Despite calls for $2,500, sellers are quick to exit their positions when the gold price approaches its previous monthly highs.
Although the Israel-Hamas war and rate-cut optimism have created bullish catalysts for gold, investors have shown little interest in holding long positions above $2,070. With the level near the 2020, 2022, and 2023 monthly highs, the crowd is still not sold on the prospect of much higher prices.
Furthermore, with the economic outlook continuing to darken, when bad news becomes bad news again, the PMs (especially mining stocks) could suffer mightily. For example, JOLTS job openings came in well below expectations on Dec. 5. And with the metric’s plight highly bearish for wage inflation and, therefore, consumption, more pain should confront the U.S. economy in the months ahead.
Please see below:
To explain, the black line above tracks JOLTS job openings, while the red line above tracks the year-over-year (YoY) percentage change in the Employment Cost Index (ECI). If you analyze the relationship, you can see that the pair often move in the same direction.
And with JOLTS’ descent signaling more downside for wages, weakening consumer spending could hurt risk assets, especially silver and mining stocks.
As further evidence, the S&P 500 often struggles mightily when job openings collapse. And this occurs because a weakening labor market hurts consumer demand and impairs corporate earnings. Consequently, JOLTS’ weakness should eventually hammer the S&P 500 and create even more trouble for the GDXJ ETF.
Please see below:
To explain, the black line above tracks JOLTS job openings, while the blue line above tracks the S&P 500. If you analyze the right side of the chart, you can see that a significant divergence has developed.
But, the S&P 500 has ignored the weakness because historical JOLTS drawdowns occurred during recessions, and one is yet to happen in this cycle. Although, with the black line poised to continue its crash and a recession likely to unfold in 2024, it could be a long way down before risk assets find a bottom.
Speaking of which, more timely data from LinkUp supports additional JOLTS weakness in 2024.
Please see below:
To explain, LinkUp’s job openings index has sunk like a stone over the last few months, and you can see the difference in its behavior before and after long-term interest rates rose dramatically (since September). As such, we believe risk assets still confront plenty of downside.
Debunking Rate-Cut Optimism
The recent narrative uplifting stocks and the PMs is the belief that a pivot is bullish. Conversely, pivots are not bullish, and risk assets often crash when they realize why rate cuts are occurring.
Please see below:
To explain, the blue line above tracks the S&P 500, while the green line tracks the federal funds rate (FFR). If you analyze the horizontal gray lines, you can see that the last three times the Fed cut the FFR, the S&P 500 was already sinking or was approaching a cliff.
Therefore, while it may seem like new highs are inevitable for all assets, the recent optimism is more of a ‘buy the rumor, sell the news’ type of trade. In other words, investors will likely bail on the S&P 500 and the GDXJ ETF when the Fed actually cuts rates. To that point, with oil prices resuming their crash, it’s a bad look for global growth when crude oil falls below $70.
Overall, the fundamentals continue to unfold as expected, with higher rates weighing heavily on the U.S. economy. And while the ‘bad news is good news’ trade remains intact, history shows it should end with sharp drawdowns of the S&P 500 and the GDXJ ETF and a meaningful rise in the USD Index.
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Alex Demolitor
Precious Metals Strategist