Hey There Income Hunter,
The market is finally starting to price in rate cuts.
However, they are priced to begin in 2024, though I think they’ll arrive by mid-2023 at the latest.
The Russian invasion adds more uncertainty to the number of hikes the Fed will be able to go ahead with this year.
I still believe it will be two or three (but certainly not seven), unless stocks fall by 30% or more.
That is why gold has rallied, without a pause, nearly 7% since the beginning of February. The miners are starting to catch up, as well.
As you can see, the chart below illustrates how much further gold can outperform the S&P 500 (SPX) …
Today, I’ll show you the signposts that are revealing how fast the economy is slowing and what the SPX level needs to be for the Fed to provide support.
Why Investors Are Just Waking up Now
I have been doing this long enough to understand that cracks in the market appear way before anyone realizes it.
That is probably why I am early on trades.
But if you’re not early, you risk missing a very quick move.
(As the Will Ferrell character Ricky Bobby once said, “If you ain’t first, your last!”)
This time, though, investors chose to believe what the Fed was saying instead of what the market was telling us.
As always, the proof is in the pudding and the fact remains the Fed will begin tightening just when inflation has already tightened for them.
The graph below shows the leading economic indicators turning down before the Fed even raises rates for the first time in the cycle. The green circles highlight each of the past five times the Fed started a tightening cycle and you can see each time the leading indicators were trending higher as opposed to trending lower like we are today.
Usually gold would not be trading this strongly when heading into a tightening cycle but gold anticipates what’s coming as opposed to reacting to it, which is what the Fed always does.
That is why they will never come near the seven tightenings that are priced in for 2022.
Gold Now Just Waiting for the All Clear
Gold has already ignored higher interest rates and a stronger dollar, which historically have both been negative for gold.
The gold-to-rates and the dollar divergence raises a most important point …
Gold is trading on the assumption the Fed will never be able to stop inflation before it is forced to go back to QE.
This is an assumption that has a very high probability of being correct. This is the only point that matters because once the Fed goes back to QE, the dollar will resume it’s down trend …
And once the dollar collapses, the Fed will have to take the next step and hold rates below 2.5% or even lower to avoid a debt crisis.
Those two events will send gold to new all-time highs – and possibly much higher.
Bring It Home
The Russian-Ukraine risk is expediting the SPX move to a level where the Fed will have to say something.
I think that level is well below 4,000 and closer to 3,750, which would put it a couple of percent away from down 25%.
We have a ways to go. Keep selling the rips, and when you do buy some gold …
Live and Trade With Passion My Friend,
Griff