NFP Creates Sale In Gold and Silver

Gold and Silver’s recent decline was brutal. From the intraday top around $1960 falling nearly $95 dollars in two days. Silver behaved in a similar way. Making a multi month high at 24.600 only to be slammed down over two dollars in the same timeframe as Gold.
 
The reason behind this is questionable to say the least. Non Farm Payrolls smashed the expectations of job numbers, and brought the unemployment rate to its lowest level since 1969. Herein lies the problem for the crowd that went short on the metals
 
Putting to one side the amount of American’s that have had no other choice but to get two jobs and subsequently skew these payroll figures, the Fed has actually achieved what it set out to do (whether by their own making or not is an entirely different argument) Inflation is coming down, and the labour market is solid. The problem here is rising rates should slow the economy and slow the rate of employment, so why hasn’t it?
 
Let’s go back to basics. The Fed uses lagging indicators for policy making decisions. These are known to have been fudged through the years. The PCE or CPI have had parameters changed enormously to suit certain agendas. They record what happened in a prior month and this is what the Fed base their policy on, amongst other things. The PPI on the other hand records the increase or decrease in producer costs, which is a forward looking indicator and argued by many as the one that gives the more accurate outlook.
 
So when NFP yield record months, and the PCE moves down what does the Fed do? These are two indicators which should correlate based upon their monetary policy yet worryingly for the Fed they are diverging. Jerome Powell now has a choice to make: Does he wait another month and if the same trend continues is hiking another 25 basis points the answer, or is it job done and a rug pull?
 
Dollar bulls may have got this one wrong. It is highly unlikely that Powell will increase back to 50 basis points as this is an acknowledgement they were wrong (again) so the same rate hike again will show that this is the wind down in monetary policy. The Fed and its “transitory” claim will go down in history as one of the worst calls on inflation or record. They have already slowed, and could ponder why the labour market is so strong based upon the potential for this to create wage inflation and restart the cycle.
 
Whatever happens the result is Gold and Silver waiting on the sidelines ready to be bought at these sale prices. We may see some short term volatility – mainly in Silver which shouldn’t surprise anyone, but the medium to long term outlook remains unchanged.

Gold and Silver have outgained the stock market in 2022, and don’t forget this is against a backdrop of a very strong dollar and treasury yields three times as high as in 2021. They are still a very good bet.