Sive Morten
Special Consultant to the FPA
- Messages
- 18,763
Fundamentals
This week I would mention two groups of factors that will make impact on Gold market and already is making. First is a bit longer-term, such as recent IMF article about world fragmentation, Borrell statement on the US domination and some other issues. Things that previously hardly could become public now sound from persons that hardly you could imagine could tell this. It means that big processes already under way, and raising tensions between the US and China just confirm this. Second group of factors relate to the US economy data which we mostly have discussed yesterday. Since the problems in the US economy are disguised by statistics manipulation and smoothed by using of the US Treasury cash reserves, Gold also could get the major boost later, when it will come on surface. Until they will be able to keep the image of strength and well going economy.
Market overview
Gold has climbed more than 13% this year, hitting a record earlier this month, despite the timeline for Fed cuts being pushed back. The precious metal’s ascent over the past two months has been linked to central-bank purchases, robust demand from Asian markets especially China, and elevated geopolitical tension from Ukraine to the Middle East. With the Fed’s preferred measure of inflation rising at a brisk pace in March, swap traders now see only one Fed reduction this year, well below the roughly six quarter-point cuts seen at the start of the year. Higher rates are typically negative for gold as it doesn’t pay interest.
Gold advanced later in the week, as investors found comfort in the Federal Reserve’s signals that it will still pivot to lowering borrowing costs after gaining enough confidence that price gains are cooling. The Fed noted the lack of further progress on inflation, but kept the language referring to a future reduction of interest rates, suggesting that the easing bias remains in place.
Bullion dipped to about $2,300 an ounce as Powell struck a less hawkish tone than expected, saying policymakers need more evidence that price gains are cooling before reducing borrowing costs. Data Thursday showed US labor costs jumped the most in a year as productivity gains slowed, adding to risks inflation will remain elevated.
Finally, on Friday Gold slipped, erasing gains that were driven by a soft US jobs report as traders booked profits while assessing the Federal Reserve’s interest-rate path. Nonfarm payrolls advanced 175,000 last month, the smallest gain in six months, a Bureau of Labor Statistics report showed Friday. The unemployment rate ticked up to 3.9% and wage gains slowed.
The readings revived the case that the Fed will be able to start cutting rates this year. Treasury yields and the dollar slipped after the print, helping send bullion higher by as much as 0.7% before giving up those gains. Swap traders pulled forward bets on the first Fed rate cut to September from December.
GOLD SUPPORTIVE FACTORS
Yesterday in details we've taken a look at recent data - NFP, the Fed comments and all the others, trying to understand what the Fed and US Treasury strategy is. At the same degree these factors will impact on Gold market. Despite that the Fed and US Treasury are trying to hide unpleasant moments and keep showing positive picture, but cat everytime is trying to go out of the bag. Intuitively people suspect something, which provides gradual and stable demand for the gold. Any market that shows strong rally attracts speculators. They are the source of big and wide swings on the market, making investment process a bit more difficult, but nevertheless, upside major tendency remains clear.
The big support comes from China. Not because of PBoC demand only but because of wide interest among domestic ETF's and population. Let's have a look at some charts. Below you could see the whole big picture of Gold demand from China. You could see that beyond of Central Bank demand, drop of real estate market and Renminbi devaluation make investors and population to search for alternative. This is found reflection in explosive jump of gold trading in China, constant demand on non-monetary Gold and fast inflows in ETFs.
On the last chart you could see the Gold reserves of Germany, thus, China is not alone in this process. Since US Dollar is loosing its reputation fast because of recent Congress initiatives to expropriate Russian frozen assets, dollar can't be treat any more as a guarantor of private property, it is becoming the tool of political pressure. From the financial point of view - it can't guarantee return above inflation. All these features are vital for global reserve currency and it is loosing it.
As a result, the new calls come on gold reserves repatriation out from the US and UK. Now they come from African and Arab nations. This topic is not new, a year ago it has started actively moving forward. Here is the article in Houston Post, it was deleted later (as well as on other resources by the way), so I put it here in total:
African and Middle Eastern Nations Withdraw Gold Reserves Amid American Economic Concerns (By Jillian Bennett, APR 24, 2024)
As a result, the dollar share in global reserves is dropping with the fastest tempo. The pace of shifting away from the dollar in countries’ reserves began to increase.
