the medium estimate for jobs added in May would show that approximately 318,000 new jobs were added. Additionally, the survey also predicted that the unemployment rate would fall to 3.5%. A Wall Street Journal survey of economists forecasted that employers would add 328,000 jobs in May. The survey also anticipated that the unemployment rate would fall to 3.5%. Both surveys underestimated both the number of jobs added in May 2022 and the unemployment rate.

The U.S. Bureau of Labor Statistics released the latest jobs report which said, “Total nonfarm payroll employment rose by 390,000 in May, and the unemployment rate remained at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, in professional and business services, and in transportation and warehousing. Employment in retail trade declined.”

Today’s jobs report infers that economic recovery continues to move forward despite recent actions by the Federal Reserve which is continuing its monetary and quantitative tightening. Beginning in March 2022 the Federal Reserve raised its Fed funds rate for the first time since they were lowered in 2018 to between zero and 25 basis points by ¼% (25 basis points). This was followed by a 50-basis points rate hike at the May FOMC meeting. It is also highly anticipated that the Federal Reserve will continue this trend by raising rates an additional 50 basis points at both the June and July FOMC meetings.

The CME’s FedWatch Tool is currently forecasting that there is a 94.2% probability that the Federal Reserve will move forward with another half a percent rate hike in June and an 87.2% probability that the Fed will raise rates another half a percent during the July FOMC meeting. The net result if these forecasts come to fruition is that the Federal Reserve will have raised its internal Fed funds rate from near zero to 2% in four months.

The reports that carry the greatest weight for the forward guidance of the Federal Reserve are the inflation report (PCE core inflation index) and the monthly jobs report. The Fed will most likely continue to implement both rate hikes and quantitative tightening (a reduction of their balance sheet) as long as inflationary pressures continue at the current elevated levels and the monthly job report does not indicate a strong reduction in new jobs added which would indicate that no major economic contraction occurred increasing the likelihood of a soft landing.

Today’s jobs report resulted in a strong price decline in gold as well as a nominal increase in the value of the dollar. As of 5:15 PM EDT gold futures basis, the most active August 2022 contract is currently fixed at $1853.90 after factoring in today’s decline of almost a full percent (-0.94%) or $17.50. Dollar strength was responsible for roughly 1/3 of today’s decline in gold prices. The dollar gained 0.35% taking the dollar index to 102.185.

The decline today in both gold and silver as well as the gains in dollar value was the direct result of today’s U.S. nonfarm payroll report coming in above expectations. The better-than-expected report paves the way for the Federal Reserve to continue its current forward guidance which includes additional interest rate hikes and continued attempts to reduce its balance sheet which has swelled to nearly $9 trillion to be initiated over the next two FOMC meetings, the next FOMC meeting will begin on the 14th of this month, followed by the July meeting which will begin on the 26th.

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Gold pricing -The dollar gives value and the dollar takes it away

Unquestionably dollar strength or weakness plays an extremely critical role in day-to-day price changes of gold. Intrinsically dollar strength or weakness has an exact correlation to price changes in gold. That is because in North America gold prices are paired against the U.S. dollar. Market sentiment that defines whether traders and investors are bidding gold prices higher or lower is always only partially responsible for gold’s net price change.

Yesterday, market participants were aggressive buyers taking the price of spot gold roughly $24 higher. However, dollar strength played a critical role resulting in a net gain in gold of only $9.10.

Today, we are seeing the exact opposite reflection with dollar weakness resulting in over half of the gains. As of 4 PM EDT spot gold is fixed at $1870 after factoring in a net gain of $23.50. According to the Kitco Gold Index (KGX), dollar weakness accounts for $14 of today’s move, and market participants bidding gold prices higher accounts for the remaining gain of $9.50.

Gold futures basis the most active August 2022 contract is currently fixed at $1873.50 after factoring in today’s gain of $24.90 or 1.35%. Concurrently the dollar index is fixed at 101.785 after factoring in today’s decline of 0.744 points or 0.73%. As in spot gold, today’s gains in gold futures reflect the same ratio with both market participants actively buying and dollar weakness contributing to the overall gains.

This brings us to our current technical analysis of the dollar. The dollar tends to have multi-year cycles of strength and weakness.

