Gold remains in a holding pattern as we await the Fed’s next move...but the fundamentals — including the latest numbers from the Fed itself — show that a big turning point is imminent, postulates Brien Lundin, editor of Gold Newsletter.
Another bank bites the dust. In fact, the second largest bank failure in U.S. history came over the weekend and, for a few moments, sent the price of gold jumping.
But then came the April ISM manufacturing report. The index was reported at 47.1, the sixth straight month for this number to come in under 50, indicating contraction.
You would think this bad news would be good news, as it would add further encouragement for the Fed to stop hiking rates. However, it came in better than expectations and therefore did little to alter the consensus view that Powell & Co. would raise rates by another quarter point today.
In short, we remain in a holding pattern. But my expectation agrees with the consensus, which is that THIS hike will be the LAST hike before the Fed pauses.
Why? Because things are getting crazy. The collapse of First Republic Bank last week, and its bargain-basement purchase by JPMorgan Chase (JPM), should lead the Fed to some second-guessing.
You don’t go from the easiest monetary policy in history to one of the most rapid rate-hiking regimes ever seen without breaking a few things. And while the feared banking crisis hasn’t yet become widespread, it’s obvious it hasn’t gone completely away either.
We’re likely to see more bursts in the plumbing of the financial system in the days ahead. Add in the probability of a recession, and there’s plenty to support a pause for now.
But then came the cherry on top, as the Fed just updated its estimate of the annualized cost of servicing the Federal debt:
The cost of servicing the federal debt is now $928.93 billion. That’ll have to be paid each and every year...to hedge funds, rich investors and foreign nations like China.
And this number is likely well over $1 trillion right now on a run-rate basis. Imagine the rhetoric when the squad in Congress gets a load of that number. If nothing else, this will prevent the Fed from raising rates further.
And when the pause comes, with inflation still far above the Fed’s 2% goal, the fire will be lit once again under gold.
That day is inevitable...and it’s now imminent. So, make sure you’re prepared!