Gold Hitting New Highs on Crumbling Currencies

As the stock market enjoyed a “V-bottom” rebound in the span of two weeks that has erased the losses from the trap door selloff of Aug. 2-5, there have been some other key developments worth noting that don’t really jibe with the nine-day runup in the stock averages. Typically, when the stock market celebrates tame inflation data (Consumer Price Index (CPI) and Producer Price Index (PPI)) coupled with a rosy monthly retail sales figure, there tends to be a “risk off” reaction in defensive assets, giving way to newfound “risk on” sentiment.

With second-quarter earnings season in the record books, FactSet reported that the blended (year-over-year) earnings growth rate for the S&P 500 is 10.9%. If 10.9% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4%). A remarkably strong quarter that is part and parcel to the current rally spike lower during the first week of August was an overreaction to the confluence of events at that time that created the heightened level of uncertainty and fear.

In support of the second-quarter numbers that are backward looking, and the rising chatter about the pace of an economic slowdown, it should be well noted that FactSet also measured just how concerned America’s top companies feel about a potential recession. And the quick answer is that the vast majority are not worried about a hard landing or protracted recession.

“FactSet Document Search (which allows users to search for key words or phrases across multiple document types) was used to answer this question. Through Document Search, FactSet searched for the term “recession” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from June 15 through Aug. 15. Of these companies, 28 cited the term “recession” during their earnings calls for the second quarter. This number is well below the five-year average of 83 and the 10-year average of 60. In fact, this quarter marks the second-lowest number of S&P 500 companies citing “recession” on earnings calls for a quarter since Q4 2021 (15).” Once again, this kind of earnings call transcript data is by itself highly reassuring.

Apparently, the abysmal Aug. 2 employment report (non-farm payrolls 114,000 versus 170,000 forecast and a 4.3% unemployment rate versus the 4.1% forecast) is no longer a serious concern. The weekly jobless claims data that followed came in line per consensus forecast. The next set of monthly employment data for August is due out Friday, Sept. 6. So, nothing really to worry about until then it would seem.

The Yen carry trade has been reported to be unwound, to what extent is a large unknown, but the market is of the view it is, and yet even as the Yen retreated during the same past nine trading days that have seen the equity markets rebound, the chart of the dollar index (DXY) tells a different story. A feeble attempt to rally off the Aug. 5 low failed, and now it appears as if the greenback is rolling over.

The Yen:

And the dollar:

To be fair, a view of the 20-year chart of the dollar index has a healthy-looking long-term chart. The 20-year chart shows just how the dollar has fared well against other major currencies over time. It’s just that the uptrend is tainted by the protracted deterioration of the Euro, the Yen, the Aussie Dollar (FXA), the British Pound Sterling (FXB) and the Canadian Dollar (FXC) over the same period. Only the Swiss Franc (FXF) has a chart other than the U.S. dollar that is in a multi-year uptrend.

Is this illustration simply the ferreting out of the least dirty currency in the global basket currencies that dominate trade outside China? It’s not meant to be, but rather an observation that might explain why the price of gold is trading to new all-time highs. As of last Friday, the price of gold closed at $2,538/troy oz and is experiencing an upside breakout that is taking into account a number of risk factors.

It is being reported that central banks are the biggest buyers of gold. “Central-bank demand for gold has surged in the past five years, swallowing nearly one in every 10 ounces produced by the mining sector on official data,” Adrian Ash, BullionVault’s director of research, said in a commentary this week.

The total quantity of gold held in central-bank reserves has increased by almost 19% by weight since the summer of 2004, and it’s jumped seven-fold — to $2.4 trillion in U.S. dollar value — led by Russia, China, India and Turkey, according to Ash. The continued buying of gold is “at or very close to exhausting the ‘free-floating inventory’ of tradeable gold,” Paul Wong, market strategist at Sprott Asset Management, told MarketWatch.

The quandary here is that if inflation is coming down, Fortune 500 C-Suites are confident there is no recession on the horizon, then it stands to reason that the confluence of more Fed rate cuts than currently thought are coming, risk of further currency devaluations, the Middle East is about to morph into a regional war from a northern invasion by Hezbollah into Israel and the lack of purpose to address the spiraling federal deficit are providing the mix of catalysts for the bullish move in gold.

The stock market’s resilient move back towards the previous highs is most welcome, and yet, investors may want to add some of the yellow metal to their portfolios given the size and scope of the events occurring around the world and at home. Gold is a time-tested hedge that is making a sudden move higher. Something to think about.