Gold’s Recent Gut and Silver Slam

Gold Gutted, Silver Slammed… What’s Going On?

Sometimes good news is bad news; other times, good news is simply good news. Are you confused yet? If so, then you’ll be in the company of countless commodities investors who get whipsawed with each new economic data release nowadays.

The main trends in gold and silver are still decidedly to the upside, but Friday’s price action put a wrinkle in the uptrend with gold slipping 3.34% to $2,311 and silver sliding 6.69% to $29.27 per ounce.

When you want clues about what’s happening in the commodities markets, you can usually just turn your attention to the bond market. The U.S. 10-year Treasury bond yield notably ripped 3.48% higher on Friday and landed at 4.43%.

When bond yields rally sharply, it’s time to look for news items related to interest rate policymakers and the Federal Reserve. After all, precious metals prices can sometimes be highly sensitive to interest rate policy.

More precisely, the metals can be sensitive to anticipated changes in interest rate policy. There was no Fed decision made on Friday, but there was a major data release that financial traders monitored closely.

It was the nonfarm payrolls report provided by the Bureau of Labor Statistics. You may have heard that the U.S. unemployment rate ticked up slightly to 4% in May versus 3.9% in April.

That’s not the real headline grabber, though. What’s more important is that the U.S. labor market added 272,000 nonfarm payroll jobs in the month of May. That’s a lot higher than the 180,000 job additions that economists had expected.

It’s a strange situation in which there’s a significant increase in jobs while the unemployment rate is actually moving higher. The job increase count is likely more accurate than the unemployment rate since the government’s unemployment definition excludes part-time workers, people who gave up and stopped looking for work, and so on.

A long-term, big-picture view will show that nonfarm payrolls are actually on a downtrend while the unemployment rate is curling up. These aren’t great signs for the economy during a crucially important election year, but that’s not the main reason for Friday’s move in the gold and silver prices.

As usual in the 2020s, it all comes down to what the market expects the Federal Reserve to do. You might recall that at the beginning of 2024, the so-called experts thought the Fed would cut interest rates six or seven times this year.

It’s now crystal clear that the experts were 100% wrong. At this point, mega-cap stock buyers are hoping and praying that the Fed cuts interest rates even once this year. They may very well be disappointed.

The Federal Reserve doesn’t celebrate when Americans have jobs. The Fed’s priority is to find an excuse to lower interest rates, which is what wealthy stockholders and politicians want.

Even so, there’s no easy excuse to cut interest rates when the month of May produced a blowout nonfarm payrolls report. That’s because people have more money to spend when employed, and spending activity typically leads to higher consumer price inflation.

To quote Citi senior global economist Robert Sockin, the Federal Reserve is “really walking a tightrope here.” The Fed wants to see inflation go down to 2% before it cuts interest rates, but inflation is less likely to go down when people are employed.

On top of this, there’s the wage growth issue. In May, U.S. wages increased 4.1% year-over-year, and this reversed a downward trend in annualized gains from April. Wages increased 0.4% in May on a month-over-month basis, which is twice as much as April’s 0.2% gain.

Like nonfarm payrolls growth, wage growth tends to be inflationary. This consideration further prompted fears that the Federal Reserve can’t and won’t cut interest rates. As a result, bond yields jumped on Friday, and when bonds seem relatively attractive, gold and silver can get sold off in the short term.

It’s a worst-case scenario for career politicians who need a miraculous end to inflation in 2024 and a rescue mission for the ailing U.S. economy. It’s not a worst-case scenario for precious metals, though.

Price dips in gold and silver are to be understood and bought rather than feared. The Federal Reserve does not want to be liable for precipitating a deep recession. There’s no political will to resurrect the spirit of Paul Volcker and keep interest rates high for much longer while sending America into a phase of severe economic stress.

When you realize that the Federal Reserve is a political entity, the bull case for gold and silver becomes undeniable. Bond yields will normalize when the Fed capitulates and does what powerful interests want it to do, and precious metals prices will go where they’re supposed to go: much higher for much longer.