NFTRH; On Rates, Gold, Miners and Stocks

An email from a subscriber prompts this mini update here at T-minus 1 day to FOMC.

In response to this morning’s rate cut probabilities post Mark asked my thoughts about how a Fed ‘hold’ instead of ‘cut’ and the Saudi/oil news could affect broad stocks and gold miners.

Being just a faulty human all I can do is guess like everyone else, but wanted to pass along my thoughts for all subscribers. I welcome your feedback as well, as we are all trying to see around the next corner.

Reminder: Although the linked post above notes decreased probabilities of a rate cut tomorrow, a cut is still the favored view by nearly 2/3 of CME speculators. A better scenario for gold and other beneficiaries of a steepening yield curve could be a cut by the Fed and continued firmness in long-term yields relative to the short end.

Hi Mark,

Tough questions, because of the oil input and media hype. But…

The CESI (Econ. Surprise Index) was elevated before the Saudi news. I don’t think that event does much of anything to the economy after the emotional effects are worked through.

If a rate cut were not to come tomorrow it would probably be an affirmation of higher long-term yields. I don’t think gold would do well in that scenario unless stock markets tanked (and the yield curve definitively regained its steepening status).

Here is the thing, I am leaning toward stock markets – or at least rate sensitive areas like Materials, Financials, etc. – and possibly industrial commodities strengthening against a rising rate backdrop if indeed long-term rates do rise from the recent extreme lows.

Gold played with Treasury bonds during the deflationary risk ‘off’ summer. If the Fed holds, yields rise and it is driven by an inflationary situation my guess is that it would be inflation trade up, gold down for a while. Just my hunch.

The PM miners are not gold. They fundamentally leverage gold’s performance when the backdrop is deflationary and they are fundamentally impaired when the backdrop is inflationary. Speaking in generalities here. The complication is the likes of the 2003 to 2007 period when the global backdrop was inflationary and the miners rose anyway, to very extended and over valued heights in 2008.

So there is no one-size-fits-all answer. But I hope my stumbling to provide one gives some decent inputs for consideration.