A lot of gold bugs like myself still think that the precious metal is undervalued here at around $1820/oz., not only based on the Fed’s ridiculous track record of easy money over the last 15 years but also due to the new burgeoning bifurcation of the global economy that looks to be taking place with Russia – and potentially China – looking to back their respective currencies with gold.
For many of us, this means that despite the fact that the Fed is hawkish, we still think gold is undervalued. I continue to believe that gold and silver miners represent some of the best and most undervalued equities in a market that is swiftly on its way to redirecting its attention to actual cash flow and dividends, instead of revenue growth and bombastic claims.
And what we’re seeing now in the gold market is a pullback based on the Fed posturing that it is going to continue to raise rates. Even with this “pullback”, gold is resting at levels that formerly used to be its ceiling.
On a 30 year gold chart, it’s easy to see that the $1,800 level that formerly served as resistance has now likely turned to support.
Gold, non-inflation adjusted, 30 year chart
Gold is reacting to the assumption that the Fed is going to hold course and continue to raise rates. With the 10 year already well above 3%, the market is fully baking in the Fed returning to its “neutral rate” – whatever the fuck they decide that is this week.
10 Year Treasury Yield
I think it’s safe to say at this time that the market has bought the Fed’s posturing hook, line and sinker. Equity markets are certainly diverting their focus from risk in a profound way for the first time in more than a decade as a result of the Fed’s rate hikes and concurrent posturing.
On Tuesday, Jerome Powell kept his nerve for the time being, stating during a Wall Street Journal event that “Restoring price stability is a nonnegotiable need. It is something we have to do” and “there could be some pain involved.”
He also acknowledged, as I have said many times, that we are in unprecedented territory, stating: “If you look in the history book and find it—no, you can’t. I think we are in a world of firsts.”
“I would say there is no disagreement really. It is a challenging task, made more challenging the last couple months because of global events, It is challenging because unemployment is very low already and because inflation is very high,” he continued. “We will go until we feel like we are at a place where we can say, ‘Yes, financial conditions are at an appropriate place. We see inflation coming down. We will go to that point, and there will not be any hesitation about that.”
But despite the pullbacks of recent months, especially in the tech-heavy NASDAQ, we are still above where we were prior to Covid striking.
From here, the only question that matters is going to be whether or not the Fed can hold its nerve.
I have a long postulated that one of two scenarios will be forthcoming: (1) either the Fed is simply going to destroy equity markets, causing them to plunge likely another 30% to 40% from here or..