On Wednesday, Jerome Powell and his merry band of economists (I use that term lightly) gave us an early Christmas present by switching from their long standing hawkish routine to get down right dovish. For much too long, they have struggled with simple math.
They finally showed off their math skills in a way that would make Jethro Bodine proud. By calculating that the Free Money Era gozinta out of control debt and runaway inflation, which gozinta $1 trillion in annual debt servicing costs when you quickly change to expensive money and it equals a Death Spiral of Debt. Throw into the equation that 2024 is an election year, shake it all up, and you get a dovish Fed ready to lower interest rates.
Even though they sent out one of their talking heads on Friday to try to say that they aren’t turning dovish and ready to lower rates. They can’t get away from $34 trillion in debt, deficits measured in trillions and alarming debt servicing costs.
The key reason they had a change of heart in my opinion is mainly because 2024 is an election year. It isn’t about economics. They have caused severe economic issues, but that is secondary for them, primary for them is to keep the Ponzi scheme of debt and money printing going so the politicians can buy votes and keep the Fed team intact.
The abrupt switch from a hawkish Fed to a dovish Fed was not lost on the currency traders, they hammered the US dollar. Nor was it lost on the metals traders that pushed gold higher when the Fed statement announced they were continuing to pause, then higher when the question period at the Fed press conference started and the pesky media folks kept asking about when the Fed would cut rates.
During the hawkish Fed routine, Powell would get perturbed when asked about if the Fed was considering cuts. Not this time. He mentioned that it was considered during the meeting. The comment that caught my attention the most was when he was asked if the Fed would wait until inflation got down to their 2% target. He said if they wait until then it will be too late. Which suggests to me that once they see 3% or lower dots plot, they will have their green light to cut.
The moment the Fed turned into doves, gold, silver, copper and other metals jumped up while the US dollar went into the red. The blood letting for the US dollar is just starting and will gain momentum as the Fed gets closer to lowering interest rates. My guess is it could be as early as March as they will need some time to lower three or four times before the election season really gets heated up.
I can clearly see a path for gold to get much stronger in 2024. I expect we will see a strong Santa Claus rally before the end of December, followed by a powerful January Effect for gold. Money managers are not going to want to be without gold exposure on their books in 2024.
We currently have gold stocks, and other metals stocks, at depressed valuations. With a big divergence between the price of gold and the valuations of gold stocks. Not only do I see gold making several new all-time highs in 2024, I am comfortable in predicting that the gold stocks will close the gap.
If I’m right, and I will preface it with I could be wrong, the first to move will be the ETFs and major gold miners. Followed by the mid-tier miners, smaller miners, then developers followed by the explorers.
The bane on existence for gold stocks has been the high shorts on them, both the declared shorts and undeclared shorts. The shorters have been pressing their bets all the way down to the current depressed prices.
When the prices go down, it is lucrative to keep pressing their bets. But, if the prices become less depressed, it can get painful very rapidly. It happened to the major mining companies that hedged their production prior to the 2001 to 2011 gold bull market. They found their stocks suffering despite gold going up and passed their hedged prices.
They looked like geniuses when the price of gold was below their hedged prices. It became a huge problem for them when gold broke well above their hedged prices. Back then, if you told people this was going to be extremely expensive for the hedged gold miners, they would have told you not a chance, they are too powerful.
They paid the price as will the shorters of gold stocks. They have been making easy money for a long time. But, prices have a way of fixing excesses.
I remember several years ago visiting a friend that owned a brokerage house in Toronto. He had been a successful trader for decades. I spent a couple hours in his office discussing mining stocks. He had a big short position on a Wall Street stock that hit hard times. He pushed his bets all the way down.
He had an assistant watching all his long positions and cash, every time he was in a position to short more of the stock, he did. Probably three or four times while I was talking with him. His assistant would tell him how much more he could short and he would say short more of the stock. After I left his office, I watched the stock and it just kept going down. I never asked him how the short turned out, but I imagine he made off like a bandit.
I can see the gold stock shorts are operating in the same way. As gold stocks go down, it is easy money. But we are starting to see signs that it could get a little painful. You can see it in the largest gold stocks like Newmont and Barrick.
Both of their stocks have recently bottomed and are trending higher. The moves off their 52-week lows won’t cause the shorts to lose sleep because they are liquid and can close their shorts without moving the stocks up to any level that would cause them pain.
As you move down the food chain of gold stocks, into the mid-tiers, small producers, developers and explorers are less liquid, closing their shorts can cause a rush toward the exit. A catalyst that can cause them to worry is when the Fed switches from dovish comments to lowering rates.
It will put pressure on the US dollar and drive the price of gold up bringing other metals along for the ride. The shorts had to be watching the last Fed meeting a few days ago and saw the future right in front of them. When the Fed stood pat on interest rates, then Powell made dovish comments at the press conference, the US dollar was under pressure and gold went up nicely. This was just talk from the Fed, it won’t be long before we see what happens when they lower rates.
I’m watching for gold to get into the $2100 to $2500 range to see signs that the gold stock shorts increasingly start closing their short positions. There are such high short positions in gold stocks, declared and undeclared, that when they start heading toward the exit it could be very powerful for the gold stocks at depressed prices coming from a very low base.
I also think at those levels it will bring in the online momentum players that like crypto currencies and the artificial intelligence stocks. They are organized online and can get the word out like the gold stocks have never seen before.
For those keeping score at home, the Free Money Era caused out of control debt growth and troublesome inflation that has not been transitory. Then rapidly moving from the Free Money Era to more expensive money locked in the Death Spiral of Debt. The result is that it didn’t take long for debt servicing costs to reach $1 trillion and exceed military spending. Even a few more months is going to drive the costs toward $2 trillion before the Fed knows it.
It is an election year so the politicians are knocking on the Fed’s door to remind them they need to pay off voters so they will need lower rates.
Meanwhile the beaten down gold stocks are depressed and highly shorted. What this all means is that the shorts on gold and gold stocks are going to be locked out of the golden party. The golden party will have a silver lining, Dr. Copper will be there as will other metals.
All the best,
Allan Barry Laboucan
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