Investors wait for tomorrow’s CPI inflation report for April

Traders and investors are waiting for the release tomorrow of the Consumer Price Index inflation report that will be released right before New York markets open. The CPI will probably be one of the most important economic reports to be released by the government this month. Not only will the CPI be an integral component that will shape and influence market sentiment of individual investors, but it will also help to guide the Federal Reserve’s monetary policy at next month’s FOMC meeting.

The Federal Reserve sent shock waves through the financial markets when Chairman Powell suggested that a couple more ½% interest rate hikes are a likely possibility at the June and July FOMC meetings. As expected, they raised the Fed funds rate by ½ a percent after this month’s FOMC meeting but the announcement by Chairman Powell of possibly three concurrent ½% interest rate hikes was perceived as hawkish and had a dramatic impact on markets.

With some exceptions, we have seen a substantial price correction occur in U.S. equities and in the precious metals. The cost of borrowing capital rising due to the Federal Reserve’s recent and anticipated rate hikes is intended to reduce demand by creating an economic contraction. This had a profound and negative impact on U.S. equities. Since the pandemic corporations in the United States have become addicted to free money and the extended correction is a reflection of the withdrawal pains by corporations as they adjust their forward guidance to reflect the change in the cost of borrowing capital.

Both gold and silver pricing have been in a defined corrective mode since the middle of April. Gold futures traded to a high of $2003 on April 18 and have been losing value for the last four consecutive weeks including this week which is still far from over. Gold futures basis the most active June 2022 contract opened at approximately $1884 and as of 5:06 PM, EDT is currently fixed at $1837.20 after factoring in today’s price decline of $21.40 or 1.15%. Gold has declined 2.49% in the last two trading days.

Typically, upticks in inflationary pressure create bullish undertones for gold prices as it is regarded as an excellent hedge against inflation. However, the current scenario which is a more aggressive Federal Reserve in regards to raising interest rates leads to rising yields in U.S. Treasuries and a strong dollar. Both dollar strength and rising yields have the opposite effect on gold prices creating strong bearish market sentiment as higher Treasury yields reduce investor's attraction to gold as it is a non-interest yielding asset and because gold is paired against the dollar, there is a 100% negative correlation between increased value in the dollar and gold pricing. The net result is that rising inflation took gold prices to $2078 during March (one edge of the sword) and then to its current pricing at $1835 (The other edge of the sword). The drop from $2078 to gold’s current price is a decline of 11.59%. Truly inflationary pressure is a double-edged sword for gold.

The latest forecast for tomorrow’s CPI report is that inflation will drop from 8.5% to 8.1%. The question becomes how will gold prices react if the actual numbers are above the current estimate? While high levels of inflation have historically been extremely bullish taking gold prices higher the anticipation of a more hawkish Federal Reserve will have the opposite effect.
 

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Cash is the king as financial market melt-down continues taking gold lower

The selling pressure continued as U.S. equities continued in their dramatic decline. On March 28, the S&P 500 hit an intra-week high of 4635. What followed was five consecutive weeks of dramatically lower values. If today’s selling pressure indicates the week ahead, we could certainly witness U.S. equities declining over the last six consecutive weeks. In this short period, the S&P 500 has lost almost 14% in value (-13.89%). Today alone, the S&P 500 lost 3.20%. However, it was the NASDAQ composite that had the greatest percentage decline breaking below 12,000. After factoring in today’s decline of 521.41 points, the tech-heavy index closed at 11,623.25.

Gold prices also experienced a sharp price decline and as of 4:55 PM EDT, the most active June 2022 futures contract is down $29.20 or 1.55% and fixed at $1853.40. The only precious metal to gain value on the day was palladium. Palladium futures gained $50.30 a net gain of 2.49%, and are currently fixed at $2073.50.

The dramatic sell-off in financial markets and the precious metals are in response to both the recent action of the Federal Reserve as well as the Fed outlook for the next two FOMC meetings. The Federal Reserve raised the Fed funds rate by half a percent at this month’s FOMC meeting and indicated that it would likely continue the trend of ½% rate hikes at both the June and July FOMC meeting.

