Yesterday was a gold bull's wet dream; gold and silver surged, mining stocks roared higher, and pretty much everything else dropped hard. To be clear, one day does not make a trend. However, the weakness in large/mega cap equities has become a trend since the beginning of 2022 with the Russell 2000 down 8.1%, the XHB Homebuilders ETF down 12.3%, and the Nasdaq-100 down 7.9%.
Money is fleeing the busted charts of the 2021 high-flyers like AMC, GME, and PTON and looking to find a trade that could actually make some money in a rising interest environment.
Gold and silver are actually up since the Fed officially announced the start of the tapering process. A March rate hike is a done deal at this point and the market is looking ahead to the 2nd half of 2022 for some indication as to how aggressively the Fed can actually hike interest rates. Despite a minority of market observers calling for the Fed to "shock" markets with a surprise 50 bps rate hike, such a move is highly unlikely from a Fed that has preferred to telegraph its moves months in advance.
The recent hawkish turn by the Fed has served to cool frothy asset markets like crypto and meme stocks. Moreover, recent economic data has been underwhelming and inflation appears to be gradually cooling off in the US. The last thing the Fed wants to do is to engineer a negative shock to markets and the economy. A gradual cooling off is greatly preferred.
The weekly chart of gold shows a market that has been consolidating for more than a year:
Even after yesterday's $30 jump the Daily Sentiment Index (DSI) for gold is at 46. Hardly overheated sentiment, and indicative of a market that could be poised for a powerful move higher after an extended oscillation.
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