It is worth paying close attention when a market trends into a period during which a turning point is likely based on historical cyclicality. The gold mining sector has just entered such a period.

We are referring to the strong tendency of the gold mining sector, as represented by the Gold Miners ETF (GDX), to make its high or its low for the year during August-September. Specifically, this period contained the low for the year in 2015, the high for the year in 2016 and 2017, the low for the year in 2018, the high for the year in 2019 and 2020, and the low for the year in 2021 and 2022. In other words, the August-September period ushered in the annual high or the annual low in each of the past eight years.

The vertical red lines on the following weekly GDX chart mark the aforementioned August-September turning points.

We have been following the gold mining sector’s August-September cycle at speculative-investor.com for several years now. At the start of a year there will be no way of knowing whether that year’s August-September period will contain an important high or low, but there usually will be clues by June. By mid-June of this year it was apparent that if the August-September cycle was still in effect then it would mark an important low, that is, a turn from down to up. Subsequent price action has continued to point to an August-September low.

The 12-month cycle low could be set at any time over the next few weeks, but to create maximum potential for the ensuing rally it ideally will be set after the March-2023 low has been tested or breached.

[This blog post is an excerpt from a commentary published at speculative-investor.com last week]

The year-over-year rate of growth in US True Money Supply (TMS) ticked upward in June, that is, the US money supply contracted at a slightly slower pace during the latest month for which there are monetary data. Although the uptick is barely noticeable on the following chart, it is probably significant. It is the first increase in the monetary inflation rate since March-2022 and probably marks an end to the decline.

Below is our chart comparing the US monetary inflation rate (the blue line) with the 10y-2y yield spread (the red line), a proxy for the US yield curve. The monetary inflation rate drives the yield curve, so if the monetary inflation rate has begun to trend upward then the yield curve should commence a steepening trend within the next couple of months.

Both the monetary inflation rate and the yield curve may have reached their negative extremes, but unless one of two things happens the US will experience monetary deflation and the yield curve will remain inverted until at least the end of this year. This is because even if the Fed has made its final rate hike, it plans to continue its Quantitative Tightening (QT) for many months to come.

Continuing the QT program at the current rate would remove about $380B from the money supply over the remainder of this year. Although this could be offset by commercial bank lending (commercial banks create new money when they make loans), trends in the commercial banking industry currently are heading in the opposite direction, that is, banks are becoming less willing to expand credit.

One of the two things that could shift the monetary trend from deflation to inflation over the next several months is the large-scale exodus of money from the Fed’s Reverse Repo (RRP) facility. There is still about $1.7 trillion ‘sequestered’ in this facility, which means that there is the potential for up to $1.7T to be released from RRPs to the economy’s money supply.

The other development that could return the US money supply to inflation mode is a crisis that not only stops the Fed’s QT, but also precipitates a new bout of QE.

Our expectation is that there will not be a genuine crisis between now and the end of this year, but that there will be sufficient weakness in the stock market to prompt the Fed to end QT and that at least $1T will come out of the RRP facility to take advantage of the higher rates being offered by Treasury bills. This combination probably would turn the US monetary inflation rate positive by year-end and set in motion a steepening trend in the US yield curve.

[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

While it is true that prices are still rising at above-average rates in some parts of the US economy, this should be expected. The reality is that in some parts of the economy it takes longer than in others for demand and/or supply to respond to changing monetary conditions. That central bankers choose to focus on these slower-to-respond sectors is a problem we’ve addressed many times in the past. Our purpose today is to highlight some of the signs that monetary tightness is taking a substantial toll.

Commodity prices tend to lead producer prices for finished goods and producer prices for finished goods tend to lead consumer prices on both the way up and the way down. Therefore, the cyclical “inflation” up-swings and down-swings should become evident in commodity prices first and consumer prices last. In this respect the Producer Price Index (PPI) charts displayed below and the CPI chart included in last week’s Interim Update show that the current situation is not out of the ordinary, despite the extraordinary monetary machinations of the past few years.

The following monthly chart shows that over the past 12 months the year-over-year percentage change in the PPI for commodities has collapsed from near a 50-year high to near a 50-year low. We are now seeing a level of ‘commodity price deflation’ that since 1970 was only exceeded near the end of the Global Financial Crisis of 2007-2009.

The next chart shows the year-over-year percentage change in the PPI for Finished Goods Final Demand. Here we also see a collapse over the past 12 months from high ‘price inflation’ to ‘price deflation’.

It’s likely that the year-over-year rate of change in producer prices has just bottomed, because an intermediate-term downward trend in the oil price kicked off in June of last year. Just to be clear, we doubt that prices have bottomed, but over the months ahead they probably will decline at a slower year-over-year pace. However, the declines in producer prices that have happened to date suggest that the growth rate of the headline US CPI, which was 3.0% last month, will drop to 1% or lower within the next few months.