This led to the recent sharp uptick in yields in U.S. Treasuries, with the 10-year Treasury note yield trading to a high of 3.2% today before settling at 3.039%. Higher yields in U.S. debt have been highly supportive of the U.S. dollar taking its value higher when compared to other currencies, and that has pressured both gold and silver prices lower.

The sharp decline in U.S. equities and precious metals over the last month can be directly tied to the spiraling level of inflation. This week on May 11, the U.S. Bureau of Labor Statistics will release the CPI for April. Currently, the Consumer Price Index is at 8.5%, the highest value seen since January 1982. The spiraling level of inflation is at the root of the recent rate hikes by the Federal Reserve as they attempt to slow down economic expansion to bring inflationary pressures down.

Forecasts for the April CPI differ with some analysts projecting a leveling off for a peak in inflationary pressures and others projecting that inflation will continue to run hot. According to Forbes, “April’s CPI estimate will be announced Wednesday before the stock markets open. Expectations are for the all-items rate to drop from 8.5% to 8.1%. To hit 8.1%, the month-to-month inflation rate will have to fall from 2.3% in January, 2.6% in February, and 3.8% in March to no more than 1.25% to hit the expected number.”

However, inflation forecasts released in Bloomberg Markets today say that according to a New York Fed survey, “Longer-Term Inflation Expectations Rise.” In an article penned by Alexandre Tanzi, he reported that “U.S. consumers project inflation in three years to be higher compared with a month ago, a potentially worrying sign for the Federal Reserve as the central bank tries to keep longer-term expectations anchored.”

Whether inflation levels continue to rise to higher levels as they have throughout this year or begin to peak, the probability that exceedingly high levels of inflation will continue to be persistent and not transitory as the Federal Reserve had maintained until recently with Chairman Powell and other Fed members saying that longer-term inflation expectations remain well-anchored.

While the Federal Reserve’s action of sharp rate hikes will most certainly lead to an economic contraction, the Fed cannot control the supply chain issues or the war in Ukraine which have been primary forces that have caused inflation to spike higher.

Wishing you as always good trading,

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Here's why gold is 'the most confusing' commodity right now

The latest comments from the Federal Reserve triggered a massive selloff across all risk assets. But why is gold still below the $1,900 level? Here's a look at Kitco's top three stories of the week:

3. Gold and bitcoin jump as Fed's Powell takes 75bps hike off the table in June

2. Bitcoin price plummets, gold gives up gains and stocks plunge in post-Fed trading

1. Gold is 'the most confusing' of all commodities right now, here's why

By Anna Golubova

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Is the Fed facing a credibility problem and why is gold price the 'punching bag'?

Extreme volatility in the marketplace in reaction to the latest policy shift by the Federal Reserve has many risk-on assets in a downward spiral, but why is gold — a safe-haven asset — once again 'the punching bag'?

Gold failed to hold above the $1,900 an ounce level this week as markets had a very erratic reaction to the Fed raising rate by half-a-point Wednesday while ruling out a 75-bps hike at the June meeting. The precious metal is ending the week down 1.6%, with June Comex gold futures last trading at $1,883.30 an ounce.

The Fed had one of the most highly anticipated announcements this week, and markets showed it, with the Nasdaq reversing all immediate gains and plummeting 5% on Thursday in its worst one-day sell-off since June 2020.

The markets wonder if the Fed has made a mistake – making a recession in the U.S. inevitable, OANDA senior market analyst Edward Moya told Kitco News.

"Wall Street now believes that the Fed is on a set course of delivering half-a-point rate hikes over the next couple of meetings, and at then Jackson Hole, they'll have to decide whether to continue or change course," Moya said. "Many traders thought that the Fed needed to keep all options on the table to aggressively fight inflation. But the Fed is signaling they believe inflation is peaking. There is this fear that possibly the Fed made a mistake and might have to send the economy into a recession a lot sooner."

After stating they are "not actively considering a 75 basis-point hike, the U.S. central bank has locked itself into slightly more gradual tightening. In response, the bond market has resumed its sell-off, pushing the U.S. dollar index back close to 20-year highs, which is bad news for gold, added Moya.

