“If you want to watch CNBC like the pros do, turn the sound off!” ~ Walter Deemer
In this week’s Dirty Dozen [CHART PACK] we look new highs in gold, coiling silver that’s near historic relative lows versus gold, and a SOFR market that’s close to pricing in a recession, plus more…
- Gold put in a large bullish breakout last week, closing at new all-time highs. I updated our long-term bullish precious metals thesis last week, which you can read here.
- Silver also continues to coil nicely following its breakout from its 3yr inverted H&S continuation pattern. Expansion regimes tend to follow compression regimes like these, and we should see a big expansionary regime (trend) soon.
- @PeterLBrandt shared this great longer-term chart of silver on the twitters a while back, writing:
Silver is either:
- The grand-daddy of grand-daddies of all Cup and Handle patterns, or
- Forever a disappointment. History will prove Silver to be just a basic raw material commodity, not a precious metal speculative store of value
Thoughts?
We believe it’s the former…
- Since precious metals are essentially an anti-USD equity/bond trade, we’re in one of the best starting environments for PMs in history with expected 10-year forward returns for the S&P near all-time lows.
- The silver vs. gold ratio is -1std below its 40-year average. I expect silver will soon start outperforming gold and work to close this performance spread.
- One of our largest equity holdings right now is the precious metals and rare earths miner Idaho Strategic Resources (IDR). We first covered the company in a note to Collective members (link here) back in June 23’ when it was trading for under $5 a share. It’s run up roughly 200% since, and we still think the stock has the potential to 2-3x again over the next 2-3 years.
- We think Powell will go with a -50bps cut this week. There was a coordinated leak to both the FT and WSJ over the weekend to make the case for such. We think this is the right move. The market is currently pricing roughly 125bps in cuts by year’s end. This is about the right amount and will bring yields down to a more neutral level.
- 8. BBG’s Simon White made the observation last week that “SOFR” options continue to hitch up recession risk. Taking a hard landing as fed funds below 3% in June next year, the implied probability has risen to just under 50%… It’s notable the terminal rate has not quite crossed the Rubicon of going lower than the Fed’s long-run projection, but momentum favors that soon happening, at which point the rates market would be squarely in the recession camp.”
It’s been our view since Spring that the Fed was at risk of catalyzing a recession should they not heed the clear warnings from a softening labor market. But should they wake up and start bringing the fed funds closer inline with the 2yr, then the positive momentum in the economy will allow for a soft landing. This looks to be what’s happening, so a recession in the near-term is unlikely. This is bullish for equities.
- 9. Meanwhile, the SPX put in a strong bullish reversal last week and is within spitting distance of all-time highs. Our MAJOR buy signal is still very much in play…
- This chart from DB via CNBC shows the average cycle performance when the Fed cuts, and there is and isn’t a recession within one year. We think this market follows the blue line.
- 11. Here’s the S&P’s % of stocks above both their 50 and 200-day moving averages. Both are well above 50 and trending up. This is not what you see in the lead up to major tops.
- I’m highlighting cotton again. Sentiment and positioning are maxed out bearish. Its relative valuation is in the 0th percentile. The December contract is trading in a sideways rectangle. We will be getting long on a breakout or a reversal at the bottom of this range.
Thanks for reading.