Last year they got rid of it 10 times faster than in the last two decades:
According to experts from Eurizon SLJ Capital Ltd., adjusted for exchange rate fluctuations, the dollar has lost about 11% of its market share since 2016 and twice as much since 2008.
Let's go further. Another interesting moment is about money supply You probably think that the US is ahead of the Globe with this. You're wrong - China prints more money than US. But, what is interesting - if previously the US has exported inflation to other countries, now China exports inflation to the US and EU.
China is the world leader in issuing money. Since 2000, China has surpassed the United States and the Euro zone combined in terms of the speed of printing yuan. Emissions in China, the USA, and Europe take place under loans. However, there is a slight difference: the main borrower in China is business, population and provinces. Through loans, investments are attracted into production and services, new real estate and infrastructure, respectively.
In countries of the developed world, the main borrower is the state (which, apart from violence and propaganda, generally produces nothing). In the same States, the main item of federal budget expenditure is social services . That is, money borrowed by the state directly or indirectly ends up in the pockets of residents of countries. This money very quickly flows from pockets to stores, and from there to China (because Chinese goods are cheaper and get priority among consumers over domestic goods). As a result, all major economies print money. However, inflation is affecting countries in the developed world. The PRC has come up with an excellent tool for channeling excess liquidity - it is being invested in production and concrete.
Finally, there two other major and long-term factors, suggesting higher demand for gold. The first one is the US sanctions against China. In recent couple of months the US politicians and economists have visited China more often than the whole year before, trying to force them own will. Everything has started from microelectronics and ban of last generation chips supply. Then J. Yellen said that China is developing too fast and producing too much, taking the big part of the global trade, where, by J. Yellen opinion, the US should be. So, they said that China has to slow its production. Last issue - the treat to cut Chinese banks from the SWIFT because of cooperation with Russia. What all these moments mean?
It does mean that sanctions will come anyway, and all reasons mentioned above are just an excuse to impose them. Just take a look how the American plan with the introduction of sanctions against China “for Taiwan” has grown into a more practical and concrete plan of “sanctions against Chinese banks for China’s support for Russia.” Moreover, we went through a series about direct military support, because, apparently, it was not possible to justify it in any way.
This once again shows that there will be sanctions in any case, because China needs to be weakened, and the outflow of American ones was not without reason. Moreover, there will be this demarcation, primarily from the point of view of the capital market, regardless of the resistance of players interested in preserving the existing order of things, such as the same bankers in the first place.
And recent IMF article right about it. This is second last moment that I would like to mention. IMF already writes about fragmentation due big barriers in trade, sanctions and other imposed limitations that break apart global economy:
IMF tells that this will be costly and the expenses could reach 2-3% of GDP:
In March, world central banks, according to preliminary estimates from the World Gold Council (WGC), increased the volume of gold in their gold and foreign exchange reserves by 15.7 tons: purchases of 40.4 tons more than compensated for sales of 24.7 tons. The largest buyers were Turkey (14.1 tons), India (5.1 tons), China (5 tons), Kazakhstan, Singapore (4.5 tons each) and Russia (3.1 tons)
It is interesting that the buyers of gold are entities (Central Banks) who, in principle, are never speculators. They proceed from pure fundamentals (including, of course, political ones) and, it seems to me, the point is not even in potential sanctions, but solely in the fact that they are not confident in treasuries as a means of storing reserves from the point of view of maintaining purchasing power capabilities. Otherwise, how would Singapore fit in here?
Because they understand that inflation will go up, and rates in the best-case scenario will remain in place unless they go down to zero, and maybe even lower, when the fading economy needs to be revived.
This process will continue. Even J.Borrell already is talking about loose of Hegemony by the US.When If the dollar ceases to be the world's main reserve currency, the standard of living in the United States will fall, according to various estimates, by 27% - 57%. This corresponds to our assessment of structural crisis result. The US economy should contract for ~40% to reach demand/supply balance. I do not want even try to imagine what will happen inside the US in this case....
Add on to tactical factors
Mostly we've considered all of them. Here I just add few pictures that look interesting. But first is - more confirmation of our suggestion recently came out. If you remember few weeks ago in our detail analysis we said that everything could start from the banking sector. Now CNBC writes that Hundreds of small and regional banks across the U.S. are feeling stressed.
