9/4/2024

Gold and silver recover somewhat on more aggressive Fed bets

OUTSIDE MARKET DEVELOPMENTS: U.S. stocks dropped sharply on Tuesday after signs of economic weakness sapped risk appetite. The DJIA ended the session with a 1.5% loss, the S&P500 fell 2.1%, and the tech-heavy Nasdaq tumbled 3.3% weighed by heavy selling of NVIDIA shares.

Global stocks took their queue from Wall Street with the major indexes recording losses: Nikkei 225 -4.2%, DAX -0.8%, CAC 40 -0.8%, FTSE 100 -0.8%. U.S. equities began Wednesday's session under pressure, but rising bets for more aggressive Fed easing are providing some market relief.

Risk-off is the theme to begin the month of September. In two weeks the Fed will announce policy and we'll see their latest economic projections. Between now and then key incoming data points that could materially impact policy are August payrolls (Friday), August CPI (11-Sep), August PPI (12-Sep), and Retail Sales (18-Sep).  

JOLTS nonfarm job openings fell 237k to 7,673k in July, the lowest print since January 2021. Layoffs rose 202k to 1,762k, the highest since March 2023. Hires rebounded 273k to 5,521k following a 407k plunge to 5,248k in June.

Incoming jobs data continue to suggest weakness in the labor market and may be a harbinger for a payrolls miss on Friday. The median estimate for August nonfarm payrolls stands at +162k, an improvement on the +114k reported in July. Nonetheless, a sub-160k payrolls print would likely result in Fed funds futures favoring a 50 bps cut.

Barring a dramatic payrolls miss (sub-100k), I still believe the Fed will initially be cautious as they embark on their first easing cycle since the pandemic. The last easing cycle actually began on 01-Aug 2019 and culminated with two large emergency cuts in March of 2020 as the COVID crisis ensued.

The Bank of Canada lowered its policy rate today by 25 bps to 4.25%. The move was widely expected.

U.S. factory orders rebounded 5.0% in July on expectations of +4.9%, versus -3.3% in June. It was the biggest monthly jump since July 2020. Most of the strength remains attributable to the transportation sector. Ex-trans a much more modest 0.4% gain was recorded.

Auto and light truck sales come out later today. Market expectations are 1.9M and 9.7M respectively.


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$3.76 (-0.15%)
5-Day Change: -$15.32 (-0.61%)
YTD Range: $1,986.16 - $2,529.57
52-Week Range: $1,812.39 - $2,529.57
Weighted Alpha: +30.22

Gold began the session on the defensive, edging to a two-week low of $2,474.08. However, the yellow metal rebounded as weak job openings data boosted bets for a 50 bps Fed rate cut, and weakened the dollar.



Earlier losses saw a slight breach of support at  $2,474.08 (22-Aug low), but gold is now trading back above the 20-day moving average. I suspect the range is now defined until the jobs data come out on Friday. Choppy consolidative trading should prevail until then, although a close back above $2500 would hearten the bull camp.

Key resistance is well-defined by the highs from the previous two weeks at $2,527.97/$2,529.57. A breach of this level is needed to return credence to previously established objectives at $2,539.77 (Fibonacci) and  $2,597.15/$2,600.00 (measuring objective).

The World Gold Council reports that, despite record-high prices, net central bank gold purchases more than doubled to 37 tonnes in July. The top three buyers in July were Poland, Uzbekistan, and India.


Official gold buying for reserve diversification is expected to remain an ongoing source of demand. Additions of gold to reserves are primarily coming at the expense of dollar holdings.

Goldman Sachs noted emerging market central bank buying as just one reason investors should buy gold. "Our preferred near-term long is gold. It remains our preferred hedge against geopolitical and financial risks, with added support from imminent Fed rate cuts and ongoing EM central bank buying," according to Goldman Sachs analysts.


SILVER

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.010 (-0.04%)
5-Day Change: -$1.068 (-3.67%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +20.48

Silver is consolidating within yesterday's range as soft U.S. economic data boosts the probability of an aggressive move by the Fed in two weeks. The rebound in factory orders led by the transportation sector, which is a heavy user of silver, may have given the bears some pause.



However, the magnitude of the losses seen since last week's failed tests above $30 has me thinking that the low is not yet in. The market certainly had become oversold, which helped prevent follow-through losses today.

With more than half of the August rally already retraced, further attacks on the downside can not be ruled out. Yesterday's low at  $27.779 now provides an intervening barrier ahead of the next Fibonacci level at $27.303 (61.8%).

A climb back above $29 would ease pressure on the downside and perhaps re-embolden the bull camp. However, choppy trade with a bias to the downside is likely ahead of Friday's jobs data.

Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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