Inflation, USDX, Real Yields: Doom Trio Hangs Over Gold
2022.04.27 18:26
Despite the reality check, investors keep up their buying spree. Meanwhile, problematic events are starting to gain on gold, silver and mining stocks.
With reality rearing its ugly head recently, the S&P 500 and the VanEck Junior Gold Miners ETF (NYSE:GDXJ) have suffered mightily. Moreover, while I’ve been warning for months that investors underestimated the implications of rampant inflation, the chickens have come home to roost. To explain, I wrote on Oct. 26:
Moreover, I added on Nov. 4, following the FOMC meeting:
Thus, while Powell has shifted his stance materially, and Fed officials now expect seven to 12 rate hikes in 2022, the financial markets initially ignored the repercussions. However, always late to the party, the consensus now fears that the medium-term outlook has lost its luster.
Please see below:
Likewise, while the fundamental implications have been loud and clear for months, sentiment doesn’t die easily. However, since reality is undefeated, the impact of evaporating liquidity is becoming too much to bear. To explain, I wrote on Feb. 2:
I provided an update on Apr. 13:
Surprise, surprise: after surpassing its March 2020 highs, the FCI has continued its ascent.
Please see below:
Who Could’ve Seen This Coming?
As a result, while the Russia-Ukraine conflict and misguided optimism disrupted our bearish timeline, the important point is that investors can only ignore technical and fundamental realities for so long. With a resurgent USD Index and rising real yields, which are profoundly bearish for precious metals, the latter have come down from their recent highs.
Moreover, with the general stock market’s suffering adding to the VanEck Junior Gold Miners ETF’s (NYSE:GDXJ) ills, the junior miners have underperformed their precious metals counterparts, which has been very beneficial for our short position.
However, the bearish medium-term thesis remains unchanged: inflation is problematic, the Fed is hawked up and a higher USD Index and higher real yields should materialize in the coming months.
Case in point: while February’s lagging data may not reflect the impact of rising mortgage rates, the S&P/Case-Shiller U.S. National Home Price Index surged by more than 20% year-over-year on April 26 and outperformed expectations (19%). As a result, the data is profoundly bullish for shelter inflation, which accounts for more than 30% of the headline Consumer Price Index‘s movement.
Please see below:
Also noteworthy, Whirlpool (NYSE:WHR) released its first-quarter earnings on April 25. For context, the company manufacturers home and kitchen appliances like washing machines, dryers, refrigerators and stand mixers. CEO Marc Bitzer said during the Q1 earnings call:
“As our industry and most other industries face historical levels of cost inflation, we observed over $400 million in the fourth quarter, or approximately a 10% increase on cost of goods sold. Despite this, we delivered over 9% ongoing EBIT margins and over 16% EBIT margins in our North America business, again demonstrating the earnings strength of the region and the actions we took, transforming margins over the years.”
“We now expect higher levels of inflation to persist throughout the year and have increased our full year cost inflation expectations by $600 million to $1.8 billion.”
However, is Whirlpool waiting for the Fed to solve the problem?
“Our first quarter results demonstrate that we are a different Whirlpool, delivering structurally improved EBIT margins no matter the operating environment. We have the right actions in place to deliver a solid 2022, including our previously announced cost-based price increases of 5% to 18%, addressing inflation across the globe.”
To that point, due to the time lag between incurring costs and implementing price hikes, Bitzer said that more increases are scheduled for the back half of 2022.
Please see below:
On top of that, Indeed released its latest State of the Labor Market report on April 21. An excerpt read:
“Employer demand for seasonal work is growing in line with pre-pandemic trends, with summer job postings on Indeed soaring 40.1% above their Feb.1, 2022, baseline as of April 10 (…).”
“Seasonal postings on Indeed for spring and summer jobs comprise a variety of positions. Some of these jobs, like camp counsellor and lifeguard, fit the traditional summer mold. But more general roles, like retail sales associate and cashier, make strong showings, too.”
However:
“Domestic job seeker interest in seasonal jobs lags prior year trends. As of April 10, the 2022 share of domestic job seeker searches for seasonal work was respectively 27.6% and 16.9% below the comparable periods in 2019 and 2021.”
Please see below:
To explain, the blue and green lines above track U.S. citizens’ interest in seasonal work in 2019 and 2021 (before/after the height of the pandemic), while the pink line above tracks their current interest. As you can see, there is a clear underperformance.
More importantly, the combination of normalized demand and insufficient supply is extremely inflationary. With demand “growing in line with pre-pandemic trends,” while supply is roughly 17% to 28% below comparable periods, it should put upward pressure on wage inflation. Moreover, remember what I wrote on Apr. 22?
As a result, he understands the problem. However, reducing 8.6% annualized inflation without impairing the U.S. labor market is like trying to hit a hole in one on the golf course.
Please see below:
Finally, The Conference Board released its Consumer Confidence Index on April 26. The headline index decreased from 107.6 in March to 107.3 in April, and Lynn Franco, senior director of economic indicators at the Conference Board, said:
“The Present Situation Index declined, but remains quite high, suggesting the economy continued to expand in early Q2. Expectations, while still weak, did not deteriorate further amid high prices, especially at the gas pump, and the war in Ukraine. Vacation intentions cooled but intentions to buy big-ticket items like automobiles and many appliances rose somewhat.”
All in all, the data is largely inconclusive, as there are some good and some bad results. However, since “concerns about inflation retreated from an all-time high in March but remained elevated,” more QE is far from the right medicine.
The bottom line? While I warned on April 8 that when sentiment shifts, precious metals will confront one of the worst domestic fundamental environments since late 2018, the troublesome developments are catching up to gold, silver and mining stocks. However, despite their recent drawdowns, precious metals are still trading well above their medium-term-trend-based fair values. Therefore, more pain should materialize over the medium term. It seems that we might see a sharp rebound in the near future, though (after precious metals decline some more).
In conclusion, precious metals were mixed on April 26, as mining stocks continued their material underperformance. Moreover, while investors will likely remain in ‘buy the dip’ mode until the very end, lower highs and lower lows should confront the S&P 500 and precious metals over the next few months. As a result, the medium-term outlook for the GDXJ ETF is profoundly bearish.