We woke up. The story has been dragging on for a year and a half now. The emphasis is just placed incorrectly. Banks are not “at risk”, but already are. All that remains is to wait for the event that will trigger a reassessment of risks in the banking industry. For example, some significant and relatively large bank will begin to fall. In this case, all banks will think ten times before lending to each other. Because it is not clear what is actually on the balance sheet and behind the balance sheet of a colleague.
It would be nice if BTFP was still in effect - it would be possible to urgently re-borrow it in order to repay it. Well, it’s strange that they don’t talk about the problems of the Bank of America. There, at the time of September, when yields on long-term treasuries had not yet risen to their maximum, the unrealized loss was 40% of capital. With the current fall in prices, this hole may increase by more than half of the capital. As we've discussed yesterday hardly further increase in the Fed rate will happen. This way you can bring down large trees. This is not Lehman. But nevertheless, yield could raise due to the other factors that we've considered yesterday.
And the last one, before we will turn to technical analysis... Unemployment chart. Job creation, even with this stretched methodology, has dropped dramatically and unemployment has risen. If you look at history and remove post-recession surges, an increase in unemployment has always ended in a recession and a sharp increase in unemployment itself. Moreover, the current growth is observed against the backdrop of powerful job creation in the civil service and semi-public service. In 15 years the population has grown by ~11.7%. So the current figures, if taken to 2008, are somewhere at the level of May-June 2008. So the trend is obvious
CONCLUSION:
So, guys, today we almost do not talk about the gold per se. But nevertheless have discussed a lot of very useful stuff that clearly shows the global background where market stand right now. As we've said yesterday - run out from the US assets. Here we could say - keep investing in Gold. Yes, in short-term we will get pullbacks etc. But currently with the processes that we see - we have no doubts that gold should keep raising. And we have not low chances that it could raise significantly higher as the process of fragmentation, global division on trading zones and destruction of Bretton Wood system is just entering in active stage. All that we saw before was just a preparation...
This week I would mention two groups of factors that will make impact on Gold market and already is making. First is a bit longer-term, such as recent IMF article about world fragmentation, Borrell statement on the US domination and some other issues. Things that previously hardly could become public now sound from persons that hardly you could imagine could tell this. It means that big processes already under way, and raising tensions between the US and China just confirm this. Second group of factors relate to the US economy data which we mostly have discussed yesterday. Since the problems in the US economy are disguised by statistics manipulation and smoothed by using of the US Treasury cash reserves, Gold also could get the major boost later, when it will come on surface. Until they will be able to keep the image of strength and well going economy.
Market overview
Gold has climbed more than 13% this year, hitting a record earlier this month, despite the timeline for Fed cuts being pushed back. The precious metal’s ascent over the past two months has been linked to central-bank purchases, robust demand from Asian markets especially China, and elevated geopolitical tension from Ukraine to the Middle East. With the Fed’s preferred measure of inflation rising at a brisk pace in March, swap traders now see only one Fed reduction this year, well below the roughly six quarter-point cuts seen at the start of the year. Higher rates are typically negative for gold as it doesn’t pay interest.
Gold advanced later in the week, as investors found comfort in the Federal Reserve’s signals that it will still pivot to lowering borrowing costs after gaining enough confidence that price gains are cooling. The Fed noted the lack of further progress on inflation, but kept the language referring to a future reduction of interest rates, suggesting that the easing bias remains in place.
Bullion dipped to about $2,300 an ounce as Powell struck a less hawkish tone than expected, saying policymakers need more evidence that price gains are cooling before reducing borrowing costs. Data Thursday showed US labor costs jumped the most in a year as productivity gains slowed, adding to risks inflation will remain elevated.
US Mint Inc. reported Wednesday that sales of its American Eagle gold coin fell to 15,500 ounces in April, down about a third from the previous month, and less than a 10th of the volume sold in April 2023.
Finally, on Friday Gold slipped, erasing gains that were driven by a soft US jobs report as traders booked profits while assessing the Federal Reserve’s interest-rate path. Nonfarm payrolls advanced 175,000 last month, the smallest gain in six months, a Bureau of Labor Statistics report showed Friday. The unemployment rate ticked up to 3.9% and wage gains slowed.
