Banyan Gold Corp. (TSXV: BYN, OTCQB: BYAGF)
The New Yukon Gold Rush
The price of gold seems to have established a solid support above $2,000/ounce, but due to the uncertainty of the timing of the Federal Reserve’s interest rate cuts, the short-term upward momentum of the gold price has weakened. However, without discussing short-term market sentiment, there are plenty of reasons to remain bullish on gold.
During the December meeting, the Federal Reserve appeared to declare victory in the battle against inflation. While keeping interest rates unchanged, it hinted that there would be three cuts in 2024 and another five in 2025, by which time rates would be reduced to between 2% and 2.5%. Anticipation of a policy shift drove up gold prices, which rose to a new historical high of around $2,135 in early December, but soon fell below $2,000 and then rose again above this round-number level, forming a consolidating pattern.
However, December’s CPI report revealed a dirty little secret. It was clear that the Federal Reserve had not won the battle against inflation, as both CPI and core CPI remained far above the Fed’s 2% target.
Federal Reserve officials also tried to pull back expectations for the rate cuts. Right after the December FOMC meeting, Federal Reserve Chairman Powell frankly admitted that inflation had fallen from its peak without causing a significant increase in the unemployment rate, which was very good news. However, the inflation rate is still too high, and there is no guarantee it will continue to decline in the future.
Currently, gold prices are consolidating in the $2,000 to $2,050 range. If the Federal Reserve cuts rates this spring as expected, this would lay the groundwork for another big rise in gold prices. The question now is that the market is very uncertain, the December CPI report has dampened expectations for a rate cuts, while the CME FedWatch Tool still sees an 81% probability of rate cuts starting in March.
The latest position report (COTs) from the U.S. Commodity Futures Trading Commission (CFTC) shows that asset management companies are unwinding recently established long positions, with gold futures long positions falling by 20,051 to 134,333 contracts, and net longs dropping to a two-month low of 88,459 contracts, while short positions only increased by 639 to 45,874 contracts. This suggests that asset management companies do not have a strong desire to short gold.
To see the long-term trend of gold prices, the key lies in economic trends.
The U.S. economy is dependent on loose monetary policy; this is a fact, which is why the market craves rate cuts so desperately. A highly indebted economy will struggle in a high-interest-rate environment, something nobody is saying out loud but everyone knows all too well. Indeed, the negative impact of high-interest rates on the economy has already been evident, with the current number of corporate bankruptcies exceeding those during the pandemic. At the same time, consumers and the federal government are running on empty.
Ultimately, the market may have guessed correctly about rate cuts, but for the wrong reasons.
The prevailing view now is that the Federal Reserve has won the battle against inflation while preserving the economy, and then it can continue to spend money to eventually achieve a “soft landing.”
However, the more likely scenario is that high-interest rates will lead to an economic crisis, forcing the Federal Reserve to cut rates faster and more aggressively than expected. The current level of interest rates is at the same level as in 2006, but now there is more debt and more bad investments. If the last rate hike triggered a severe recession, why should we be able to avoid it now?
If the economy collapses and leads to a financial crisis, the Federal Reserve will once again bring interest rates down to zero and restart quantitative easing, thereby creating inflation again. So any declaration of victory against inflation is, in fact, a surrender, meaning the Fed is returning to inflationary policy. In other words, as long as the Federal Reserve declares victory, what wins is actually inflation, and this is the bigger picture that all gold investors must always keep in mind.
