AEM:CC - Gold May Benefit As The Federal Reserve Heads Towards A Pivot Point

2023-06-15 01:28:31 ET

Summary

• This recent drop in inflation presented the FOMC with an opportunity to ‘pause’ its current rate hike policy.
• The question that we wrestle with is when do they pivot and decide that the interest rate level is as high as it is going to go.
• A visual inspection of the dollar and gold shows that the dollar peaked in September 2022 and gold bottomed around the same time.
• Gold has an inverse relationship with the US dollar so it should be the beneficiary of the dollar’s demise.
• Gold has an inverse relationship with the US Dollar so it should be the beneficiary of the dollar’s demise.

Introduction

There is a myriad of alternative investments to the precious metals sector including the stock market, property, cryptos and various currencies. Today we will take a quick look at the US Dollar and how it relates to gold and the associated mining stocks .

The US Dollar has been supported for some time by successive rate hikes implemented by the Federal Reserve seen as necessary to combat inflation. This week we have hot off the press the latest CPI report which shows an increase of 0.1% last month after gaining 0.4% in April. Core CPI rose 0.4%; up 5.3% year-on-year. The following chart is from the Bureau of Labor Statistics and shows that inflation has fallen but still remains above the Fed's desired level.

The US Dollar has been supported for some time by successive rate hikes implemented by the Federal Reserve seen as necessary to combat inflation. This week we have hot off the press the latest CPI report which reported an increase of 0.1% last month after gaining 0.4% in April. Core CPI rose 0.4%; up 5.3% year-on-year. The following chart from the Bureau of Labor Statistics shows that inflation has fallen but still remains above the Fed's desired level.

This recent drop in inflation presented the FOMC with an opportunity to 'pause' their current rate hike policy as continuation of such an aggressive monetary policy could be detrimental to the economy and so they decided to do just that and hold interest rates as they are for now. The rate remains unchanged at 5.0%-5.25%, the first "pause" after ten consecutive rate hikes.

The question that we wrestle with is when do they pivot and decide that the interest rate level is as high as it is going to go. The Fed have always said that they are data driven and no doubt they will look to see what the CPI does next month before making a decision on rates. What troubles me is that they print an extraordinary amount of money and don't expect to see inflation, when it comes we are told not to worry about it as is transitory. But here they are contemplating a few more rate hikes this year if inflation remains strong. It appears to me that there is little in the way of predictive analysis and monetary policy is determined on a month-by-month basis, which does not instill confidence in the investment community as the outlook is so short.

One would expect the beneficiary of rate hikes would be the US Dollar but as we can glean from the chart below the Dollar isn't exactly going gang busters these days.

The US Dollar

The chart below depicts the dollar's drop from the 114 level to around 102 today, so it has been heading south when interest rates have been heading north.

This is of interest to me as my investments are all in the precious metals sector of the market. Should the Fed ease monetary policy then I would expect the Dollar to head south and test the '90' level as it was doing just two years ago.

A visual inspection of the Dollar and gold shows that the Dollar peaked in September 2022 and gold bottomed around the same time. The Dollar went south, and gold went north suggesting that their inverse relationship remained intact.

The Gold Chart

The chart below depicts gold's rise into the $2000/Oz area and the breather that followed. It pleases me that gold hasn't suffered a hard fall and appears to be base building in readiness for a rally to higher ground. An end of the year close of around $2300/Oz would be par for the course in my opinion as I suspect that future rate hikes may not materialize.

Conclusion

This period of aggressive tightening is coming to an end suggesting less support and further weakening for the US Dollar.

Gold has an inverse relationship with the US Dollar so it should be the beneficiary from the Dollar's demise.

Once gold establishes itself above the $2000/Oz level we may never see these price levels again.

If you are new to this sector of the market buy physical gold and silver first followed by some good quality mining stocks and royalty companies. If you are an experienced trader then a well thought out options strategy could return handsome profits, but options also carry with them a large amount of risk so go gently with them.

For the record, I have been long physical gold and silver for a number of years and also own a portfolio of stocks in the precious metals sector including Sandstorm Gold Ltd ( SAND ), Wheaton Precious Metals Corp . ( WPM ), Agnico Eagle Mines Limited ( AEM ) and SSR Mining Inc. ( SSRM ).

Got a comment, fire it in, the more opinions that we have, the more we share, the more enlightened we become, and hopefully our "well-informed" trades will generate some decent profits.

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