The readings revived the case that the Fed will be able to start cutting rates this year. Treasury yields and the dollar slipped after the print, helping send bullion higher by as much as 0.7% before giving up those gains. Swap traders pulled forward bets on the first Fed rate cut to September from December.
GOLD SUPPORTIVE FACTORS
Yesterday in details we've taken a look at recent data - NFP, the Fed comments and all the others, trying to understand what the Fed and US Treasury strategy is. At the same degree these factors will impact on Gold market. Despite that the Fed and US Treasury are trying to hide unpleasant moments and keep showing positive picture, but cat everytime is trying to go out of the bag. Intuitively people suspect something, which provides gradual and stable demand for the gold. Any market that shows strong rally attracts speculators. They are the source of big and wide swings on the market, making investment process a bit more difficult, but nevertheless, upside major tendency remains clear.
The big support comes from China. Not because of PBoC demand only but because of wide interest among domestic ETF's and population. Let's have a look at some charts. Below you could see the whole big picture of Gold demand from China. You could see that beyond of Central Bank demand, drop of real estate market and Renminbi devaluation make investors and population to search for alternative. This is found reflection in explosive jump of gold trading in China, constant demand on non-monetary Gold and fast inflows in ETFs.
On the last chart you could see the Gold reserves of Germany, thus, China is not alone in this process. Since US Dollar is loosing its reputation fast because of recent Congress initiatives to expropriate Russian frozen assets, dollar can't be treat any more as a guarantor of private property, it is becoming the tool of political pressure. From the financial point of view - it can't guarantee return above inflation. All these features are vital for global reserve currency and it is loosing it.
As a result, the new calls come on gold reserves repatriation out from the US and UK. Now they come from African and Arab nations. This topic is not new, a year ago it has started actively moving forward. Here is the article in Houston Post, it was deleted later (as well as on other resources by the way), so I put it here in total:
African and Middle Eastern Nations Withdraw Gold Reserves Amid American Economic Concerns (By Jillian Bennett, APR 24, 2024)
As a result, the dollar share in global reserves is dropping with the fastest tempo. The pace of shifting away from the dollar in countries’ reserves began to increase.
Last year they got rid of it 10 times faster than in the last two decades:
According to experts from Eurizon SLJ Capital Ltd., adjusted for exchange rate fluctuations, the dollar has lost about 11% of its market share since 2016 and twice as much since 2008.
Let's go further. Another interesting moment is about money supply You probably think that the US is ahead of the Globe with this. You're wrong - China prints more money than US. But, what is interesting - if previously the US has exported inflation to other countries, now China exports inflation to the US and EU.
China is the world leader in issuing money. Since 2000, China has surpassed the United States and the Euro zone combined in terms of the speed of printing yuan. Emissions in China, the USA, and Europe take place under loans. However, there is a slight difference: the main borrower in China is business, population and provinces. Through loans, investments are attracted into production and services, new real estate and infrastructure, respectively.
In countries of the developed world, the main borrower is the state (which, apart from violence and propaganda, generally produces nothing). In the same States, the main item of federal budget expenditure is social services . That is, money borrowed by the state directly or indirectly ends up in the pockets of residents of countries. This money very quickly flows from pockets to stores, and from there to China (because Chinese goods are cheaper and get priority among consumers over domestic goods). As a result, all major economies print money. However, inflation is affecting countries in the developed world. The PRC has come up with an excellent tool for channeling excess liquidity - it is being invested in production and concrete.
Finally, there two other major and long-term factors, suggesting higher demand for gold. The first one is the US sanctions against China. In recent couple of months the US politicians and economists have visited China more often than the whole year before, trying to force them own will. Everything has started from microelectronics and ban of last generation chips supply. Then J. Yellen said that China is developing too fast and producing too much, taking the big part of the global trade, where, by J. Yellen opinion, the US should be. So, they said that China has to slow its production. Last issue - the treat to cut Chinese banks from the SWIFT because of cooperation with Russia. What all these moments mean?
