Market Update September 1

The gold price appears poised to break through to new highs over $2100, the question has been what will be the catalyst? Over the past 20 years, the peak in Fed Funds rate has propelled gold price higher.  There are other factors that coincide with peaking Fed Funds rates. Foremost, the Federal Reserve has been forced to reverse course to counter its past policy errors of not letting market forces correct excesses.  The Fed remains on a boom bust cycle merry-go-round.

In our opinion, despite Jerome Powell’s Volker like speak, he will not have political will to break the cycle when the next credit event or banking crisis hits, even if inflation is still running hot.

Government Expenditures Up, Revenue Down

Rising interest costs along with cost of living adjustments(COLA) are taking a toll on Federal government expenses. Tax remissions are on the decline at the same time widening out the Federal budget deficit. Officially, the economy has not reached the recession the yield curve inversion is signaling is right around the corner. Total Federal Debt looks poised for ablow-out over the next few years, in our opinion.

1970’s Inflation Cycle versus Current Inflation Cycle

If the current inflation cycle plays out similar to the 70’s pattern, inflation will moderate prior to taking off to new highs. Financial assets will come under pressure over the next five years if that is the case, in our opinion. The historic undervaluation of commodities versus financial assets sets up a consumer nightmare scenario of things you need going up and the things you have going down.

BRICS Meeting Recap

There was no watershed announcement regarding a new currency unit referencing gold.  The closest comment regarding a new BRICS unit came from Brazil’s president DaSilva, “We need a new currency unit which will not replace our existing currencies”.  South Africa’s President Ramaphosa summed up the frustration of G7 countries using economic sanctions when he said, “We are concerned that global financial and payment systems are increasingly being used as instruments of geopolitical contestation”.

BRICS formally accepted Argentina, Saudi Arabia, Egypt, UAE and Iran as members.  BIRCS countries now represent 80% of global oil production and 36% of global GDP.  “The expansion of BRICS shows the intention to build a world order alternative to the current one, which is seen as too Western,” said the French President Macron during a meeting with ambassadors earlier this week.

Corporate Profits Dropping

From Liz Ann Sonders of Charles Schwab: “Corporate profits contracted by 6.5% year/year in 2Q23 … acceleration to downside from prior quarter’s 1.8% decline; worst drop since pandemic.”

 

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