USD Gold Spot All Time High – Resistance Smashed – Look out for Silver!

Yesterday gold hit an all-time high in AUD terms and last night the USD spot price rocketed $31 in the session to $2114 (up 1.5%) to make a new all-time high as well. In AUD terms it was even better, up $54 to $3248, a 1.7% jump. But if you thought that was good, silver doubled (literally) down by jumping 3.3% in AUD terms and 3.1% in USD terms to reach $23.92 spot. That saw the Gold Silver Ratio (GSR) drop from 91 to 88.5. Why, and could this be the beginning of the next silver outperformance rally?

First, lets look at what drove last night’s gains and the significance of gold smashing decisively through the $2100 resistance it’s struggled to breach for so long.

I appears the market is actually losing faith that the Fed has ‘got this’ with respect to inflation and the so called ‘soft landing’. To the simple observer we saw a disconnect between bonds and gold with bonds, and in particular the 5yr Inflation Breakevens (essentially the bond market’s bet on future inflation) actually falling, seeing a rise in yields. In other words, the market is betting on higher inflation from here. On cue, Wall Street (shares) was all red as the ‘soft landing’ Kool Aid was digested….

In this month’s Macro and Global Liquidity Analysis: Gold, Silver, and Bitcoin we spoke to the following chart showing the current disconnect between the Fed Funds Rate (‘official interest rates’) and the US Treasury bond yields. History and economics dictate they must come together and indeed for the system to work, the Feds fund rate needs to be under the bond yields rate.

The last week has seen an erosion of belief that the Fed will be dropping rates any time soon as inflation feels stickier and last night Atlanta Fed President Bostic said:

“This threat of what I’ll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months,”….“ As my staff and I have talked to business decision-makers in recent weeks, the theme we’ve heard rings of expectant optimism.”

And in terms of the $34 trillion question of rate cuts…

“I would probably not anticipate they would be back to back”….“Given the uncertainty, I think there is some appeal to acting and then seeing how participants in the markets, businesses leaders and families respond to that.”

That set markets aflutter…

So why did gold rally? Because, quite simply, the USA has 34 trillion reasons (their national government debt) to get the rates down as they are already spending $1.1 trillion in interest payments, greater than defence spending and zooming up on welfare and medicare. The very head of the Federal Reserve in January this year stated on 60 Minutes “the U.S. is on an unsustainable fiscal path”.

If this doesn’t resolve soon there is likely a financial crisis. Gold wins.

If they (predictably) cave and reverse tack, drop rates and print more currency, Gold wins.

Rarely is there such a high probability each way bet as gold right now. Gold has bounced off $2100 four times since 2020. Last night it smashed through it with conviction.

But if you think gold looks good, silver is now looking simply tantalising. Silver has languished now for years as gold fails to get fast momentum. Beautifully ticking up and up 83% in 5 years, yes, but not the sorts of momentum events as last night. Silver traditionally extends out to lower lows (a high GSR) waiting for gold to take off then it (GSR) mean reverts and shoots past gold to a higher high silver price. We also have a stupendous secular cup and handle technical formation (just as gold was and shooting out of now). Silver hasn’t done that yet, but it certainly feels poised. Over to Crescat Capital’s Tavi Costa…

Warren Buffet famously said “be fearful when others are greedy and to be greedy only when others are fearful.”