Next week is the two day FOMC meeting followed by a press conference. Presumably there will be a 25 basis point rate “hike” on Wednesday, June 13th at 2:00 p.m. EST.
The markets are giving the odds of a rate hike of over 90%.
Why am I mentioning next week for this week’s SD Outlook? The week before the Fed meets, there is generally what can be described as “radio silence” by the Fed.
The logic goes like this: The Fed doesn’t want to spook the markets, or have to do circles because the markets don’t interpret an interview/statement “correctly”.
So we have basically a silence from the “jawboning”.
Thank God. Oh yeah, and good riddance to NY Fed Head Dudley who refuses to answer questions on gold!
That said, no need in putting up the events calendar this first full week of June, because other than trade data on Wednesday, there isn’t a whole lot of action.
Which brings us to the political and geopolitical fronts.
Politics can be even more dangerous for the markets than the Fed can.
Politics can be unpredictable at times, a stark comparison to the highly choreographed Fed of the last decade.
And Gold & silver feed off of uncertainty and unpredictability.
Ok, “What’s your point Half Dollar, you’re just running around in circles on your outlook?”.
My point is that while the mainstream news, and especially the mainstream financial news, will be looking for things to cover, with the lack of Fed action and a light calendar, the MSM will be poking and prodding for stories that may speak to a kind of political and geo-political uncertainty.
Here’s a few off the top of my head:
- Italy is far from resolved, and in addition to finance and the euro, the Italians just started talking immigration/migrant crisis.
- Spain is back in the spotlight after ousting Rajoy in a vote of no confidence, and while a new Prime Minister is sworn in, Pedro Sanchez, to simply state that Spain is solved would be to also fall in the Italy trap.
- President Trump steps up the trade war rhetoric this week.
All of this brings me to a larger point: Don’t be surprised if the fundamentals assert themselves this week, and we see some decent price action in the metals.
Now we have some headwinds to work though, particularly the summer doldrums.
They say past performance is not indicative of future results, but I’d like to point out a couple of things on the silver chart from over the last year.
Behold the June beat-down and July rally:
The Fed hiked last June, and coming into early July, silver began a rally of over 20% in short order. A 20% rally coming off of wherever this short-term bottom is will put us squarely staring down $20.
Also note the low on that chart. That’s a print in which we nearly lost $15 last year.
Here’s my thinking – the rate hike is already priced in. I mean, this is, after all, the sideways channel of pure agony we are talking about, and crude oil was in the low $42 range last year, and surly any lag between now and then has also worked itself though the system as well.
So silver doesn’t have much downside, and the next rally could shoot silver up to $20 and quickly.
See the predicament the cartel is in right now?
They know what is coming, they are only delaying the inevitable as long as possible to shake out as many longs as possible, and to add just a little more coinage to their coffers to better prep for the next wave of demand.
Gold has had a rough couple of weeks:
From being squarely above $1300 to spending several days now below it, the next step for the yellow metal is to break-out above the 200-day moving average, which is basically $1309.
Gold could make that kind of move in one single day, especially if fundamentals assert themselves as I discussed earlier.
The gold to silver ratio has held up and and is set-up for silver to lead the way on the next rally:
The downtrend is still clearly in place, which is bullish for silver.
So how did things look with gold & silver overnight and into the morning?
Gold & silver managed to work in slight gains as we get close to the opening bell at 9:30 a.m. EST.
Notice too on that chart that the dollar was weak overnight.
Isn’t there all this emerging market turmoil and euro-skepticism?
The dollar looks like it could be finally rolling over here:
The break-down on the dollar chart is signaling the next move in the dollar should be lower, not higher.
What does it mean if the dollar move is finally out of steam?
Well, we already discussed how fundamentals could assert themselves this week. Next, add in a weakening dollar, and we have the recipe for a nice gold & silver rally on the week that nobody is looking for.
Talk about pure agony:
The hope trade was on last week, in part because of the perceived “flight to quality” double play into dollars and then the U.S. stock market.
But here’s something to consider: As losses from last week’s turmoil sink in, there may be, on a fundamental level, the need to liquidate paper assets (stocks) to raise cash to cover losses elsewhere. So it will be interesting to see what happens to the U.S. stock market this week, especially if the dollar rally is done.
