Markets Brace For This Week’s FOMC Rate Decision

During last week’s trade, we learned that US growth is too strong to justify an easing, consumer inflation is too sticky to ignore, crude oil prices are too geopolitical to forecast, AI spending is too large to be sustained, and consumer confidence is slipping.

Against this backdrop, the US Federal Open Market Committee (FOMC) will meet this week to decide if an interest rate adjustment is the next step for American monetary policy.

At the close of business last Friday, the probability of a 25-basis point hike in the FED Funds target was a near certainty at 85%

With that in mind, the precious metals complex will likely be driven more by the post-meeting press conference than an interest rate hike.

Physical Gold priced in USD traded with a downward bias and posted a weekly close below the 30-Day Moving Average (30-DMA) for the first time since July 24th.

USD Gold fell 1.8% for the week to close at $4348.00. The daily Relative Strength Index (RSI) is a neutral 47.5. Initial support is $4270.00 and resistance is $4325.00

Gold denominated in AUD traded below the 30-DMA every day last week and finished 1.4% lower at $6060.00. The daily RSI is 45.7, with a flag pattern on the daily chart bound by $6000.00 as support and $6250.00 as resistance.

Physical Silver priced in USD posted its first weekly close below the 30-DMA since August 3rd and finished the week 2.6% lower at $64.45.

USD Silver lost 6.5% last Thursday, hitting an intraday low at $63.50, which should act as initial support this week. The daily RSI is a neutral reading of 48.00.

Silver denominated in AUD posted its first weekly close below the 30-DMA since July 31st and closed out the week 2.20% lower at $89.85. The daily RSI is 46.00. Initial support is $86.20, and resistance is $94.50.

The Gold versus Silver ratio rose fractionally in favor of Gold and closed at 67.35, which means it takes 67.35 ounces of Silver to equal the price of one ounce of Gold.

We prefer the short side of the ratio back down to the low 60.00 handle.

Physical Platinum frayed support at $1750.00 but recovered to close above its 30-DMA at $1765.00. Platinum finished the week 1.5% lower at $1795.00.

The daily RSI is 50.7 and pointing higher. Initial support is $1750.00, and resistance is in the $1890.00 to $1910.00 range.

One of the justifications for the FED raising rates this week is that a symbolic rate hike will cap the steep rise in bond yields across the longer end of the Treasury curve.

We believe that is partially correct but overlooks a significant dynamic in the current bond market structure: the competition for funds from the Hyperscalers.

The Hyperscalers are technology firms that have issued over $1 trillion in corporate bonds over the last two years; over $700 billion has been issued over the last seven months.

These companies include Microsoft, IBM, Amazon, Oracle, Nvidia, Google, and a handful of others.

As illustrated on Chart 1, the Hyperscalers are raising and spending this money building data centers to secure capacity for the vast profits they expect to earn over the next decade from Artificial Intelligence (AI).

At the same time, there are enormous unanswered questions about the commercial viability of these massive amounts of investments, amid doubts that AI will generate the trillions of dollars in revenues to make that investment worthwhile.

It is uncertain where these trillions of dollars in new revenues are supposed to come from.

Nevertheless, the race to build AI data centers continues unabated.

The massive amounts of money raised in the bond markets thus far only reflect the construction costs of the buildings.

These amounts do not include the most expensive parts of a functioning data center: the servers, the racks, the electronic and optical equipment to connect the servers to the internet, the electrical equipment to supply power and cooling to the servers, the solar power generators, the transmission lines, etc.

It has been estimated that 50% of the current US GDP growth has been driven by the mad rush by the Hyperscaler firms to get all of their AI hardware in place.

This includes buying large quantities of Silver for the solar panels and Gold and Platinum for the thousands of chips, circuit boards, and other components that require high levels of durable conductivity.
As shown on chart 2, the Hyperscalers are expecting billions of dollars in free cash flow from their AI ventures over the next three years.

However, as illustrated on Chart 3, Hyperscaler bond spreads have exploded higher over the last four months as uncertainty about the viability of the AI revenue forecasts permeates global bond holders.

We are certain that the FOMC governors are aware that shortages of memory chips for AI servers have caused prices of semiconductors to soar, and they have started to spread to consumer electronics, and from there to inflation metrics.

This kind of sudden spending boom, funded by corporate cash and massive debt and equity issuance, leaves its marks everywhere, including by helping to push up government bond yields as they all compete for the same pool of money.

We don’t believe this recent stress in the AI funding bond market will influence what the FED does this week, but we do believe it is serious enough to prevent a protracted tightening cycle.

In short, If the Hyperscalers are right and the AI revenues meet expectations, physical Gold, Silver and Platinum will have another pillar of steady support to continue the recent uptrends.

If they are wrong and the FED has to bailout the bond markets with some variant of quantitative easing, then investors will once again flock to the safe haven and security of hard assets.

Either way, now is the time to consider adding to your hard asset holdings and making physical Gold, Silver and Platinum the cornerstone assets in your long-term wealth creation strategy.