Gold slid nearly 4% last week, ending the month of September with a loss of 4.7%. It was the second consecutive lower weekly close and the second consecutive lower monthly close as well.
Passage of the continuing resolution over the weekend pushes the government shut-down risk into November, leaving markets to now focus almost exclusively on rising yields, expectations of “higher for longer” rates, and the rallying dollar. All of this adds weight to a gold market that was already on the defensive.
The 10-year yield reached a 16-year high of 4.71% on Monday, helping to lift the dollar index to a 10-month high. This pushed gold to a 6-month low of $1823.59.
For perspective, the yellow metal is now just over 12% off its all-time high of $2075.80 from August 2020 and just below the midpoint of the range that emerged over the past 12 months ($1614.92 – $2067.00).
Last week’s violation of the August low at $1884.88 leaves the lower bound of the bear channel around $1810 vulnerable to a short-term challenge. The 200-week SMA at $1814.72 further highlights this area. Below that, the 61.8% retracement level of the rally from $1614.92 to $2067.00 comes in at $1787.61.
In order to attract buyers back to the gold market, there needs to be some indication that rates and the dollar have topped out. With Treasury borrowing expected to be $852 bln in Q4, Treasury supply continues to surge, underpinning yields.
As of the end of September, total debt outstanding was $33.2 trillion. The national debt should be just north of $34 trillion by year-end. U.S. GDP for 2023 is forecast to come in around $26 trillion, resulting in a debt/GDP ratio of about 130%.
Whether Congress passes another continuing resolution in November or an actual budget, make no mistake, deficits and debt will continue to rise. The national debt is on track to exceed $50 trillion within 10 years.
With interest rates at multi-year, and in some cases multi-decade highs, financing our debt poses a huge problem. According to Treasury, “As of August 2023 it costs $808 billion to maintain the debt, which is 15% of the total federal spending.”
Debt servicing is an ever-increasing economic headwind and is simply unsustainable. At some point, the Fed may have no other choice than to reinstitute quantitative easing as a means to inflate away the debt. The implications for the dollar would be dire. By extension, the implications for gold would be quite bullish.
Silver lost 5.8% last week, 9.2% in September, and 2.5% in Q3. The white metal extended lower on Monday, reaching a 6-month low of $21.02 after important support at $22.11 (23-Jun low) gave way.
With more than 61.8% of the rally from $17.56 to $26.15 now retraced, the next significant support level to watch is the low for the year at $19.90 (10-Mar). The 78.6% Fibonacci support comes in at $19.38.
Even better than expected manufacturing PMI and ISM prints for September failed to generate a bid on Monday. Fundamental focus now shifts to auto sales on Tuesday, factory orders on Wednesday, and jobs data on Friday.
The median expectation for September nonfarm payrolls is 165k jobs. The unemployment rate is expected to tick down to 3.7%.
Fed Chairman Powell participated in a roundtable discussion on Monday. While he didn’t comment on policy specifically, he said the central bank was focused on ensuring a healthy economy and strong jobs market by checking inflation.
If taming inflation remains the Fed’s primary goal, Powell reinforced the “higher for longer” theme. The takeaway from the last FOMC meeting was that there was scope for one more rate hike before year-end. However, Fed funds futures continue to reflect a belief that the Fed is already on pause.
Silver needs a robust economy and strong consumer demand for electronics and automobiles to stoke demand. The industrial metals, including silver and copper, don’t seem to have much faith in the Fed’s ability to orchestrate a soft landing.
Platinum slid to a new low for the year on Monday at $876.80. A retest of last year’s low at $796.34 must now be considered.
Good auto/truck sales numbers on Tuesday could provide some support. The market is expecting auto sales of 2.3M and light truck sales of 9.7M.
According to Edmunds, the average interest rate on a new car purchase was 7.4%. For a used vehicle it was 11.2%. These are the highest rates in 8 years and are sapping demand, especially for those with less-than-pristine credit.
Additionally, the expanding autoworkers strike threatens to adversely impact supply moving forward. An additional 7,000 workers join the picket line this week amid ongoing contract negotiations.
Palladium remains defensive at the low end of its multi-year range.
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