9/17/2024
Gold and silver correct ahead of tomorrow's Fed decision
OUTSIDE MARKET DEVELOPMENTS: German ZEW Economic Sentiment plunged 15.6 points to an 11-month low of 3.6 in September, well below market expectations of 17.0, versus 19.2 in August. The current conditions index dropped to -84.5 on expectations of -80.0, versus -77.3 in August. The current conditions print is the lowest since May 2020.
Two ECB rate cuts have done little to improve the mood in Europe's largest economy. The stalling German economy bodes ill for the rest of the EU. There are worries that Europe is heading for a Japan-like lost decade (or more) of stagnant growth, albeit for different reasons.
Europe has a fertility problem with birthrates well below replacement levels. In Germany, the birthrate fell to 1.36 last year. There is some speculation that birthrates may rebound as the Europeans continue to shake off lingering worries from the COVID crisis but a return to the replacement rate of 2.1 seems unlikely.
Equally significant is the fact that governments in Europe have a spending problem. European Commission data shows that EU general government expenditures are nearly half of GDP. In some individual countries, it's well over 50% of GDP.
As governments grow they require more and more resources, crowding out productive private businesses. The beast must be fed leading to ever higher tax rates. Generous government-funded welfare programs lure workers away and sap productivity.
German Productivity through June 2024
It's worth considering how government decisions to essentially allow unrestrained immigration might be factoring into this reality. The most recent data from Eurostat shows that 5.1 million immigrants entered the EU from non-EU countries in 2022. The Council on Foreign Relations estimates Europe has absorbed 29 million migrants in the past decade and growth risks abound nonetheless.
The U.S. is on a similar trajectory both in terms of demographics and growth of government. Without a course correction, America could face its own lost decades.
And speaking of troubling trends: The International Institute for Democracy and Electoral Assistance reports that the global state of democracy continues to erode, even in high-performing countries in Europe and the Americas. "We now live in an era of radical uncertainty, in which multiple, compounding challenges threaten the patterns of stability and growth on which we have come to rely," the organization warned.
The Fed will seek to address immediate growth risks with its first rate cut in four years at the end of the two-day FOMC meeting that begins today. Fed funds futures continue to favor a 50 bps cut, but there still seems to be a fair amount of debate on the size of the cut.
U.S. retail sales rose 0.1% in August, above expectations of -0.2%, versus +0.4% in July. Ex-auto also rose 0.1% on expectations of +0.2%, versus +0.4%.
U.S. industrial production rose 0.8% in August, above market expectations of +0.4%, versus a negative revised -0.9% in July (was -0.6%). Cap use rose to 78% from 77.4% in July.
U.S. business inventories grew by 0.4% in July in line with expectations, versus +0.3% in June. Sales rose by a solid 1.1% reflecting broad-based strength.
The NAHB Housing Market Index ticked up two points to 41 in September but remains well off the July high of 56 and the 2020 record high of 90.
Much of the incoming U.S. data continues to reflect a resilient economy, pushing the DJIA and S&P500 to record highs. This keeps me leaning toward a cautious 25 bps cut as the Fed's first move.
GOLD
OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$10.07 (-0.39%)
5-Day Change: +$46.98 (+1.87%)
YTD Range: $1,986.16 - $2,589.13
52-Week Range: $1,812.39 - $2,5789.13
Weighted Alpha: +34.29
Gold has turned corrective as the dollar firmed intraday and traders square positions ahead of tomorrow's pivotal Fed decision. The yellow metal is off nearly 1% from yesterday's record high at $2,589.13.
While Fed funds futures continue to imply a 50 bps rate cut tomorrow, today's data reflect a resilient economy that may warrant a less aggressive 25 bps cut. If the policy move is 25 bps, gold could face more significant corrective action initially, perhaps back below $2500. However, investors are likely to view such a dip as yet another buying opportunity.
Gold is pressuring support at the $2,559.79/$2,557.21 level. Below that, a minor chart point at $2,529.57 and congestion around $2,500 are noted.
On the upside, the previously established measing objective at $2,597.15/$2,600.00 is now protected by Monday's high at $2,589.13. I've got another Fibonacci objective at $2,619.35.
SILVER
OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$0.035 (-0.11%)
5-Day Change: +$2.255 (+7.94%)
YTD Range: $21.945 - $32.379
52-Week Range: $20.704 - $32.379
Weighted Alpha: +32.63
Silver made another run at the $31 level early in today's U.S. session but upticks stalled at $30.963, leaving yesterday's high at $31.073 well protected. At this point, I don't expect to see the 31-handle again until after the FOMC policy statement tomorrow.
A short-term move back above $31 is likely contingent on a 50 bps rate cut. If the Fed only cuts by 25, I see the white metal retreating to at least the $30 zone as the market reassesses, but the potential would be back to the important moving averages which are clustered around $29.
The bull camp should be heartened by today's generally positive U.S. economic data. However, persistent growth risks in Europe and China are a significant offset in terms of global optimism.
A short to near term breach of $31.073 would keep the white metal on the path for a challenge of the $31.652 high from 11-Jul. Penetration of the latter would further bolster the scenario that calls for a test of the high for the year at $32.379.
Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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