As an aside, there is nothing inherently wrong with falling prices, as lower prices for both producers and consumers is a consequence of economic growth. The problem at the moment is that prices are being driven all over the place by central bankers.

Historic ‘deflation’ in producer prices is one sign that monetary tightness is taking a substantial toll. While this price deflation could be viewed as a positive by those who are not within the ranks of the directly-affected producers, other signs are definitively negative. For example, the following chart shows that the year-over-year percentage change in Real Gross Private Domestic Investment (RGPDI) has plunged to a level that since 1970 has always been associated with an economy in recession.

For another example, the year-over-year rate of commercial bank credit expansion has dropped to zero. As illustrated by the following chart, this is very unusual. The chart shows that in data going back to 1974, the annual rate of commercial bank credit growth never got below 2.5% except during the 2-year aftermath of the Global Financial Crisis.

For a third example, the next chart shows that the annual rate of change of US corporate profits has crashed from a stimulus-induced high during the first half of 2021 to below zero. Moreover, the line on this chart probably will be much further below zero after the latest quarterly earnings are reported over the next several weeks.

The above charts point to economic contraction, but the performances over the past four months of high-profile stock indices such as the S&P500 and NASDAQ100 dominate the attentions of many observers of the financial world and at present these indices are painting a different picture. They are suggesting that monetary conditions are not genuinely tight and that the economy is in good shape. How is this possible?

Part of the reason it is possible is that ‘liquidity’ has been injected into the financial markets despite the shrinkage in the economy-wide money supply. We note, in particular, that $514B has exited the Fed’s Reverse Repo (RRP) Facility over the past six weeks, including about $300B over just the past two weeks. Another part of the reason is that the stock market keeps attempting to discount an about-face by the Fed. A third reason is simply that the senior stock averages are not representative of what has happened to the average stock. Related to this third reason is that there are money flows into index-tracking funds every month that boost the relative valuations of the stocks with the largest market capitalisations.

We end by cautioning that just because something hasn’t happened yet, doesn’t mean it isn’t going to happen. It’s likely that eventually the monetary tightening will reduce the prices of almost everything.

[This blog post is a modified excerpt from a newsletter published at www.speculative-investor.com about two weeks ago]

The world is not going through a replay of the 1970s, as there are some critical differences between the current situation and the situation back then. For example, a critical difference is that private and government debt levels were much lower during the 1970s than they are today. However, this decade’s macroeconomic path probably will have a lot more in common with the 1970s than with any subsequent decade. One similarity is that just like the 1970s, the current decade probably will have multiple large waves of inflation. Another similarity and the one we will address now is the performance of the US yield curve.

Here is a monthly chart of the US 10-year T-Note yield minus the 3-month T-Bill yield (the 10year-3month spread), a proxy for the US yield curve. Clearly, nothing like the current situation has occurred over the past forty years. Just as clearly, the current yield-curve situation is not unprecedented or even extreme compared to what happened during 1973-1981.

Note that the shaded areas on the chart show when the US economy was deemed by the National Bureau of Economic Research (NBER) to be in recession.

During the period from June-1973 to August-1981, the yield curve was inverted for a cumulative total of 40 months (about 40% of the time). This means that during the aforementioned roughly 8-year period, yield curve inversion was almost the norm. Furthermore, there were times during this period when the inversion was more extreme than it is today.

Of potential relevance to the present, the 1973-1974 recession began 6 months after the yield curve became inverted and 3 months after the inversion extreme, that is, 3 months after the start of a steepening trend, while the 1981-1982 recession began 8 months after the yield curve became inverted and 7 months after the inversion extreme. The ‘odd man out’ was the 1980 recession, which began 13 months after the yield curve became inverted and 2 months BEFORE the inversion extreme. In other words, even during the major inflation swings of the 1970s and early-1980s, the yield curve tended to reverse from flattening/inverting to steepening prior to the start of an official recession.

Also of relevance is that during the 1970s gold generally did well when the yield curve (the 10year-3month spread) was inverted. For instance, the entire major rally from around $200 in late-1978 to the blow-off top above $800 in January-1980 occurred while the yield curve was inverted. In addition, the entire large decline in the gold price during 1975-1976 occurred while the yield curve was in positive territory.

The situation today is that the US yield curve (the 10year-3month spread) became inverted in October of last year. This means that about 8 months have gone by since the inversion. As mentioned above, the longest time from inversion to recession start during 1973-1981 was 13 months. Also, at this time there is no evidence that an inversion extreme is in place.

One conclusion is that based on what happened during the 1970s, we probably will have to get used to the yield curve being inverted. Another conclusion is that today’s inversion-recession path would remain within the bounds of what transpired during 1973-1981 if a recession were to begin by November of this year.