The chart above is a two-week candlestick chart of the dollar index. At the beginning of 2017, the dollar completed a dynamic rally beginning in 2014 when the dollar index was trading at approximately 79. Over three years, the dollar hit an apex just above 103 which was followed by a strong price decline from 2017 until January 2018. This correction took the dollar index from 103 down to 88.23. The relative value of the dollar declined by approximately 16%. Following the correction that concluded in 2018, there was a multiyear rally with the dollar gaining value up until the first quarter of 2020 when the dollar reached an apex of 103 once again. Just as in the top that occurred in 2017 what followed in 2020 was a price correction that lasted approximately a year and ½ resulting in a decline in dollar value of approximately 15%. In other words, historically speaking the dollar tends to have extended periods of strength and extended periods of weakness. The latest top that was achieved in the dollar index in w

hich for the third time since 2017 the dollar index hit a top or apex between 103 and 105. As of today, the dollar index has declined from 105 to 101.76.

This brings us to our observation today which is that the U.S. dollar historically will have extended rallies and extended declines which can last a year or more. While past performance does not guarantee that we will witness the same occurrence once again, it does suggest that we could see a decline in dollar value over this next year or longer. If the dollar continues to have defined longer-term trends, then we may see the dollar index decline in this instance. If that assumption proves to be correct it will have a profound impact on gold creating bullish market sentiment for the precious yellow metal.

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Gold declines almost 1%, flirting with the 200-day Tuesday May 31, 2022 18:06

Today's price decline results in the second consecutive month of lower prices. On a technical basis, the fact that gold tested and briefly dipped below its 200-day moving average brings up a realistic probability that the long-term market sentiment for gold is neutral to bearish.

As of 4:30 PM, ET. August gold is trading near its low today of $1837.60, and the 200-day moving average is currently fixed at $1846.90. Gold prices hit a low two weeks ago of $1792.80 before recovering and trading back above the 200-day moving average last week. Today gold opened at $1856.50 and traded to a high of $1867.90 before moving lower and breaking below the widely accepted long-term market sentiment study (200-day moving average) on an intra-day basis.

President Biden meets with Chairman Powell and U.S. Secretary of the Treasury Yellen

Today President Biden met with Jerome Powell and Janet Yellen. This is their first meeting since Chairman Powell was confirmed for a second term by the Senate earlier this month. Before the meeting, President Biden made a brief remark stating that this meeting was to "discuss my top priority, and that is addressing inflation."

The obvious agenda was to discuss the extremely high level of inflation. With inflation still at levels not seen for over 40 years.

"My meeting with the Chairman today and Secretary Yellen is to discuss my top priority, and that is addressing inflation in order to transition from historic recovery to a steady growth that works for American families. And my plan is address inflation starts with simple proposition; Respect the Fed, Respect the Fed's independence, which I have done and will continue to do."

White House National Economic Council Director Brian Deese called it, "very constructive ,,, We have run this first leg of the race at a very rapid clip that has put us in the strong position relative to our peers, but this is a marathon and we have to move and shift to stable resilient growth. We can actually take on inflation without having to sacrifice…all of those (labor market) gains."

It has been actions by the Federal Reserve's monetary policy that has resulted in higher yields in U.S. Treasuries and dollar strength. Those factors have pressured gold lower over the last two months. While higher levels of inflation typically result in bullish market sentiment for gold, higher interest rates and dollar strength have the opposite effect. Therefore, market participants have witnessed the pendulum shifting from bullish market sentiment in gold as inflation rose, and bearish market sentiment as interest rates and the dollar moved higher.

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Gold prices stuck in no-mans land holding support at $1,850 on quiet U.S. holiday

Gold prices have dropped from their overnight highs but continue to hold support above $1,850 an ounce; Commodity analysts note that the market generally lacks conviction in any direction as U.S. markets are closed for the Memorial Day long weekend.

Spot gold prices are trading in neutral territory Monday morning, last trading around $1,856 an ounce.

Analysts note that the precious metal is trading in the middle of its broader long-term range. Although gold prices continue to benefit from a weaker U.S. dollar, rising risk sentiment, helping to boost equity markets, is taking some shine off the yellow metal's safe-haven allure.

However, some analysts have said that the jump in the S&P 500 last week was a classic bear market. Analysts have said that rising fears of an impending recession will continue to weigh on equity markets.

"There could still be more pain to come," said Craig Erlam, Senior European Market Analyst at OANDA. "But at these levels, it's only natural that the vultures are circling. There isn't a huge amount to be excited about on inflation, interest rates and the economy but that doesn't mean there isn't value out there."

Friday, commodity analysts at Bank of America warned that oil prices, being driven by Russia's invasion of Ukraine, could push the global economy into a 1980s-style recession.

"For next year, we believe oil demand could approach pre-Covid levels but only if Russian liquids production holds near 10mn b/d and OPEC+ supplies increase. With our $120/bbl Brent target now insight, we believe that a sharp contraction in Russian oil exports could trigger a full-blown 1980s style oil crisis and push Brent well past $150/bbl," said Francisco Blanch, Global Research head of global commodities and derivatives research at Bank of America Securities.