This market reaction could also signify that the Fed is losing its credibility, especially after underestimating inflation as transitory last year.

"My reading is that the Fed faces a credibility problem with market participants. There's concern that the Fed could cause a recession by hiking rates," Gainesville Coins precious metals expert Everett Millman told Kitco News. "Important to consider an inverse relationship between interest rates and unemployment. Unemployment is very low right now. If markets perceive the Fed as willing to let unemployment rise to tame inflation, that is still not a great outcome. There is fear of causing prolonged periods of unfavorable conditions for risk assets."

Uranium price has a lot more runway left and needs to double for supply to meet demand – Sprott's Ciampaglia

There has been massive liquidation of risk assets in the post-Fed trading, with many investors moving into cash, Millman pointed out. "That's why all markets crashed together," he said.

It is important to remember that gold held reasonably well considering how high the U.S. dollar is. And even though gold remains vulnerable to pullbacks, Millman remained bullish.

"The pullback gives gold plenty of room to run," he said. "Plus, the highs of the U.S. dollar index could be near the top. That would be good for gold as it sets up a macroeconomic environment favorable to the precious metal. But prices are still likely to experience elevated intraday volatility."

Gold has been "a punching bag for quite some time," Moya described, adding that until the U.S. dollar comes down, the precious metal will continue to struggle.

"If we continue to see risk aversion across equities and if the dollar appreciation is not as strong as we've got used to seeing, gold should start to stabilize. There is still a big risk that we could have another major move in the bond market, and gold could still be vulnerable to the last major sell-off before things bottom out," he explained.

Key resistance for next week will be the $1,900-$1,920 an ounce, and the $1,850 level will be the first support target, which, if breached, could send prices to $1,800, Moya stated.

Markets will be extra data-dependent next week, and the critical dataset to watch will be the U.S. inflation numbers from April.

One significant risk is the longer the supply chain problems last and the war in Ukraine persists, the more it puts a drag on growth, Moya added. And China is not budging from its zero-COVID policy. "That is difficult for the inflation outlook. I am not convinced that we'll see it significantly ease," he said.

Market consensus calls are expecting the annual inflation in the U.S. to slow to 8.1% in April after accelerating to 8.5% in March.

"Consumer price inflation is the key number out of the U.S. next week and it should hopefully show inflation has passed the peak with the year-on-year rate slowing … and core inflation edging down," said ING chief international economist James Knightley. "Lower gasoline prices will be a big help, as will a drop in second-hand car prices as heralded by data from the Mannheim car auctions. However, it will be a long slow descent to get to the 2% target."

Data to watch next week

Wednesday: U.S. CPI

Thursday: U.S. jobless claims and PPI

Friday: Michigan consumer sentiment
 

By Anna Golubova

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Reversals across many markets, while gold remained resilient

This week the Federal Reserve addressed revisions to its current monetary policy in its attempt to reduce the current levels of inflation to an acceptable target. The statement released after the FOMC meeting, coupled with Chairman Powell’s press conference, resulted in extreme volatility in many financial sectors.

Market participants witnessed one of the strongest knee-jerk reactions and complete market sentiment reversal over 24 hours. The initial market sentiment was extremely short-lived as it was followed by a complete turnaround from the initial reaction the following trading day.

The release of the Federal Reserve’s FOMC statement, coupled with Chairman Powell’s press conference, resulted in a major rally in U.S. equities. The Standard & Poor’s 500 gained almost 3%, the largest daily gain in two years. Equities overall experienced the best Fed-day return since 2011. It significantly impacted gold, moving the precious yellow metal higher. Concurrently, the dollar had a significant decline losing almost 1%, and yields on U.S. Treasuries were also significantly declining.

Yesterday market participants had 24 hours to digest the information presented by the Federal Reserve through the May FOMC statement and comments from Chairman Powell during the press conference. This resulted in a 180° reversal from the reaction on Wednesday. U.S. equities declined sharply, declining more than Wednesday’s gains. The S&P 500, which gained almost 3% on Wednesday, declined by 3.56% on Thursday. On Wednesday, 95% of the stocks contained in that index had daily gains. However, on Thursday, over 95% of the stocks included in the index experienced sharp declines.

