Precious Metals Weekly Report 3.26.18

Tactical Volatility Weekly Report

Bullion.Directory precious metals analysis 26, March 2018
By Christopher Lemieux
Macro Strategist; Twitter @Lemieux_26

Last week, the Federal Reserve boosted the fed funds rate by 25 bps as expected and markets acted accordingly. The economic growth and inflation projections that were released didn’t reflect the narrative of robust economic growth. The FOMC minutes has a series of contradictions, but one thing was realized: growth and inflation are to remain muted for some time. Risk sentiment sank, and yields compressed with the 10s/2s curve making its way back down to cycle lows.

This puts a real cramp on the Fed’s trajectory. The whole point of hiking, and backing it up with rhetoric, was to push the long-end of the curve higher by pushing the short-end higher via monetary policy. The idea is to portray the economic optimism of the Eccles Building and hope it diffuses throughout the consensus.

When the 10s/2s curve began to steepen from 50 bps (cycle low) to 78 bps, market participants were on the whole “coordinated global growth” train. But, that was stunted as consensus GDP forecasts began to free fall, and worries of a Chinese slowdown are pulling down expectations.

MacroView Research’s Q1-18 GDP forecast midpoint is 185 bps.

The MVR U.S. Macro Composite currently shows our key macro components are expanding above 50, the three-month acceleration has come into 2018 hot and has since cooled down. We still think markets has to adjust their current economic projections.

Three sigmas. No, I’m not talking about a local fraternity but price action. Gold has moved significantly to the upside despite inflation expectations flat-lining. Why is gold moving? A lot of it is due to the dollar which takes weekly beatings behind the woodshed. Yes, the U.S. deficits are an impact, as previously noted. The U.S.-China trade relation tensions over tariffs also adds to the weakness; however, gold is positioning itself for a pullback.

Gold has a tendency to trade at extremes going from overly extended to the downside then extended to the upside. If we look back at the last two times gold was this overextended (Nov 2017 & Jan 2018), gold fell 4.34 percent over 36 days and 4.40 percent over 25 days respectively.

Yes, gold can continue to ride the momentum but it is important to risk manage trends. In juxtaposition, the U.S. dollar is trending into a negative three sigma price move.

If we look at the intermediate tacvol range, we can see gold has room to run but it is extremely unlikely to reach our top end of $1,387.37 in one fell swoop.

Currently, our volatility pivot stands at $1,312.71. If gold just mimics previous three sigma replacements, prices would undercut the pivot and fall sub-$1,300.

The tacvol bottom end stands at $1,238.05

5- and 10-year inflation breakevens are stagnating. The 5-year, 5-year forward rate remains off the recent highs and has continued to cap gold’s rally.

Silver has continued to lag gold, and we continue to see why grouping silver in with gold as a monetary metal can get risky.

The trends in growth expectations has stunted silver’s performance, and we’re seeing that bleed through industrials (XLI), base metals (DBB) and mining (XLE). The “growth” commodities, particularly those strongly linked to China, have been unable to catch a sustained bid.

Silver is been unable to trade above its volatility pivot. If macro fundamentals continue to deteriorate, silver could trend to mid-to-high $15/oz.

The gold/dollar ratio has been on a tear, up 37 percent since 2017 – the exact time MacroView went from bullish to bearish on the U.S. dollar. The ratio has been in a clear channel since dollar’s rapid decline, and it is currently about to pop into a large supply zone.

Considering the over-extension in both gold and the dollar, the ratio can pullback and test the channel support because stalling within the designated supply zone could signify a larger, longer-term pullback.

China’s reflation rollover is real. Nobody is mentioning it. Nobody is pointing out that growth commodities are falling quick. In early Sunday trading, everything from nickel to copper to iron ore is down 2-3 percent; and rubber is down almost six percent.

As is pointed out on Friday, copper is moving lower with Chinese bond yields.

#copper and #China 10Y yields continue to trend lower. pic.twitter.com/Vi7I2XhNCT

— Chris (@Lemieux_26) March 23, 2018

Here is an update:

Growth bulls haven’t mentioned copper’s performance recently. Why does yields and copper trend? Chinese producers get extremely cramped under a higher yield environment, so money in pushed into speculation to push prices higher.

We can even take this yield analog further with platinum and palladium, which is lagging along with silver in the traditional precious metals grouping.

In my recent platinum and palladium note, I outline my intermediate projections and continue to remain convicted. To wit:

Platinum and palladium are more prone to under-performance due to weakening growth prospects, particularly in motor vehicle sales. Although to two industrial metals have been able to rise on a fluctuating dollar, the decline in motor vehicle sales is worrying.

Furthermore, demand for industrial metals could wane due to tightening within China. If we go back to 2014-2015, both industrial metals began to fall off sharply as U.S. and Chinese growth slumped. To avoid an economic catastrophe, China opened up the free money spicket, and metals went parabolic.

There is no wonder why industrial metals have been struggling since China has tried to reign in massive speculation and flooding the markets with money.

 

 Previous Post

Gold Production May Be Peaking

Next Post  

Gold Sinks $15 After Stock Rebound