It does mean that sanctions will come anyway, and all reasons mentioned above are just an excuse to impose them. Just take a look how the American plan with the introduction of sanctions against China “for Taiwan” has grown into a more practical and concrete plan of “sanctions against Chinese banks for China’s support for Russia.” Moreover, we went through a series about direct military support, because, apparently, it was not possible to justify it in any way.
This once again shows that there will be sanctions in any case, because China needs to be weakened, and the outflow of American ones was not without reason. Moreover, there will be this demarcation, primarily from the point of view of the capital market, regardless of the resistance of players interested in preserving the existing order of things, such as the same bankers in the first place.
And recent IMF article right about it. This is second last moment that I would like to mention. IMF already writes about fragmentation due big barriers in trade, sanctions and other imposed limitations that break apart global economy:
IMF tells that this will be costly and the expenses could reach 2-3% of GDP:
In March, world central banks, according to preliminary estimates from the World Gold Council (WGC), increased the volume of gold in their gold and foreign exchange reserves by 15.7 tons: purchases of 40.4 tons more than compensated for sales of 24.7 tons. The largest buyers were Turkey (14.1 tons), India (5.1 tons), China (5 tons), Kazakhstan, Singapore (4.5 tons each) and Russia (3.1 tons)
It is interesting that the buyers of gold are entities (Central Banks) who, in principle, are never speculators. They proceed from pure fundamentals (including, of course, political ones) and, it seems to me, the point is not even in potential sanctions, but solely in the fact that they are not confident in treasuries as a means of storing reserves from the point of view of maintaining purchasing power capabilities. Otherwise, how would Singapore fit in here?
Because they understand that inflation will go up, and rates in the best-case scenario will remain in place unless they go down to zero, and maybe even lower, when the fading economy needs to be revived.
This process will continue. Even J.Borrell already is talking about loose of Hegemony by the US.
Add on to tactical factors
Mostly we've considered all of them. Here I just add few pictures that look interesting. But first is - more confirmation of our suggestion recently came out. If you remember few weeks ago in our detail analysis we said that everything could start from the banking sector. Now CNBC writes that Hundreds of small and regional banks across the U.S. are feeling stressed.
Consulting firm Klaros Group analyzed about 4,000 U.S. banks and found 282 banks face the dual threat of commercial real estate loans and potential losses tied to higher interest rates.The majority of those banks are smaller lenders with less than $10 billion in assets.
We woke up. The story has been dragging on for a year and a half now. The emphasis is just placed incorrectly. Banks are not “at risk”, but already are. All that remains is to wait for the event that will trigger a reassessment of risks in the banking industry. For example, some significant and relatively large bank will begin to fall. In this case, all banks will think ten times before lending to each other. Because it is not clear what is actually on the balance sheet and behind the balance sheet of a colleague.
It would be nice if BTFP was still in effect - it would be possible to urgently re-borrow it in order to repay it. Well, it’s strange that they don’t talk about the problems of the Bank of America. There, at the time of September, when yields on long-term treasuries had not yet risen to their maximum, the unrealized loss was 40% of capital. With the current fall in prices, this hole may increase by more than half of the capital. As we've discussed yesterday hardly further increase in the Fed rate will happen. This way you can bring down large trees. This is not Lehman. But nevertheless, yield could raise due to the other factors that we've considered yesterday.
And the last one, before we will turn to technical analysis... Unemployment chart. Job creation, even with this stretched methodology, has dropped dramatically and unemployment has risen. If you look at history and remove post-recession surges, an increase in unemployment has always ended in a recession and a sharp increase in unemployment itself. Moreover, the current growth is observed against the backdrop of powerful job creation in the civil service and semi-public service. In 15 years the population has grown by ~11.7%. So the current figures, if taken to 2008, are somewhere at the level of May-June 2008. So the trend is obvious
CONCLUSION:
So, guys, today we almost do not talk about the gold per se. But nevertheless have discussed a lot of very useful stuff that clearly shows the global background where market stand right now. As we've said yesterday - run out from the US assets. Here we could say - keep investing in Gold. Yes, in short-term we will get pullbacks etc. But currently with the processes that we see - we have no doubts that gold should keep raising. And we have not low chances that it could raise significantly higher as the process of fragmentation, global division on trading zones and destruction of Bretton Wood system is just entering in active stage. All that we saw before was just a preparation...
