While the geopolitical conflict has been a boon for the yellow metal, the domestic battle supports much lower prices in the months ahead.

The PMs are back in style, as market participants have flocked to gold amid the ongoing Middle East conflict. And despite the surprise, we recently closed our GDXJ ETF short position for a profit, as the technicals have proven superior over the last several months. 

Furthermore, with another short opportunity likely on the horizon, the junior miners are making a familiar mistake.

Please see below:

(Click on image to enlarge)

To explain, the gold line above tracks the weekly movement of the GDXJ ETF, while the black line above tracks the weekly movement of the iShares 20+ Year Treasury Bond (TLT) ETF. If you analyze the left side of the chart, you can see that the GDXJ ETF soared during the Russia-Ukraine conflict, while the TLT ETF continued its medium-term downtrend. And with the divergence a bad omen for silver and the junior miners, they eventually reversed and declined precipitously.

Similarly, the price action on the right side of the chart shows how the recent GDXJ ETF rally has occurred alongside another TLT ETF crash. Consequently, while the former may have some more upside, it could be a long way down if (when) the decoupling reverses.

To that point, we warned on several occasions that Fed Chairman Jerome Powell would remain hawkish, which supports higher real yields and a stronger USD Index. And with the central bank chief reiterating that stance on Oct. 19, the PMs’ bear markets should have plenty of room to run. He said:

“While the path is likely to be bumpy and take some time, my colleagues and I are united in our commitment to bringing inflation down sustainably to 2%…. Does it feel like policy is too tight right now? I would have to say no,” even though “higher interest rates are difficult for everybody.”

He added:

“We’re very far from the effective lower bound, and the economy is handling it just fine.”

Thus, while Powell believes the economy is invincible right now, we think that notion is short-sighted. In reality, long-term interest rates have risen dramatically, and the forthcoming pain should lead to a Minsky Moment. 

Recession Signals

Although the crowd and the Fed have dismissed the ominous data, there are plenty of scars outside of unemployment claims. For example, The Conference Board’s Leading Economic Index (LEI) declined by 0.7% month-over-month (MoM) in September, which was worse than the 0.5% MoM decline in August. Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board, said:

“In September, negative or flat contributions from nine of the index’s ten components more than offset fewer initial claims for unemployment insurance…. So far, the US economy has shown considerable resilience despite pressures from rising interest rates and high inflation. Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”

Consequently, while we may disagree on the magnitude of the economic slowdown, the rapid rate rise should have drastic consequences for crude oil and the PMs.

Please see below:

(Click on image to enlarge)

To explain, the blue line above tracks the year-over-year (YoY) percentage change in the LEI, while the gray line above tracks the YoY percentage change in real GDP. If you analyze the right side of the chart, you can see that the blue line has dipped again and remains near recession levels. As such, it’s likely only a matter of time before real GDP follows suit.

Finally, the large U.S. banks reported earnings recently, and executives’ message was noticeably different from 2021 and 2022. Wells Fargo CEO Charlie Scharf said:

“While the economy has continued to be resilient, we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly.”

In addition, Citigroup CEO Jane Fraser said the deceleration in spending indicated “an increasingly cautious consumer.”

Likewise, because actions speak louder than words, the five largest U.S. banks have cut a combined 20,000 jobs so far this year, and the pain should only intensify in the months ahead.

Overall, the crowd and Powell think the surge in long-term rates is no big deal. However, history shows that rates rise and rise until an ‘uh oh’ event occurs. And with the damage starting to show, don’t be surprised if a panicked yield reversal coincides with a sharp drawdown of the PMs and major pain for the S&P 500.

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