In summary, I think the near term has pain in store for gold and silver. However, after a FED pivot early next year, the precious metals will be poised to outperform.
The high dollar and a lack of sentiment by the big-money players for gold have kept the metals trapped. This is likely to continue until the S&P 500 finds a bottom. When that happens, Wall St will be forced to capitulate and admit that the economy is a mess. This should invoke a fear trade in gold, which as we all know is the main driver for gold prices.
End of Month (EOM) / Previous EOM
- Gold: $1737 ($1765)
- Silver: $18.78 ($20.35)
- Oil: $97 ($98)
- HUI: 195 (207)
- DXY: 108 (105)
- S&P: 4030 -16% (4130 -14%)
- 10-Yr: 3.1% (2.6%)
Why Zoltan Pozsar May be Right About a Coming Crash
First of all, who is Zoltan Pozsar?
Zoltan Pozsar is an investment strategist at Credit Suisse. He has become known in the online investing community over the last couple of years because of his sharp and bold commentary and predictions on the market. Some say he is the rock star of financial analysts. People like to see what he’s talking about because prior to joining Credit Suisse Pozsar was a senior adviser to the US Treasury, where he advised the “Office of Debt Management” and the “Office of Financial Research”, and served as the Treasury’s liaison to the FSB on matters of financial innovation.
So, why do I say he might be right to expect an “L-shaped” recession?
First of all, let’s start by rephrasing what he recently wrote in a paper.
Chimerica and Eurussia no longer exist and have been replaced by Chussia. Trust in international trade between China and America, and between Russian and Europe, is gone. As a result, trade between these countries, as it used to be pre-Ukraine, is not coming back. And it is why soaring inflation isn’t going to be tamed any time soon.
He then provides these two dynamics (the foundation of these economies) as being broken and not repairable:
- Cheap Chinese goods allowing real wages (in America) to increase while nominal wages stagnate.
- Cheap Russian natural gas fueling German industry, and Europe more broadly.
In last month’s newsletter, I was pretty intense, claiming that the US era is over and that we are currently entering a transition for that outcome. Pozsar and I are in agreement. This is a fait accompli, since nothing will prevent it.
I’ll give you one final Pozsar idea, and then we will move on.
He thinks the Fed will do everything it can to maintain US global economic dominance and not allow the US economy or financial system to implode. His expectation is that the Fed will print a gazillion dollars, which won’t work and will only create more inflation. Inevitably, the Fed will just make matters worse with their digital printing machine.
Luke Gromen, another analyst whom I respec, is in agreement with this latter outcome, whereby the Fed prints too much money to fight off a recession. He expects inflation to decrease into next year, to be followed by a second wave of inflation as the Fed begins to attempt to print its way out of the recession.
Note that the Fed printed something like $4 trillion dollars to make sure that COVID did not crash the economy. How much will they print to ensure that economy does not implode during this recession? Moreover, how many bailouts will be required? Will they need to bail out any banks?
I’ve been saying that the bad news (black swans) for the economy has not arrived yet. In fact, we haven’t really had any bad news since the sell-off began in October 2021. You could say that the war in Ukraine and the resulting exploding energy prices were bad news. But I’m wating for the next Lehman event, to be followed by mass layoffs. I’m waiting for the “Oh crap, we’re screwed” news, and these smart analysts agree with me.
Is the Economy Doing Well?
No, it is not. The backdrop for the economy is bad. In fact, it is the worst it has been since this sell-off in the stock market began in October 2021.
However, this is not the worst. I expected it to get worse. I do not expect a soft landing. Everything I have written in these newsletters over the years is consistent with this view. My views have not changed. In fact, the war in Ukraine has only made my views more likely to be accurate.
If you have listened to me being interviewed on podcasts, I tend to talk about the economic history of America since 1980. That is when everything changed, and the American decline began. I speak about how globalism has failed America and that we have relied on debt to maintain our standard of living. I have been an ardent critic of MMT. These are the reasons I invest in PM mining stocks and physical silver.
So, no, I do not think the economy is doing well.
What do I Invest in to be Protected?
I think that we’re at a transition point and we will soon witness the ending of the US era.
If I’m right, it is only a matter of time before Wall St figures this out. Once it does, the PM bull market will resume, and we will experience an epic period when gold and silver make all-time highs and then keep going. Both 1980 and 2011 were basically short-lived blow-off tops. This one is going to have legs.
However, the near term isn’t as clear. Both gold and silver are knocking on the door of very important support levels ($1,680 and $18.50). Plus, Wall St is getting ready to begin selling as the S&P 500 falls to a new cycle low, below 3,633, and is likely to test my target of 3,373.
With that selling pressure coming and a high dollar (currently at 108), I think the odds favor even lower gold and silver prices in the near term. My expectation is that the HUI will bottom between 170 and 180. It’s currently at 195. I plan to buy to the bottom and will be a buyer until the HUI rises above 230.
The high dollar and a lack of sentiment by the big-money players for gold have kept gold trapped. This is likely to continue until the S&P 500 finds a bottom, Wall St is forced to capitulate that the economy is a mess, and that earnings are not going to come back anytime soon. This should invoke a fear trade in gold.
When is it Time to Buy Gold and Silver?
When the S&P has found a bottom and when the dollar rolls over and begins trending lower.
I doubt that will happen in September, but any time after that gold could begin to run. If I had to look at my crystal ball, I’d guess that Q4 2022 and Q1 2023 are going to be when gold finally breaks out of its now 24-month correction. I want to see gold over $2000 in Q1 and off to the races. I think this will happen if inflation remains elevated and the stock market languishes.
