June was not a great month for people who were long just about anything. The ones who shorter PM stocks, stayed in cash or were betting on a higher 10-year yield made some money. This is what’s happened with gold, silver, and the economy and where we’re headed.
- Gold fell 2.22% in June.
- Gold stocks (GDX) fell 13.71% in June.
- Silver fell 6.16% in June.
- Silver stocks (SIL) fell 14.75% in June.
- S&P 500 fell 8.4% in June.
- Oil fell 7.77% in June.
- The DXY ran 2.90% in June.
- The 10-year yield ran 5.93% in June.
Why Does Gold Keep Crashing?
As you can see above, June was a terrible month for gold, silver, and the miners. The PM bull has definitely been bucking recently. It hasn’t been easy to ride. If you’re still holding on, you’re a tough cookie.
The HUI is at 223, which is a new 22-month low. I recently saw a chart that showed not a single miner in the GDX was above its 200 DMA. So, basically, all of the miners have been getting whacked, and many of them are down 70% or more from their ATH.
This type of deep correction is not unusual and is to be expected during market sell-offs. I knew it was coming and was hoping the HUI could stay above 250. I thought that was probably wishful thinking, and it was. Now the HUI could go sub 220, which is a level I wanted to avoid.
What to do During a Crash in Gold Stocks?
When these deep corrections happen, you have three options;
- You can sell and wait for them to end
- You can buy the dip
- You can light a candle and ride it out
I’m not a good trader, so I tend to use the middle option and look for opportunities to buy.
Will Everything Keep Crashing?
I don’t think gold can go too much lower, but that is just a guess.
My expectation is that gold will bottom around $1725 to $1750, and silver will retest at $18.50. If $1680 gets retested for gold and it doesn’t hold, then that would be a very bad sign. That could push gold down below $1600 and silver below $17.
The S&P 500, on the other hand, is off 20% and my guess is that it is going much lower. I think we will see 3300 to 3500, and I would not be shocked to see 3000 tested. When that selling comes (likely in July, but perhaps August or September), gold and silver will likely find their bottoms.
If you are a reader of the GSD newsletter, you know that I consider a strong economy to be gold’s kryptonite. And that I believe fear is what drives gold to ATHs. I have also said all year that the macro fundamentals currently favor gold. Those three sentences require a bit of analysis this month since we will have entered H2 on July 1st.
Will the Economy Crash in H2?
My gut doesn’t think it’s looking all dandy here.
The Fed raised rates in June by 0.75 basis points, and plans to raise rates in July and September (probably .50 bps each time).
With these two looming rate raises, the economy will have a lot of headwinds. Plus, the Fed began QT in June. With higher rates and QT, the economy has a monkey on its back. So, from my perspective, gold remains in a strong position and the economy is headed for the gutter.
You may be asking, if gold is in a strong position, then why is it trading at $1820 and not $2500? I think a “strong” dollar is the reason why. But an even bigger reason is that Wall St believes the Fed is going to pivot soon and bring back the risk-on trade. Thus, Wall St is not fearful enough at this time to desire gold. These two factors have zapped sentiment for gold.
Will Institutional Investors Buy Gold Soon?
Eventually, they will, but what is going to flip that sentiment and get Wall St, the 1% crowd, hedge funds, and billionaires to buy gold?
If I knew that answer, I wouldn’t be writing a newsletter, but I can make a guess; I think it will be a combination of factors stemming from economic weakness. The economy will slow, inflation will continue, and the Fed will appear to be feckless. There will be a recognition that the Fed can’t bring the economy back to life, and that inflation is going to linger. The result will be an igniting of the fear trade and gold will begin to trend.
When Will Gold go Back up Again?
At this time, it appears that 2022 is a lost cause for PMs and will have to wait until 2023.
For gold to go back up again, what I wrote above will have to become reality. When will institutions and rich individuals recognize all of it? When it hits them in the face … even harder than it already has. I don’t think they’ll be realizing it in Q3 of this year.
Gold seems trapped in the near term. It could happen in Q4, but we might have to wait until Q1 of next year. That’s a long wait, considering we have already been in a 22-month correction. At least, for the believers among us, it gives us more time to buy more miners on sale. Perhaps we will get lucky, and some type of black swan event ignites fear and pushes gold higher? Sure, everything is possible but I am not better on it.
The good news is that PMs have not broken down and probably won’t. I believe gold and silver are in a bull market, and until they break down below important support levels ($1680 / $18.50), we are in a PM bull market, that is experiencing a nasty correction. At some point, I expect this correction to end in a breakout to the upside.
Will the FED Manage the “Soft Landing”?
“We’ve never had inflation go over 5% and not ended up in a recession.”Stanley Druckenmiller
As you can guess, Stanley Druckenmiller thinks that a “soft landing” is a long shot, and I agree.
The chances of avoiding a recession seem remote. So, we will have to wait for the looming recession and then see how Wall St reacts. If I’m right, they are not going to be happy.
Right now, if you watch the cable business channels, the analysts are practically giddy that the Fed will eventually pivot and bring back low interest rates and a roaring stock market. What they are missing is that the US economy has been busy dying since 2000-2001, when the dot-com bubble popped and 9/11 occurred.
