Breakevens Are Consolidating
Do you see CNBC running endless segments on gold’s move to $2,030? I sure don’t. The fact is that gold has rallied to near-ATH without retail craze whatsoever. In fact, Wall Street has missed this trade and data supports this.
Going LONG gold during a time of rate hikes isn’t exactly an easy decision to defend to clients, and the hedge funds have largely remained on the sidelines.
The retail public has seen disappointment after disappointment from gold in 2021 and 2022, when they thought that hyperinflation would surely send precious metals to new highs – but to no avail, so they didn’t trust this rally either.
It’s only in the last few weeks, in the month of March basically, that any retail activity has picked up.
When you see this chart climbing like that, it usually signals that gold will be weak. After all, rising interest rates deter the incentive to own precious metals.
Here’s where this gets interesting, if, after the rise in interest rates ends abruptly, rates crash back down, and silver does one of its spectacular moves like you see between 2010 and 2011.
If, on the other end, after rates rise, they stay elevated, like in 2015-2019, silver lags badly.
The big question, perhaps the only question, is which of these two scenarios comes next.
In 2010, the FED was cutting interest rates and desperately trying to revive and reflate the economy.
In 2015, the FED began raising rates, in order to tame the inflationary forces that were slowly building up.
In 2023, the FED is fighting a crazy and impossible mix of both of these.
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This chart shows you that in Europe, for example, the contraction in credit and money supply is the most severe in over 40 years.
Why is that of immense importance?
The reason is that when the Euro leads the dollar, silver is one of the best-performing assets in the world.
The chart above shows you that Europe entered their contraction sooner than America and will likely exit it before the U.S. does, or, more accurately, it will recover, just as America falls into its mini-recession.
Courtesy: U.S. Global Investors
As you can see, central banks are buying gold heavily, but they’re not the ones setting the price, because when silver surged to $49/oz in 2010 and 2011, they weren’t big buyers.
For silver to hit $50 again, you need retail participation.
What makes the average person buy silver and what makes Wall Street get excited over silver in the ETFs and derivatives market?
The answer is a weak dollar.
The dollar peaked in September 2022 and has since declined by 10%, a big move, but for silver to have a chance to breach its major resistance at $29.50, the DXY index must continue to weaken into the low $90s, whereas now, it is still above $100.
What will cause the index to weaken?
Counterintuitively, if the FED hikes in its May meeting, it will confirm this was the final hike and the markets will begin pricing cuts and a weaker dollar.
So, the gameplan:
- Wait for the May meeting to confirm the dollar bear market.
- Build your silver portfolio watchlist.
- DXY falling to mid-$90s.
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