Extreme price volatility was also evident in the U.S. dollar and U.S. Treasuries and bonds. The dollar index had a significant decline of just under 1% Wednesday, followed by gains of 0.96% yesterday. On Wednesday, investors also witnessed sharp declines in U.S. Treasuries yields, followed by a complete 180° reversal yesterday. Yesterday yields on the 10-year Treasury Note advanced to 3.043%, and 30-year Treasury bonds gained 17 basis points yielding 3.176%.

However, it was gold that seemed to have price stability resulting in three consecutive days of higher pricing. As of 6 PM EDT gold futures basis, the most active June 2021 contract is currently up to $7.10 or 0.38% and fixed at $1882.80. Unquestionably this was a week that will be remembered for quite some time, considering the major price reversals on Wednesday and Thursday.

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Gold firmer but loses altitude as USDX, bond yields spike up

Gold prices are posting modest gains in midday U.S. trading Thursday but the bulls are fading fast after solid early gains have been erased. The precious metals markets are being buffeted today by strong gains in the U.S. dollar index and a big spike up in U.S. Treasury yields. June gold futures were last up $5.70 at $1,874.30 and May Comex silver was last down $0.037 at $22.33 an ounce.

Traders Thursday were still digesting the Federal Reserve move Wednesday afternoon to raise its key interest rate, the Fed funds rate, by 0.5%, which was expected by the marketplace. After some initial exuberance by the marketplace that the Fed was becoming less hawkish on U.S. monetary policy, traders and investors came to their senses and realized nothing has changed: the Fed will have to remain aggressive and hawkish in its fight to tame inflation that is presently still out of control.

The key outside markets today sees Nymex crude oil futures prices down and trading around $107.00 a barrel after trading above $111.00 earlier today. The U.S. dollar index is solidly higher at midday and hit a new 20-year high. The yield on the 10-year U.S. Treasury note is presently fetching 3.082%, which is a 3.5-year high. It’s been quite a while since Treasury bond futures prices were down over 3 full points in a day.

Gold remains on track as Federal Reserve lays out path for 50-bps rate hikes – State Street's Milling-Stanley

Global stock markets were mixed overnight, with European shares mostly up and Asian shares mostly down. U.S. stock indexes are sharply lower at midday and have taken back all of Wednesday’s big gains and then some. The keener risk aversion in the marketplace should keep a floor under the safe-haven metals prices at their present levels.

The Bank of England is at its regular monetary policy meeting raised its interest rate by 0.25%. The BOE raised its annual inflation forecast significantly, to 10.25%. A rate hike was expected but the inflation forecast was a surprise on the upside.

Traders and investors are now awaiting Friday morning’s U.S. employment situation report for April. The key non-farm jobs number in the report is expected to come in at up 400,000, which compares to a rise of 431,000 in the March report.

Technically, June gold futures see a downtrend is place on the daily bar chart. Bears have the overall near-term technical advantage. Bulls' next upside price objective is to produce a close above solid resistance at last week’s high of $1,935.50. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,800.00. First resistance is seen at $1,900.00 and then at today’s high of $1,910.70. First support is seen at Wednesday’s low of $1,861.10 and then at this week’s low of $1,849.70. Wyckoff's Market Rating: 4.0

May silver futures see a steep price downtrend in place on the daily bar chart. The silver bears have the solid overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $24.00 an ounce. The next downside price objective for the bears is closing prices below solid support at the December low of $21.445. First resistance is seen at $23.00 and then at today’s high of $23.245. Next support is seen at Wednesday’s low of $22.135 and then at this week’s low of $22.12. Wyckoff's Market Rating: 2.5.

May N.Y. copper closed down 495 points at 427.90 cents today. Prices closed near the session low today. The copper bears have the firm overall near-term technical advantage. A price downtrend is in place on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 450.00 cents. The next downside price objective for the bears is closing prices below solid technical support at the December low of 411.65 cents. First resistance is seen at Wednesday’s high of 438.55 cents and then at today’s high of 442.00 cents. First support is seen at Wednesday’s low of 424.00 cents and then at this week’s low of 419.00 cents. Wyckoff's Market Rating: 3.0.

