RING - FOMC To Decide Gold's Next Move

2023-03-22 05:00:00 ET

Summary

• The Fed would provide 1-year loans to banks in trouble and take the banks’ US Treasury bonds as collateral at face value.
• Gold, silver, the miners, and bitcoin are all rallying strongly and will continue to do so.
• I am cautious in the very short term, but extremely bullish to the upside thereafter.

By David Brady

Gold began its rally from $1,819 on March 9, when news of trouble at Silicon Valley Bank ("SVB") (SIVB) surfaced. Silver followed suit the following day from ~20 when SVB collapsed. Then, Signature Bank (SBNY) went bust over the weekend. The US Treasury responded by providing a blanket guarantee on all deposits of the Banks. Many believed the worst was over, but I didn't and still don't. It reminded me of Bear Stearn's meltdown in March 2008, four months ahead of Lehman's collapse, and then a multitude of other banks thereafter. This time it's worse. The dominoes are falling faster.

Then, First Republic (FRC) joined the club of banks in dire straits. The Fed stepped in with the BTFP ("Bank Term Funding Program"). They would provide 1-year loans to banks in trouble and take the banks' US Treasury bonds as collateral at face value. This would enable the banks to avoid being forced to sell such bonds at a loss and provide liquidity to meet withdrawal demands from depositors.

The point is that this is QE, whatever new name they want to call it:

This was all caused by the Fed's rapid increase in interest rates and QT, to bring down the inflation they wanted to begin with and then turned out to be more than transitory. Now, they are forced to reverse it. The only question is if the trouble in the banking sector is contained. Based on previous experiences, including the most recent, "Hell No!" Credit Suisse (CS) is still on the brink of collapse and now the liquidity crunch is spreading to companies outside the banking sector, such as Virgin Orbit. This is just the beginning imho.

This explains why Gold, Silver, the miners, and Bitcoin, are all rallying strongly and will continue to do so. The fact that inflation expectations are plummeting and fears of a looming recession are soaring is just gravy on the train.

However, in the short term, we have the FOMC meeting this week. My guess is that the Fed will want to reassure people to stem the run on deposits across the US and protect the banks from any further contagion. How will they pitch that to the markets and the public? By continuing their existing policy and raising interest rates again, the amount of which is somewhat irrelevant at this point. In other words, the worst is over, "Subprime, sorry "bank liquidity issues" have been contained". It will fail! If there is any relief from this, it will be fleeting. The dollar and bond yields spike on the news and everything else dumps. But, as always with the Fed, don't trust the first move, and soon after, the markets will call the Fed's bluff, and everything but the dollar and bond yields will soar again.

Even if I'm wrong and the Fed announces a "pause" in future rate hikes, whether it hikes at the meeting or not, the same outcome will occur, just without the initial pop in the dollar and yields. Different routes, same destination.

I put a greater probability on the "Everything is just fine now" scenario which would support my expectation for a pending short-term reversal in Gold before it takes off again to new record highs.

Just so this is crystal clear, Gold can climb above $2,000 in wave 1 of 3 ahead of the FOMC on March 22 and then drop briefly but sharply to the low of $1,900's before taking off to new record highs next.

The alternative is, the drop is deeper and longer than expected until the next bank falls, but again, that is just a delay of the inevitable move to new highs.

Either way, I am cautious in the very short term, but extremely bullish to the upside thereafter.

The same goes for Silver but its parameters are simpler. A close above $24.37. with follow-through above $24.77, and it's likely off to the races then.

The miners are slowly playing catch-up but if and when the metals take off, the miners will outperform the metals handsomely IMHO.

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