Granted, the VIX is prepped for market bliss:
Bring in some political and geo-political uncertainty, however, and we could start seeing those spikes again.
Then there’s the yield on the 10-Year Note that’s causing all kinds of trouble:
See, here’s the thing: The narrative is that we are in a rising rate environment.
We’ll see if the Fed can contain rates during the next financial crisis, but I digress.
The problem is, however, that we have a record short level in 10-year treasuries.
What does that mean?
People are betting on the price of the bond to go down, which also is essentially a bet that yield is going up – remember, bond prices and bond yields move in opposite directions of each other.
Here’s the thing: If there is a “short squeeze”, then it till force people to buy, in this case, the 10-Year Note. If that is the case, the rush of short covering will send bond prices up (more buyers than sellers), and that would send the yield plummeting.
So the massive move of last week could really be just the beginning of, even if short-lived, another massive drop in the yield on the 10-year. Now, the mainstream financial pundits like to say “rising rates are bad for gold”, even though they are not, but let’s play along for a moment.
If rising rates are bad for gold, then falling rates are good for gold.
See where I’m going with this?
If rates drop again because of short covering, that would be bullish for gold & silver.
OK. “So, are you saying gold & silver are going to rally this week Half Dollar?”
It wouldn’t surprise me one bit:
- Nobody is expecting the rally to begin in earnest
- Everybody has accepted the “summer doldrums” narrative (meaning don’t expect much of anything)
- But there is plenty of political and geo-political risk this week, including trade war risk, and that doesn’t even include any war drums or military actions
- The dollar could be rolling over now
- Yields could be dropping.
That’s just points there which support a rally, several fundamental and two technical in nature.
So we’ll see.
I’m still sticking to my original call that the rally began two weeks ago, and while it was weak and put on hold last week, if we do move up this week, then we have some serious potential going forward.
Which ties me back into the very first silver chart above – all of this could get front-run, which is yet another reason why I’m thinking upside surprise this week.
Let’s finish with the commodities and the other two precious metals.
Palladium showed a little strength overnight:
Palladium is now working on its seventh up-day in a row. Palladium led the metals last year, and we could be seeing the indications from palladium yet again as to the integrity and validity of this stealth rally we started two weeks ago.
Even platinum wants to stop the bleeding here:
We really want platinum to get above $928 in a hurry to carve out a much needed bottom, because right now, it’s prolonged bearish trend. Not a death spiral by any means, but nothing has been going for platinum either. So let’s just get above $928, and take it from there, shall we?
Copper surged back over the 200-day moving average overnight and into the morning:
Slowly but surely the 50-day moving average is starting to point up again.
But crude oil, even with the dollar weakness, turned south again overnight:
Sure, there’s chatter that OPEC could be tweaking output, but the bottom line is this: Crude oil has performed nearly better than any asset so far this year.
That means it’s due for a breather. Now if we take a trip down to the 200-day, or if we don’t straddle the 50-day but move farther away from it, then we could be talking about some serious drops in price, but the latest drop was already profound, and if the dollar is rolling here, I would be looking for crude oil to recover.
So the main question: “Does Half Dollar think the metals will rally?”
The metal shouldn’t rally, because gold & silver have effectively been sat on all year long, and there’s no reason to assume they won’t be sat on this week (and next) until after the rate hike when the cartel must “allow” a certain bit of a rally.
But then again, with the five points mentioned above, and being both fundamental and technical in nature, and throw in a possible front-running of the Fed, then I would not be surprised one bit if we do rally here this week.
Am I calling for a rally?
I’m calling for an up-week, and whether we rally in earnest, or just confirm the bottom I called two weeks ago, I think gold & silver will pull off gains on the week.
That said, I will be looking for the convergence of factors to actually boost the metals prices with some momentum.
Which would mean an “unexpected” rally, or a break-out from the sideways channel of pure agony, would not be unexpected at all.
The iShares Silver Trust ETF (SLV) rose $0.03 (+0.19%) in premarket trading Wednesday. Year-to-date, SLV has declined -2.94%, versus a 3.50% rise in the benchmark S&P 500 index during the same period.
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