By Jim Wyckoff

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Gold, silver see tepid short covering after recent losses

Gold and silver prices are firmer in midday U.S. Trading Tuesday. Short covering by the shorter-term futures traders was feature today after both metals hit 2.5-month lows on Monday. The bulls are trying to stop the bleeding in down-trending markets that have been punished by a strong U.S. dollar and rising bond yields. June gold futures were last up $7.50 at $1,871.10 and May Comex silver was last up $0.101 at $22.65 an ounce.

The economic data point of the week in the U.S. Federal Reserve Open Market Committee (FOMC) meeting that began Tuesday morning and ends Wednesday afternoon with a statement. It's widely believed the Fed will raise the key U.S. interest rate by 0.5%, amid the highest inflation levels in 40 years. The monthly U.S. jobs report is also due out Friday morning.

The key outside markets today sees Nymex crude oil futures prices lower and trading around $103.00 a barrel. The U.S. dollar index is weaker in early trading. The yield on the 10-year U.S. Treasury note is presently fetching 2.954%. The 10-year yield early this week hit a 3.5-year high just above 3%. The yield on the benchmark German 10-year bond (bund) rose above 1% for the first time since 2015.

Global stock markets were mostly higher overnight. U.S. stock indexes are mixed at midday. The Nasdaq and S&P stock indexes are near their 12-month lows scored Monday. A brief "flash crash" occurred in European stock markets Monday, reportedly on an erroneous trade entered by a Citigroup in Sweden.

Paul Tudor Jones: 'Capital preservation is the most important thing' right now

In other, the Euro zone producer price index for March was up 5.3% from February and up 36.8%, year-on-year. The mammoth rise was mostly due to soaring energy costs, but still, excluding energy the PPI was up 13.6%, year-on-year.

Australia's central bank overnight raised its key interest rates by 0.25%–the first rate hike by the Reserve Bank of Australia in a decade.

Technically, June gold futures See a price downtrend still in place on the daily bar chart. Bears have the overall near-term technical advantage. Bulls' next upside price objective is to produce a close above solid resistance at last week's high of $1,935.50. 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 $1,878.40 and then at $1,883.00. First support is seen at today's low of $1,849.70 and then at $1,835.00. Wyckoff's Market Rating: 4.0

May silver futures see a steep price downtrend in place on the daily bar chart. The silver bears have the solid overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $24.00 an ounce. The next downside price objective for the bears is closing prices below solid support at the December low of $21.445. First resistance is seen at Monday's high of $22.83 and then at $23.00. Next support is seen at today's low of $22.475 and then at this week's low of $22.12. Wyckoff's Market Rating: 2.5.

May N.Y. copper closed up 70 points at 426.25 cents today. Prices closed nearer the session low today. Prices Monday hit a 4.5-month low. The copper bears have the solid overall near-term technical advantage. A price downtrend is in place on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 450.00 cents. The next downside price objective for the bears is closing prices below solid technical support at the December low of 411.65 cents. First resistance is seen at today's high of 434.40 cents and then at this week's high of 438.55 cents. First support is seen at this week's low of 419.00 cents and then at 415.00 cents. Wyckoff's Market Rating: 3.0.

By Jim Wyckoff

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Gold, silver smacked by strong USDX, rising bond yields, technical selling

Gold and silver prices are sharply lower in midday U.S. Trading Monday, with both scoring 2.5-month lows. The precious metals are getting hit early this week by the bearish outside market forces of a strong U.S. dollar index that is near a 20-year high, higher U.S. Treasury yields and chart-based selling pressure as the near-term technical have eroded significantly the past two weeks. June gold futures were last down $42.50 at $1,869.40 and May Comex silver was last down $0.42 at $22.62 an ounce.

