Crashes Come After Cuts... Right? Gold, Silver, Stocks Rocket

U.S. initial jobless claims came in at 219,000 – well under the expected 230,000 estimate. This is cemented in the theory that the king-size rate cut is happening in a strong economy, not coming too late in a weak economy. The big difference is that although crashes typically come after rate-cutting cycles, if the cutting is happening in a strong economy it can lead to a smooth take-off to higher levels.

To believe that traders' recent actions reflect the true future, you would have to believe that the Fed is willing to keep flooding the country with trillions in digitally generated currency (via rate cuts) throughout the U.S. elections. Consistent strong jobs data could combine with this and make no reason to short-sell most markets. The prospect of a slump period for gold, silver, other precious metals, and most other investments would not come in this scenario, as the avalanche of money creation/inflation would make gold and silver very attractive hedges. The lower interest rate environment could also put a stranglehold on other investments, leading more investors to buy gold and silver, which do not rely on interest.

Gold price performance this year in AUD (even before the big rate cut):

The big cut's slightly delayed response triggered a global stock market rally and a buying spree for gold and silver. But investor sentiment after a cautious initial reaction, at least in part due to the gloomy demeanour of Federal Reserve Chairman Jerome Powell during Wednesday's post-meeting news conference, showed what investors really thought on Thursday. Investors are now seemingly convinced that the Fed is going to be aggressive with rate cuts over the next year – a scenario that has become the leading driver of markets and risk assets. Traders poured money into technology stocks and other riskier assets, betting that lower borrowing costs would help keep unemployment low.

Major indices, as well as gold and silver, pivoted from their slight retracements and began rocketing higher. The Russell 2000 index ended the day 2.1% higher, extending its winning streak to seven sessions. That's the best winning streak in 3 years. As mentioned previously, increased investment in the Russell can be a sign that investors are confident in more rate cuts.

Investors can always be wrong, but if they are right in believing the Fed’s willingness to keep increasing the money supply, this could be the last ‘buy the dip’ moment for the foreseeable future.