The disinflation theme, which we kicked off well over a year ago, continues apace as it appears that the recent bump up in inflation signals was only just that, a bump. Both Fed and prognosticator alike expect interest rate cuts in 2024. In other words, the end of this phase of the inflation problem is at likely hand because the Fed will not ease until it sees one or preferably both of two things; easing inflationary effects and decelerating economy.
Ironically, inflation fears have driven the US dollar upward because it also stirred up Fed (hawk) fears and associated rising short-term yields, which are USD supportive. Just as ironically, perceived inflation problems have punished traditional beneficiaries of inflation, like commodities.
Ironically still, we have viewed disinflation, which has not benefited commodities during the last year+ of Goldilocks, to eventually morph into a phase that could at least temporarily benefit commodities for the same reason the Fed’s fight against inflation impaired them.
Meanwhile, a Fed taking its foot off the brakes (easing policy) is positive for gold in part because it will be negative for markets and the economy. Let’s remember that historically, the Fed only starts a rate cut campaign as or just after stocks top out. This would drive up the gold price as measured in stocks, and that would introduce another important component of a bullish gold mining case:
- Gold out-performs commodities, including mining cost driver commodities/materials. This has already come about.
- Gold rises in all global currencies. This has already come about.
- Gold rises in terms of developed stock markets, especially the headline indexes like SPX. While gold has risen in terms of small caps and the Value Line Geometric Index (XVG, the median of 1700 stocks), it is still in a process of confirming a bottom vs. the headline indexes.
I don’t know what the rest of this week or next week will hold, but the signaling is for a decelerating economy and continued diminished inflationary effects in 2024. That can give commodities some breathing room (let’s watch the TSX-V, currently holding a higher low to the Feb. 13th low and other indications for the commodity/resources sectors), stocks can keep bulling along like a dead man walking and the precious metals can confirm a bottom and new upturn in the bull market that began in 2016.
Bottom line? Things appear to be changing, finally. Patience, because even if the above is correct the markets tend to move much slower than our analysis of them.