The economic data point of the week in the U.S. Federal Reserve Open Market Committee (FOMC) meeting that begins Tuesday morning and ends Wednesday afternoon with a statement. It’s widely believed the Fed will raise the key U.S. interest rate by 0.5%, amid the highest inflation levels in 40 years. The monthly U.S. jobs report is also due out Friday morning.

The key outside markets today sees Nymex crude oil futures prices slightly lower and trading around $104.50 a barrel. The U.S. dollar index is solidly higher today and not far below last week’s 20-year high. The yield on the 10-year U.S. Treasury note is presently fetching 2.99%–the highest in nearly 3.5 years.

Global stock markets were mostly lower overnight. Markets in China and Hong Kong were closed for a holiday. U.S. stock indexes are mixed at midday. The U.S. stock indexes are trying to recover from April’s losses, which were the worst since the beginning of the pandemic.

Gold is an 'ideal' asset right now but why isn't the price higher? Fidelity weighs in

Three major elements in the marketplace remain static but still prompting risk aversion among traders and investors: the Russia-Ukraine war, the Covid outbreak in China and problematic inflation around the globe.

China’s strict lockdowns to curb Covid-19 cases are taking a toll on the world’s second-largest economy and further disrupting global supply chains. China President Xi Jinping is under pressure to deliver on pledges to support economic growth. China’s manufacturing and services purchasing managers indexes (PMI)in April plunged to their worst levels since February of 2020.

Technically, June gold futures prices hit a 2.5-month low today. A price downtrend is in place on the daily bar chart. Bears have the overall near-term technical advantage and gained more power today. Bulls' next upside price objective is to produce a close above solid resistance at last week’s high of $1,935.50. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,800.00. First resistance is seen at $1,883.00 and then at $1,900.00. First support is seen at today’s low of $1,853.40 and then at $1,800.00. Wyckoff's Market Rating: 4.0

May silver futures prices hit nearly three-month low today. A steep price downtrend is in place on the daily bar chart. The silver bears have the solid overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $24.00 an ounce. The next downside price objective for the bears is closing prices below solid support at the December low of $21.445. First resistance is seen at today’s high of $22.83 and then at $23.00. Next support is seen at today’s low of $22.12 and then at $22.00. Wyckoff's Market Rating: 2.5.

May N.Y. copper closed down 1,415 points at 425.35 cents today. Prices closed nearer the session low today and hit a 4.5-month low. The copper bears have the solid overall near-term technical advantage. A price downtrend is in place on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 450.00 cents. The next downside price objective for the bears is closing prices below solid technical support at the December low of 411.65 cents. First resistance is seen at 430.00 cents and then at today’s high of 438.55 cents. First support is seen at today’s low of 419.00 cents and then at 415.00 cents. Wyckoff's Market Rating: 3.0.

By Jim Wyckoff

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

A massive destruction of wealth is coming, this is what the Fed is 'engineering' – Alfonso Peccatiello

Attempting to slow down the economy and subdue inflation, the Federal Reserve has already raised interest rates by 25 basis points and is expected to raise rates by 50 basis points at each of its next two meetings in May and June.

"Right now, the wealth effect still dominates the way we engineer economic growth to make sure the balance sheets of consumers become stronger. As asset prices keep going up, consumers' liabilities, debt and leverage get cheaper," explained Alfonso Peccatiello, Author of The Macro Compass. "If equity or housing prices drop by 50%, it will be a destruction of wealth generated by two generations, because of this loss of wealth effect. Nobody wants to see this happen."

Peccatiello spoke to David Lin, Anchor at Kitco News about his views on wealth, markets, and the Federal Reserve. Paccatiello worked as a portfolio manager for a multibillion-dollar portfolio comprised of multiple asset classes, prior to becoming an author.

Comparing the Fed's current tightening policies to policies of previous years when the Fed wanted to ease conditions, Peccatiello said they are trying to engineer an economic slowdown.

"From 2016 to 2019, the Fed was basically selling the put to the market, putting the floor on the asset prices," he noted. "Right now, the Fed is doing the opposite. They are trying to slow down the demand side of the equation in the economy. They are making your balance sheet weaker, your 401(K) go down a bit, and your second home worthless. This way demand slows down, therefore, inflation slows down."

