At the peak of the U.S. regional bank crisis, gold and silver reached as high as $2,090 and $26, but have since given back about 5%-10% of their gains, even though the S&P 500 is making new highs and talks continue of the U.S. going into potential default once the debt ceiling date expires.
As the U.S. regional banks kept crumbling one by one, gold, silver and bitcoin made new highs as money rushed to the metals and cryptocurrency as safe havens on hopes that the Fed would be cutting rates soon. This logic helped the Nasdaq rally as well, given technology is one of the few sectors that is a direct beneficiary of lower interest rates. Since April, U.S. regional banking fears have receded as the Fed seems to have plugged the leak from its side by funding programs to help the banks keep their marked-to-market bonds at par and able to pay out the interest on their deposits, avoiding bank runs.
Most analysts have penciled in much higher consensus earnings for the third and fourth quarters, as they expect a sharp rebound from either a China-led demand recovery or a cut in U.S. interest rates, allowing the economy to avoid a recession altogether. The rates market has been pricing in about three rate cuts, even though the Fed members, including James B. Bullard, who suggested two more rate hikes this year. It is known that Fed members are backward-looking, after all, by the time their data turns, it is almost too late. But equity investors are convinced the Fed will be cutting and have started positioning their portfolios long to play the "eventual" rebound.
The latest artificial intelligence buzz seems to have exacerbated that move even more as each investor and trading algorithm is falling over itself, chasing the few stocks that are involved in AI. Then there are some companies who just mention the word AI a hundred times to trigger algos to buy their stock. This is all reminiscent of the dotcom period -- when every company threw in the word "dotcom" in their presentations to garner interest. AI is no doubt here to stay, but paying valuations of 30-times to 40-times price/sales for earnings that may not come to fruition for a few good years is a tall order. We know timing is everything, but for now, the market seems to disagree as it shifts all its capital into a handful of names, despite them being at nosebleed levels.
Momentum and hope is not a productive strategy, so is chart chasing, especially when the fundamentals look dubious. Precious metals are good examples as they are following their normal correlation to U.S. bond yields and have given up their gains as falling industrial demand along with higher yields. Assets can get extended for a while but at the end of the day, financial modelling and relationships need to be respected. We are so used to assuming a Fed either in rate tightening or rate cutting stance, that no one has pondered a Fed that truly does nothing, leaving rates in a higher-for-longer mode, a prospect that makes it very difficult for the economy to grow, especially if inflation is as sticky as the Fed thinks.
The debt ceiling debate is another reason one would expect gold to rally, yet it is not. It may seem perverse to think the U.S. could default and the two sides are playing a game of chicken into the final 11th hour. Either way, it really is not about the debt ceiling as either side will need to cut spending and/or raise taxes or issue more debt. Neither scenario bodes well for the U.S. economy as it needs more liquidity to keep up with the growth rate especially with this level of debt.
Bear markets are known for their violent up and down swings. It is easy to get excited on the top and gloomy at the lows, but it is important to keep important relationships and fundamentals at all times. Charts are great, but they only tell you how far things can go if nudged in a direction, but not that it will get there and more importantly if it can stay there. Everyone has become a chart trader at their own peril and we know how things turned out for them in 2022. At the end of the day, it is all one big macro trade.
