There once was a time where normal economic reports were followed with normal market reactions. And there was also a time when central bank activities were recognized as being late to the party. That was then. Now, good economic news simply means that the Federal Reserve probably has to wait longer to start unwinding its 11 rate hikes with a new rate-cutting campaign. And news of China finally not buying gold for a month may be misinterpreted.
The biggest mystery for gold and silver might have been why the precious metals sector reacted so violently lower to Friday’s strong jobs number. The larger issue for gold (and therefore silver) was overnight news that the People’s Bank of China confirmed that China bought no gold in May. Both reactions are understandable. Both reactions may have been overdone as well.
China had been buying for 18 months or so while other central banks have been large buyers of gold as a means of bolstering reserves when the world is monetizing debt. The news caused a sharp reaction and spot traders and an algorithmic selloff combined into sharp losses. Then came the strong jobs data and hopes of immediate rate cuts were pushed out even further.
Oggonomics still sees a strong case for $3,000 gold per ounce, up handily from Friday’s late-day level of $2,291.50. That said, What that translates to for silver remains up for debate but what still seems clear there is that $35 or even $40 per ounce is within the realm of possibilities.
THE PAYROLLS IMPACT
The ADP payrolls data set the stage for a weaker jobs number. The market was braced for about 190,000 new payrolls. BLS data showed that 272,000 net jobs were created in May’s seasonally adjusted data. Perhaps the big question is whether this jobs strength was really as strong as it seems. The leading industries for jobs gains were led by health care (68K) and followed by government (43K) and hospitality (42K). The professional and businesses services group (33K) ranked fourth in May.
The top three sectors actually accounted for over half of May’s total jobs creation. Job losses were seen in department stores an in furniture and home furnishings retailers. The only other solid strength coming from business and professional services means this jobs report looks stronger than it actually is. Many sectors remain in the dumps. The gains for hospitality may also have some seasonality ahead of the summer months.
THE CHINA IMPACT
After an 18-month period of buying gold, some will wonder if China is ready to stop. Perhaps a more likely explanation is that China just isn’t willing to pay up for higher and higher gold prices if it knows that it is “the axe” in the market. With gold having hit the $2300 to $2400 per ounce range, maybe it’s true that high prices get in the way of higher prices. Even for China.
Chin’a first-quarter addition of 27 tonnes of gold took its total reserves up to 2,262 tonnes. Again, maybe China has decided that it can slow down its endless buying of gold at whatever price. Gold was routinely under $2,000 per ounce a year ago. After breaching $2,400 maybe enough really is enough.
THE MARKET REACTION
Gold under $2,300 is probably not the end of the world for gold bulls and gold bugs alike. The reaction in key ETFs was hard to ignore.
SPDR Gold Shares (NYSEArca: GLD) closed down 3.55% at $211.63 on Friday.
The VanEck Gold Miners ETF (NYSEArca: GDX) closed down 6.8% at $33.57 on Friday. Newmont Corporation (NYSE: NEM) was down 5% at $40.37 and Barrick Gold Corporation (NYSE: NEM) closed down 6.7% at $16.16.
And to prove that silver’s nickname of “the devil’s metal” is alive and well — iShares Silver Trust (NYSEArca: SLV) closed down over 6.5% at $26.66.
The Global X Silver Miners ETF (NYSEArca: SIL) was last seen down 6.4% at $31.71 on Friday. Wheaton Precious Metals Corp. (NYSE: WPM) was down 5.4% to $52.59, and the more speculative Hecla Mining Company (NYSE: HL) closed down 7.9% at $5.34.
Perhaps the biggest shock here is that trading volumes were not unilaterally astronomical. It seems sellers were out with fewer buyers to pair off the sales. Barrick Gold had the highest volume spike about 50% higher than normal, but otherwise it wasn’t abnormal in gold and silver peers.
WHEN $3,000 GOLD VERSUS IF?
Making an exact dollar price prediction for gold may be a fool’s errand. That said, Oggonomics believes that the stage is set for $3,000 gold at some point in the not-so-distant future. Several ideas back this up.
The next 100 basis point move is still likely down 100 basis points than up 100 basis points. Even if that is 2025, that’s still the expectation.
Similar to the United States, global central banks have issued too much debt. When this catches up to the global markets is anyone’s guess but the last three years alone ramped up the U.S. critical levels a decade faster for total debt and annual debt servicing costs via interest payments.
The U.S. political landscape is no longer easy for foreign investors to bank on. Ask yourself how “indivisible” and “united” we are as a people. And ask if that old mantra “we all really want the same thing” is even remotely true.
THE CAVEATS
There are many caveats that could prevent gold from rising much more. Russia, Ukraine, China, Taiwan, Israel and elsewhere could all decide to settle down. They don’t show any sign of that, but they could.
Short-term interest rates are probably 200 basis points higher than a natural rate around 3%. How many governments can afford to pay 5% at debt servicing with record debt loads? At this time, the U.S. national debt was more than $34.67 trillion.
China can easily telegraph it doesn’t want to buy more gold. That might even be in their best interest. That said, China’s core economy is not strong and the government has to likely do whatever it can to keep their economy from rolling back.
There are many other caveats that can come into play that would send gold back down toward $2,000 rather than upwards toward $3,000. That said, the cost of mining has only risen and the geopolitical risk premium only seems to be adding catalysts at this time.
It is always possible that the continued interest in Bitcoin and crypto assets can continue to take away from the interest in gold. That doesn’t appear to be the case today and there very well may be plenty of room for continued growth for both assets.