Peccatiello discussed how high he believes the Fed will hike interest rates. "The Fed will raise rates 50 basis points in May and then again in June. They are going to hike rates until something breaks. The Fed believes neutral rates are between 2 and 2.5%, which means they can easily hike all the way to 2.5% without much happening," Peccatiello predicted. "If the economy can handle 2.5%, and the labor market remains solid, and the equity market remains buoyant, then the Fed is going to keep raising rates fast. But that assumption is just a fairytale."

On equities, Peccatiello disclosed he shorts the S&P 500, which is his main trade, and tech stocks. "My target is for the S&P to drop below 4,000 in the next two months. The reason for this target is because the Fed has been explicit about wanting financial conditions to tighten," Peccatiello emphasized. "If you look at the financial condition index; equity markets, real interest rates, credit spreads, mortgage rates and the dollar are all tightening."

Peccatiello explained why there's very little positive macro-economic news to find at this stage. "Things must get worse, unfortunately, before they get better. The big picture is that central banks won't aggregate demand to slow down. When we start seeing more signs that growth is slowing down, and or when the equity markets start to drop more aggressively, it will get worse. 4,000 for the S&P will ring some bells for the Fed," he said. "If growth slows down, it will imply that inflation will also slow down as a result. If that happens the Fed will feel more comfortable slowing down their hawkish stance."

Speaking about the real estate market, Peccatiello pointed out that it is the biggest and most leveraged asset class out there. "People should pay attention to it. The real estate market is huge, almost a $300 trillion market cap. It's much larger than the equity market, at a $100 trillion cap, or the bond market," he stressed. "Housing prices sit on the asset side of the balance sheet of consumers. Real estate prices are of paramount importance for the wealth effect. If housing prices go down, then consumers appetite to spend will also drop."

"The housing market could face a 50% slowdown. Despite all the rumors you hear about all cash buyers, 85% of all home purchases are bought with mortgages. Mortgage rates have gone up massively. 30-year mortgages in the U.S. have risen from 3% to 5%," Peccatiello stated.

"Wages have not changed for most Americans and most people around the world. And housing prices compared to last year have gone up 20%. In order to buy the same house a year ago, you must pay 30% higher in your monthly mortgage payments, which means you can't afford it."

Peccatiello advises investors to be defensive in this macro environment we are facing.

"Investors should raise their cash allocation. I know it feels uncomfortable with this spot inflation levels. It's better to be defensive than to be offensive where the macro environment doesn't allow you to be offensive," he continued. "You just must be patient. This is an environment where you have nowhere to hide. You can't buy stocks, you can't buy gold, you can't buy Bitcoin."

For more on Alfonso Peccatiello's views on wealth, markets and the Federal Reserve, please watch the full video above.
 

By Kitco News

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

What's in store for gold price as Fed remains laser-focused on inflation and its supersized hikes?

The gold market will be wrapped up in the Federal Reserve's interest rate decision next week as analysts see the U.S. central bank ignoring the steep drop in the U.S. Q1 GDP data and remaining fixated on fighting inflation.

Gold is looking to end April down 1.7% on the month despite Friday's gains. June Comex gold futures were last trading at $1,912.20, up $21 on the day.

"April was a terrible month for gold. Many traders were surprised by another strong move higher in the U.S. dollar. Greenback's strength was driven by safe-haven flows on concerns about economic slowdown across Europe, China's zero-COVID strategy, and expectations of a rather wide interest rate differential between the dollar and its major trading partners due to the Fed's aggressive stance," OANDA senior market analyst Edward Moya told Kitco News.

The Federal Reserve, scheduled to make its interest rate decision on Wednesday, has locked itself into an aggressive rate hike cycle for the next three meetings. "The market has around 250 basis points worth of rate hikes priced in over the next 12 months," Moya said.

The big surprise this week was the U.S. economy contracting 1.4% in the first quarter. But the Fed is likely to look past that negative number because the outlook for the second quarter looks better, according to analysts.

