The year 2023 saw a resurgence in the stock market, driven by the Federal Reserve’s strategic injection of liquidity despite a gradual reduction in its balance sheet. Notably, in March 2023, the Fed printed $400 billion to revive regional banks, signaling a proactive approach to potential banking system and debt crises. The Bank Term Funding Program and other subtle measures further contributed to maintaining liquidity in the banking system.
The Fed’s implicit pivot on interest rate policy in November 2023 played a pivotal role. The easing of systemic financial conditions in November and December marked the most substantial two-month change in the history of the Financial Conditions Index. This orchestrated easing, largely orchestrated by the Fed, led to the outperformance of the precious metals sector compared to the stock market in the last two months of 2023. Gold, silver, and mining stocks exhibited significant gains during this period, outperforming major indices.
Remarkably, gold and silver’s outperformance, along with mining stocks surpassing the S&P 500 by 50%, went largely unnoticed by mainstream financial media. This anonymity factor positions the precious metals sector as a textbook value investment play. As the financial and economic tailwinds persist and potentially intensify in 2024, the sector is well-positioned for further gains.
Examining individual bank quarterly financial statements reveals increasing delinquency, default, and charge-off rates, particularly in commercial real estate and household debt. Subprime auto loans are experiencing delinquency rates higher than during the peak of the 2008 financial crisis. Despite this financial stress in the banking system, mainstream media tends to echo the narrative of banks being in good shape, potentially underestimating the challenges.
The Monetary Base, comprising bank reserves and currency/coin in circulation, has been on the rise since February 2023, indicating early actions by the Fed to inject reserves into the banking system. This pre-emptive move, combined with the removal of reserve requirements for banks in 2020, has contributed to a multiplier effect, impacting the reflation of the stock bubble and a significant drop in long-term Treasury yields.
Looking ahead to 2024, there is a high probability of the official return of Quantitative Easing (QE), albeit potentially under a different label. The scale and duration of this next phase of money printing will likely determine the extent of the bull move in the precious metals sector. As the Fed navigates challenges in the banking system, increased liquidity creation is anticipated, eventually translating into higher prices for gold and silver. Investors are advised to closely monitor unfolding monetary system developments and their potential impact on precious metals.
