Calm In A Storm: Market Insights and Gold Price Predictions

Dec 5, 2021

Calm In A Storm

Notes From The Inside

December 5, 2021

The hardest thing to do when facing a volatile market is to remain calm and do nothing. Every impulse wants to try and manage the moment. We have learned the hard way through experience that trading in the midst of a volatility frenzy is about the worst thing one can do.

Storms have been raging in recent weeks. On November 24th, the Omicron variant of the coronavirus became headline news around the world and instantly witnessed a dramatic government overreaction. Germany, the UK, and the United States each announced they would ban travel from South Africa. Since that time, markets have witnessed a dramatic increase in volatility.

But don’t be fooled by the media headlines. A far bigger threat has investors running around like chickens without a head. On November 22nd, president Joe Biden announced that his nomination for Fed Chairman would be none other than Jerome Powell. While most expected this would be the case, the market reaction since has surprised many. Especially as one of the very first things Powell did after regaining the nomination was to announce his intentions to retire the word “transitory” and speed up the tapering process.

Since that time, the Dow Jones and S&P have each dropped 3.5% and the Nasdaq has dropped 4%. Bitcoin is down 15%, silver has dropped nearly 10% and Gold prices have fallen 1.5%. But these headline numbers significantly undersell the pain that has occurred under the surface in financial markets in the last two weeks. The VIX has risen more than 50% from 19 to 30 as volatility has raged.

None of it has been good for our 2-22-22 trade. On November 12h, our trade was up a total of 55%. In the last three weeks, we have felt the pain. Gold futures on the March ‘22 contract have fallen over 50%. Silver futures have been hit even harder, down a dramatic 75%. As of Friday, the 2-22-22 trade was down a total of 22.75%. See the day-by-day performance here.

The market is now fighting opposing forces. The end-of-year Christmas rally (one of the most reliable market timing strategies) is facing off with a double whammy of the Omicron virus concern and Powell doing his best imitation of his 2018 hawkish self. The big question is will this year end be like most and witness a holiday boom, or will we do a repeat of 2018 and witness Powell pummel markets with a follow-through on tightening.

The big question we are faced with is what to do with our trade at this point?

Firstly, we expect volatility in our event trade. It’s why having an end date in mind allows us to be more patient. Three of the biggest events for our trade are coming due in the next 10 days. CPI numbers are going to come in very hot on Friday, likely higher than 7%. Additionally, we are in the midst of a Fed blackout period which means there will be nobody talking the market off the ledge should volatility continue. Finally, the Fed will announce their decision on monetary policy next Wednesday.

Powell has virtually promised a speeding up of tightening which could see bond purchases reduced from $105 billion per month down to $90 billion per month. Should volatility remain elevated and markets continue to crater this week due to a Fed that is tightening, gold will likely get a strong safe-haven bid. Should volatility disappear and markets continue their epic run higher, it will further force the hand of Jerome Powell to tighten and remove the punchbowl.

We believe that each of these scenarios presents a strong setup for gold as a safe haven play, particularly as Wall Street seems to be rotating away from crypto momentum. We must remember that gold prices in a tighter Fed fall before stocks do. We see Powell follow through on tightening to be very supportive of gold. In fact, once the tightening begins, gold historically rises. Gold bottomed at $1058 per ounce in 2016 as the Fed began its tightening cycle and rose steadily throughout. Gold similarly rose from 2002 to 2007 through the Greenspan rate hikes.

But the even bigger scenario for gold would be if markets were to hemorrhage further this week and force Powell to take a more dovish stance and walk back his tightening talk. Should Powell be forced into this action, we anticipate a serious lift-off in gold prices.

Despite the recent pain, we remain confident in our price target for 2-22-22 and expect to see gold prices at all-time highs before then.

Best,

Adam Baratta

Editor-in-Chief

Brentwood Research