"You have to take a look at why the economy contracted. The consumer was still strong, and the consumption was still fairly robust. But imports were one of the key reasons why. They over-delivered when you consider that exports were soft. A lot of traders shrugged the data off a bit. Nothing to change Fed rate hike expectations," Moya explained.

Fed Chair Jerome Powell will remain focused on inflation, which is tricky to control, especially considering the type of price pressures the U.S. is seeing, noted CIBC World Markets chief economist Avery Shenfeld."Some are pointing to the fact that the Fed has never achieved as sharp a deceleration in inflation as it aims to engender without causing a recession," Shenfeld said. "That's actually not our central worry because we haven't really faced this type of inflation in the past … The problem is that just as this year's spikes in such prices have made the inflation problem look worse, next year's retreats will have the CPI understating the true trend. Getting inflation down will be easier than keeping it that way unless we slow the pace of hiring and prevent a further tightening in the labor market."

Here's what to expect from the Fed

The two main things the markets are anticipating to see next week are the 50-basis-point rate hike and the start of quantitive tightening.

"We doubt that the unexpected 1.4% annualized decline in first-quarter GDP will stop the Fed from hiking its policy rate by a bigger 50bp next week or from launching quantitative tightening. The Fed will stress the ongoing strength of employment growth, the temporary impact of the Omicron wave, and the pick-up in the growth rate of final sales to private domestic purchasers, which is arguably a better gauge of underlying demand. But the bottom line is that with inflation rampant, it simply doesn't have a choice; policy needs to be tightened rapidly regardless of the costs to the real economy," said Capital Economics chief North American economist Paul Ashworth.

The minutes from the last FOMC meeting suggested that "participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate."

Strategists at ING said they are forecasting for the Fed to start with $50 billion "being allowed to run off each month before getting up to $95bn by September."

Looking forward, however, the Fed is unlikely to get more aggressive and talk about 75-basis-point rate hikes, said ING's chief international economist James Knightley, citing the weak GDP number. "For now, our base case remains that the Fed will follow up next week's 50bp hike with 50bp increases in June and July before switching to 25bp as quantitative tightening gets up to speed. We see the Fed funds rate peaking at 3% in early 2023," Knightley clarified.

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What gold price is looking for from the Fed

The gold market is looking at the Fed to show signs of optimism, said Moya. "Is inflation peaking? You are probably going to see many traders very fixated on that," he said.

The latest core PCE price index data published on Friday suggested that core inflation peaked at 5.2% annually in March, following 5.3% reported in February, Moya noted. "This is pretty significant. It is the first time we've seen a decline since October 2020. This could help the argument that Fed could develop a soft landing and not be as aggressive once we get past super seized rate hikes," he said.

After the Fed meeting, gold could start to benefit from some safe-haven flows, especially if uncertainty in the equity markets continues, Moya added.

The $1,875 an ounce level remains good support for gold in the short term. On the upside, Moya is watching $1,940 an ounce. "If we break $1,875 on the downside, gold could fall to $1,830. But this is the level at which many technical traders become bullish. That is when you see gold testing a 200-day moving average," he said.

It is only a matter of time before gold can break above its critical psychological $2,000 an ounce level, said Bloomberg Intelligence senior commodity strategist Mike McGlone. And the main trigger is likely to be the Fed showing some hesitancy in the face of the promised aggressive rate hikes.

"The base now appears closer to $1,800, and $2,000 is key resistance. We expect that it's just a matter of time for gold to potentially break above this threshold. A top potential catalyst is a trough in Fed's rate-hike expectations, which may not occur until the stock market declines further. The S&P 500 down about 10% in 2022 to April 28, appears to be insufficient," McGlone said. "When fed funds futures start anticipating a rate-hike cycle end, the precious metal should breach $2,000-an-ounce resistance."
 

Data to watch next week

Monday: ISM manufacturing PMI

Tuesday: Factory orders

Wednesday: Fed's interest rate decision, ADP nonfarm employment change, ISM non-manufacturing PMI

Thursday: BoE interest rate decision, U.S. initial jobless claims

Friday: U.S. nonfarm payrolls
 

By Anna Golubova

For Kitco News

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