The big-money players are hoping the US economy can have a soft landing and take-off in 2023. Q4 2022 and Q1 2023 should prove this outcome is not in the cards. This is the period when we learn how deep the recession will be and that mass layoffs and a weak job market are inevitable. Bad news for the economy will be good news for gold.
Am I Buying or Selling Gold and Silver Now?
I’m buying to the bottom. I have about 5 stocks on my buy list and about 5 on my watch list. I will cease my buying once the HUI gets above 230. Then, I will wait for my exit strategy to begin, which is to sell to the top. My first sell will be when silver reaches $50, then I’ll likely sell every time silver rises another $10. My first gold sell will be when gold reaches $2500, then I’ll likely sell every time gold rises another $100.
What is the Best Investment Strategy for Gold and Silver?
Here are a couple of investing strategies to consider in the current economic environment, when it comes down to gold and silver.
Once the HUI gets below certain levels, many stocks become very attractive to buy the dip. Below 200 (which we are now), below 190, below 180, etc.
Keep an eye on the HUI and buy these levels if you want to buy to the bottom. I doubt we will see 150, so anything around 170 should be near a low.
Here is what I’m seeing in the HUI weekly chart.
I’ve been saying, throughout this 24-month correction in the PM bull market, to be weary of false breakouts. We’ve seen many of those, and we could easily get few more.
Once gold gets to $1,900, many are going to say the correction is over. They might be right, but to be conservative, the two levels I think will point to a breakout are $2,050 gold, to be followed by $31 silver. That is when I will get excited. That said, once we get above $1,900 gold and $25 silver, I will start to anticipate a breakout, with my fingers crossed that they both keep trending to ATHs.
Those of you who know me well by reading these newsletters and my Friday Recaps, and by listening to podcasts where I’m interviewed, know that I don’t care about $1,900 gold or $1,500 gold. The only thing I care about is big returns. Those can only be had from gold and silver both breaking ATHs, and continue to trend much higher for an extended period. I think 2023 could very well be the beginning of that epic multi-year PM bull market.
Will the US Dollar Finally Crash in 2023?
I think it’s possible we see a big correction in the DXY, from the current levels.
The dollar (DXY) has been on fire since the Fed began raising rates earlier this year, as you can see to your left.
It looks like once the dollar gets under 100, it should be a good time for gold and silver to trend higher.
Some chartists are saying that once the dollar gets under 106, it will roll over and head to below 100. Some are saying that it just put in a double top at 109 and now will begin to roll over. I’m not so sure. It will not surprise me if the dollar has one more final blow-off rally above 110. In fact, it could get as high as 115 in September/October, when selling in the stock market resumes and the big-money players run to the dollar for safety.
Will Inflation Slow Down in 2023?
This one is more difficult to guess because of potential demand destruction, as well as year-on-year comparisons in many commodities.
Some feel that inflation will head much lower in Q4 2022 and Q1 2023 as demand destruction does its thing. This is what Wall St is hoping for to get its soft landing. I’m not in that camp. I think inflation will rage for several more months (above 5% year-on-year CPI) because of higher energy prices, which will push up all commodity prices in Q4 and Q1 as winter bites in Europe.
Will the FED Keep Hiking Interest Rates in 2022?
As of today, the FED is still raising rates. Given that the US economy has relied on low rates and easy credit since the last recession in 2009, that’s not great for the economy.
The FED plans to raise rates 75 bps at the end of September and then at least one more time in Q4 2022. That is a recipe for disaster. Plus, they are increasing QT (quantitative tightening). That combination of higher interest rates and QT is going to be destructive for the economy, assuming QT is real.
This is why Powell said that “there will be pain” during his Jackson Hole speech last week. He knows the Fed is going to cause a recession, but he doesn’t think they have another choice in their battle with inflation. They want their main tool (printing money) back, and they think this is the only way to accomplish that goal.
The Fed is taking a big risk with this strategy. They are assuming they can kill inflation and not kill the economy. What happens if they stop the economy and then can’t restart it? Another big unknown is how much money they will need to print to restart the economy, and will this printing bring back inflation? All of these unknowns are good for gold, and once we get deeper into Q4, these unknowns should increase and ignite the fear trade.
The economic dynamics have perhaps never looked better for gold, but in the near term (at least September), gold is likely to remain trapped until these dynamics ignite the fear trade. That is not likely to happen in September, but Q4 2022, and Q1 2023, should look much better as the Fed turns its back on the economy and hopes that inflation goes away. Hope is not a good strategy.
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More Analyses From Don Durret
Find my previous Resource Talks articles here.
Thank you for reading, and don’t hesitate to correct me in the comments if you think I’m wrong.
– Don Durrett.
Don Durrett is not an investment advisor. Don Durrett has a high risk appetite. Don Durrett might own, buy, and/or sell shares of companies discussed herein without prior notice. Resource Talks is not responsible for the quality nor accuracy of information provided herein. Resource Talks is not receiving financial compensation from any company for the publication of this article. Don Durret is receiving financial compensation from Resource Talks for the production of this article. The information provided in this publication – and all other publications by Resource Talks – is impersonal in nature and meant for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple licensed, experienced, and qualified investment advisors. Get numerous opinions before taking your own decision in the end. The minimum risk on any investment mentioned in this publication is 100% loss of capital.
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