The US economy has not been able to stand on its own since the 1990s. Now we are up to $30T in national debt and rely on $1T deficits and the Fed monetizing our debt (expanding their balance sheet). The Fed’s balance sheet is now up to $9T. Welcome to MMT. We have a mess on our hands, and Wall St thinks everything is going back to normal? They are on hopium, but a dose of reality is coming.
My expectation, if it’s not obvious, is that this recession is going to be nasty and last for several years. Growth will be non-existent (we’re turning Japanese), and the dollar is in big trouble. At some point in the next 3-9 months, it is going to become obvious that the US economy is in big trouble. Once the mass layoffs begin, it will become obvious to everyone, except for those on Wall St who are perennial optimists regarding the US economy.
The Ukraine invasion was a black swan event. The US economy was already in trouble and reliant on debt for growth, and the Ukraine invasion exposed that reality. Just this week, Iran and Argentina said that they are joining the BRICS+ economic alliance. This group has already expanded to include Indonesia and Mexico. It won’t be long now for them to announce a new international trade currency based on a basket of currencies and commodities, one of which I expect to be gold.
This new currency will be the death knell for the dollar as the preeminent global reserve currency. Perhaps this new currency won’t appear, or if it does, it won’t have an impact on the dollar. I think it will for several reasons. First, many countries are upset with the US exporting inflation by printing so many dollars. Second, many countries no longer think the US is entitled to use the dollar and SWIFT (the international trade dollar-based banking system) to bully other countries. They think the US dollar gives the US an undue advantage. Thus, the desire for a dollar and SWIFT alternative is strong.
I mentioned the macro fundamentals as something that needs to be analyzed for H2. Wall St keeps mentioning that employment and the consumer are strong. I think both are wishful thinking, and both are getting ready to roll over. Some have made an argument that the PMIs are fairly strong, again likely wishful thinking, as we head into a recession.
The retail stocks are all down, which implies weak consumer spending. With high inflation, that is not likely to improve in H2. Housing prices remain high, but that sector clearly has headwinds from higher interest rates. Auto sales are another sector hit with higher interest rates.
It’s hard to look at the macro fundamentals and not be pessimistic about H2 economic growth. This is not 2013, when gold got crushed because the economy was back on its feet. If the economy regains its footing in 2022, then I will be surprised. For this reason, I would expect $1680 gold to hold if it is retested (let’s hope it doesn’t get retested), as well as $18.50 silver.
I suppose the dollar needs to be mentioned since it is the elephant in the room.
The dollar is at 104 (DXY). That is a lofty valuation and mostly because the ECB and JCB have not raised rates. The Euro and Yen combined make up 65% of the DXY. And these two central banks have been reluctant to abandon MMT (which relies on low interest rates). The Euro is currently flirting with 100, and the Yen has crashed to 135. This keeps gold lower as it creates the illusion of a “strong” currency.
Until the dollar (DXY) drops below 100, it is unlikely for gold to break out. One thing that is good to look forward to is the dollar dropping in value. When that happens, gold should rise. Can the dollar remain at this lofty level, or go higher? I suppose 110 is not crazy talk, but at some point, I expect the dollar to drop. We probably will have to wait for the Fed to pause.
Another important data point is the US 10-Year bond. Currently, it is at 3.0% and has been volatile of late. It seems to be stuck in a range from 2.5% to 3.5%. I doubt it will get above 3.5%, but it could if the Fed raises the Fed Funds rate in September. My belief is that 3.5% or higher is a flashing red flag. Why? Because the US Government can’t afford to finance its debt at that level.
At what 10-Year rate does everything break? 3.5%, 4%, 4.5%? Clearly, there is a level where everything breaks. The US can’t have a budget that has a massive interest payment above $1T. The markets can’t handle that outcome. They will become too unstable. In fact, that would lead to the US defaulting on its debt. Probably not all of it, but a percentage.
Let’s conclude with oil. Have we reached peak oil production? The rumor is that OPEC is currently out of excess capacity. The second rumor is that oil is going to spike soon to $150 or higher. Could that be the black swan event that ignites the fear trade and pushes gold to an ATH? Perhaps. I don’t think the US economy or global economy can handle $135 oil or higher. At that price, everything breaks, and inflation explodes. $150 oil would create a crisis.
So, we have two looming black swans:
1) High interest rates
2) High oil prices
Perhaps we won’t get either one. But with these two looming, it seems odd that Wall St is so confident that the Fed is going to ride in on a white horse to save the day (and thus they can ignore gold). Perhaps today is a good time to refer to my favorite chart: Exter’s Pyramid. This chart is Wall St’s worst nightmare and why gold is the most manipulated asset (although silver bulls would argue!).
Investors prefer to hide from risk by owning US Bonds and fiat currencies. But where do they go if these turn sour? Only one place is left; gold.
More Analyses From Don Durret
Thank you for reading, and don’t hesitate to correct me in the comments if you think I’m wrong.
– Don Durrett.
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