Market analysts have said that these fears will continue to support gold prices.

"Recent data has shown that the world's largest economy is cooling rapidly, raising fears of a hard landing in the near term. This situation has led traders to price in a less aggressive tightening cycle over the forecast horizon, pulling down Treasury rates of late," said Diego Colman, Market Analyst, in a note published Saturday.

"In terms of technical analysis, gold is stuck between support at $1,840 and resistance at $1,870. A decisive move outside of these levels is required for near-term guidance, but if prices break out on the topside, buyers could become emboldened to launch an attack on $1,895," he added. "If XAU/USD resolves to the downside and breaches the $1,840 area, where the 200-day simple moving average is currently located, selling pressure could accelerate, paving the way for a drop towards $1,785."

However, not all analysts are convinced that gold prices are ready to move higher or that the U.S. dollar has peaked.

In a recent note to clients, Bart Melek, head of commodity strategy at TD Securities, said that he still prefers to sell rallies in the gold market.

"Given that [gold's] positioning is still tilted to the long end of exposure, any signs that inflation will remain stubbornly high, or data pointing to a steadfast economy due to higher wages and the spending of savings, as seen today, Fed Funds estimates could easily move back to the highs seen at the start of Mayor even higher," he said. "…Repositioning could easily force gold to trend down to $1,840/oz and then to just below $1,800/oz. It should be noted that specs have plenty of room to take on new short exposure and reduce long positions."
 

By Neils Christensen

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

If gold is not the best inflation hedge, then what is? Nancy Davis

Gold and oil are not ideal investments for those seeking inflation hedging, according to Nancy Davis, Founder and Managing Partner of Quadratic Capital Management. Davis spoke with David Lin, Anchor and Producer at Kitco News.

Stock and Bond Market

Davis commented on the recent stock market selloffs. She attributed the fall in prices to companies facing higher costs.

“This is a little bit of a wakeup call,” she said. “…Investing is risky and, you know, especially when you’re buying corporate securities, whether it’s their stocks or their bonds, if that corporation has higher costs, maybe in the form of labor costs, more supply side disruptions in the form of, you know, all the things that are happening around the world from a geopolitical and COVID perspective, coupled with consumer confidence in this country is at lows from 2008.”

Davis also said that markets have “priced in” the Federal Reserve’s projected interest rate hikes. Fed Chairman Jerome Powell recently raised interest rates.

“Now I think it’s really important for investors to realize that the rate hikes from the Fed have already been priced in,” she remarked. “The Fed has only hiked 75 basis points so far, but the interest rate markets have moved with the Fed’s forward guidance. So… we have about six months left in the year in 2022, and the rates market has priced in 175 basis points. So, if the Fed does not hike 175 basis points, they’re actually going to be easing rates.”
 

Inflation and CPI

Davis said that the Fed has not lost credibility with investors.

“I know the Fed has gotten a lot of critics saying they’re not credible and all those things,” she mentioned. “I am not one of those. I think the Fed is doing the best job they can with the tools they have available… I think using the balance sheet more as a tool to fight inflation is prudent… [It] seems like they’re going to be using that in addition to hiking policy rates.”

Davis also said that the Consumer Price Index is not the only way to calculate inflation.

“The big problem I see with CPI alone is that a third of the index, approximately 33 percent, is what they call ‘shelter,’ and it’s actually owner-occupied rent,” she said. “… Year over year, rent increases are up about 1.5 percent, whereas home ownership prices are up closer to 20 [percent].”

Do Gold and Commodities Hedge Against Inflation?

Davis’s company, Quadratic Capital, has a fixed-income IVOL ETF that protects against inflation. According to Davis, “85 percent of the portfolio” is composed of Treasury Inflation-Protected Securities (TIPS).

“But then we try to fix the problems that exists with TIPS alone… [We] actually try to profit when long-dated yields move higher, which would likely happen in a stagflationary or inflationary environment… And the other really attractive thing in my opinion for investors is we own options. And whenever you own options… you’re long volatility on the underlying asset class… So we actually own fixed-income volatility, which is a nice potential diversifier.”

She added that real assets, such as energy and gold, are not the best inflation hedges.

“I personally think, you know, energy and gold and all these real assets may not be the best inflation asset because… they don’t pay any coupons so there’s no monthly distribution at all,” said Davis. “They do have carry costs… Gold is not an inflation hedge, in my opinion, it’s a currency trade. It has no yield, it has no carry.”

For more information on inflation hedging, watch the video above.

By Kitco News

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley