It's a rare thing to see gold soar more than $60 in a single trading session.
What's even more rare is for me to see gold and silver in the red first thing in the morning... and be happy about it.
That's because the metals were down yesterday (Monday) much less than I would have expected given the fact that the Mideast didn't erupt into flames over the weekend.
Yes, gold and silver gave up some of their big gains from Friday.
On Monday, gold was off about $15 and silver was down about $0.20.
But after jumping about $60 and $1.00 respectively, that's not as bad as I would've feared. And then prices have rallied here again on Tuesday morning.
Geopolitics Are Still The Short-Term Driver, But...
Investors are still worried about what will happen once Israel moves into Gaza in force, something that didn't happen over the weekend.
And Iran officials are making ominous threats, while Saudi Arabia has reportedly met with Iranian representatives and is putting normalization talks with Israel on hold.
But there are conflicting reports flying all over the place, many of them intended to distract from the truth, and we won't know who ends up getting involved until they do or don't.
That's the issue, though. The uncertainty of it all. And there's no doubt that this is the primary driver for gold right now. We wouldn't have seen a $60 spike on Friday without it.
But the fact remains that gold looked to have bottomed early this month, bouncing off of a technical “death cross” and rebounding strongly on economic news that should've sent it tanking.
In addition, Friday's Commitment of Traders report showed that the positioning of non-commercial traders had slipped to its lowest level since April 2019 (which was right before gold soared $700!).
Yes, the stars had aligned for gold well before the crisis in Israel emerged.
My friend Adrian Day put it all in powerful perspective in an email yesterday:
But geopolitical rallies in gold tend to be short-lived; think of the less-than two month move after the Russian invasion of Ukraine. Monetary matters tend to be more important to gold; and this past week saw the failure of three Treasury auctions, the three-year, 10– year and 30-year.
“We are not alone in pointing to the large increase in Treasury issuance coinciding with a lack of demand from traditional buyers (the Fed, China, Japan and Russia, as well as U.S. banks). Treasury issuance is increasing not only because of the widening deficit and the backlog of Treasuries from the debt-ceiling related pause earlier in the year, but also because nearly 30% of all outstanding Treasury will mature in the next 12 months and have to be rolled over.
These events perhaps show that the Fed has lost control of the narrative. Many commentators think that the Fed will be forced back into the Treasury market as buyers; and at any rate, the probably of a rate hike next month has dropped to just 7%, down from 30% a few days ago and over 50% in mid-September.
We are clearly coming close to the point where the Fed can no longer tighten even as inflation stops falling. Just as the softening in the oil price in the second-half of 2022 and first-half of this helped bring down the inflation numbers, so too the 30% increase in the last three months will flow through to the price of virtually every good in the stores.
"A weakening economy, and widening budget deficit, will prevent the Fed from raising rates more in an election year, even as inflation remains stubborn. The acknowledgement of that confluence will spark the next bull market in gold.
About the Author:
Brien Lundin is the publisher and editor of Gold Newsletter, the publication that has been the cornerstone of precious metals advisories since 1971. Mr. Lundin covers not only resource stocks but also the entire world of investing, from small-caps of every type to macroeconomics and geopolitical issues that ultimately affect every investor. He also hosts the annual New Orleans Investment Conference, the oldest and most respected investment event of its kind.