Sive Morten
Special Consultant to the FPA
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Fundamentals
This week gold mostly reacted on easing of Middle East tensions rather that on the US statistics. Although we think that this is temporary and very soon recent GDP and PCE numbers also will make impact as on US Dollar as on Gold. Yesterday we've explained why we think these numbers are of extreme importance. In short-term this could make holding effect on gold market as US yields will continue to raise, but in longer term, real rates should start falling and overall worsening situation in the US economy which should provide bullish effect on Gold. Big the US military spending to Ukraine and Israel will keep geopolitical tensions at high degree. And as soon as we come closer to election day the measure of entropy will increase.
Market overview
On Monday bullion dropped as much as 2.8% in its biggest intraday decline since June 2022. While Israel and Iran have traded attacks, raising concerns about an all-out-war in the region, Tehran has played down the impact and significance of Israel’s recent strike, saying on Monday that Israel has received the “necessary response at this stage.” The fact that the Iran regime downplayed Israel’s response — and signaled no retaliation — has taken some risk premium out of the gold market, according to Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney. Monday’s bearish sentiment on oil also supported the idea of easing tensions in the Middle East, he added.
US business activity expanded in April at the slowest pace this year on a pullback in demand that led to the first employment decline since 2020. Gold pared losses after weaker-than-expected US business activity data helped underpin the case for Federal Reserve rate cuts this year.
Gold’s record-setting rally has been defying the sort of headwinds that normally would have held it back -- and this week's retreat has done little to clarify matters. China could be the answer, though, according to several prominent figures in the world bullion market. They are coming to the conclusion that the major new driving force is a legion of fleet-footed retail investors on the Shanghai Futures Exchange. In a matter of weeks, the bourse has gone from a sedate futures venue to a nexus of the global gold market.
After weeks of debate about whether a mystery buyer was stoking the rally, several prominent figures in the global gold market are coming to the conclusion that the major new driving force is a legion of fleet-footed retail investors on the Shanghai Futures Exchange.
In a matter of weeks, the SHFE has gone from a sedate futures venue to a nexus of the global gold market. While rival centers such as London and New York have also seen activity rise, the fact that SHFE volumes have spiked from a low base offers a compelling sign that a newly arrived cohort of Chinese investors has helped drive prices sharply higher.
For months, consumers and institutional investors in China have been snapping up physical bullion, while the People’s Bank of China has been on a 17-month buying spree. Those two forces, which helped buoy international prices, have now been augmented by surging speculative demand. Numbers back up the theory. Trading on the SHFE has exploded, with average daily volume almost tripling in April compared with the preceding 12 months. It peaked at about 1,200 tons on April 15, the highest since 2019, before prices started to sag this week.
It’s notable that while SHFE volumes have soared, the number of outstanding contracts has hardly moved. That indicates participants day-trading, not taking a long-term view. But not everyone thinks Chinese investors are the major driver behind gold’s ascent.
Gold may be in favor as higher-for-longer US interest rates to tame inflation may tip the economy into recession, according to Christian.
Samson Li, a Hong Kong-based analyst at Commodity Discovery Fund, sees a more nuanced picture. Rather than being a direct driver of prices, the frenzied demand in China has encouraged western speculators to ramp up bets on gains in New York, he said. Daniel Ghali, a senior commodity strategist at TD Securities, has also been on the hunt to identify gold’s mystery buyer, and he still thinks that the dominant force is likely to be a deep-pocketed buyer in the so-called official sector, which covers state-linked institutions such as central banks and sovereign wealth funds. But he says buying activity there has also been closely correlated with weakness in the yuan, and investors on SHFE may be acting with the same underlying motivations.
Gold traded steady Wednesday after a two-day decline as traders await key US inflation data due later this week that may shed more light on the Federal Reserve’s path for interest rates.
The odds of a reduction in US borrowing costs in June — the base-case scenario earlier in the year — have dropped sharply over the last few weeks, with the swaps market now pricing in just a 14% chance. Some traders in the rates market are now putting on wagers that the Fed won’t cut at all this year.
Gold is headed for its first weekly loss in six as investors booked profits after the metal’s months-long rally. Fresh inflation data released Friday reinforced the view that high interest rates are here to stay for now. The metal’s robust performance has been linked to central-bank buying, surging interest in some Asian markets including China, and the possibility that investors may be seeking protection against sticky inflation.
The Fed’s preferred gauge of underlying inflation climbed 0.3% in March and 2.8% from a year earlier, the same as the prior month. Figures from earlier this year were also revised up slightly, government data showed Friday. The three-straight months of worrisome inflation data indicate progress toward the central bank’s 2% goal has stalled, and suggest the first interest-rate cut is getting pushed further out.
Overbought gold was also witnessing a technical correction. In the long term, gold will rise further, with 2024 being an election year, persistent geopolitical conflict and increasing U.S. debt, said Jonathan Rose, Genesis Gold Group CEO.
GDP&PCE meaning for Gold
Gross domestic product increased at a 1.6% annualized rate, below all economists’ forecasts, the government’s initial estimate showed. The economy’s main growth engine — personal spending — rose at a slower-than-forecast 2.5% pace. A wider trade deficit subtracted the most from growth since 2022. A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip, the first quarterly acceleration in a year, the Bureau of Economic Analysis report showed Thursday.
The figures represent a notable loss of momentum at the start of 2024 after the economy wrapped up a surprisingly strong year. With the inflation pickup, Federal Reserve policymakers — who were already expected to hold interest rates at a two-decade high when they meet next week — may face renewed pressure to further delay any cuts and even to consider whether borrowing costs are high enough.
Federal government spending subtracted from GDP for the first time in two years (!!). Stripping out inventories, government spending and trade, inflation-adjusted final sales to private domestic purchasers — a key gauge of underlying demand — rose at a 3.1% rate. Residential investment jumped at a nearly 14% annual rate, the fastest since the end of 2020 and underscoring builder efforts to boost inventory.
The record price of gold signals that the current fiat money order, based on the dollar as the world's reserve currency, is coming to an end... And the end is never peaceful...Although the rise in gold prices reached a nominal maximum, in real terms gold and silver prices never surpassed the record highs of 1980. Adjusted for inflation, gold should rise to around $3,590 an ounce and silver should rise above $50 an ounce.
️Precious metals will continue to rise unless the Federal Reserve radically changes its interest rate policy to combat inflation, as former Fed Chairman Paul Volcker once did. Volcker raised interest rates to double digits, causing gold prices to fall. While Volcker could get away with such actions (because the US was still a creditor country at the time), current Chairman Jerome Powell cannot due to massive public and private debt. Double-digit interest rates would destroy the economy and plunge millions of Americans into bankruptcy.
In fact, recent sharp slowdown of the US economy with rapid raising of budget deficit shows low efficiency of spending stimulus. Economy conditions demand rate cut. At the same time, inflation remains too high and will increase more, based on recent tendencies with commodities and fuel, not speaking about US budget spending. This makes really terrible situation and headache for the Fed and US Treasury. $250 Bln of taxes that have been recieved recently will smooth situation a bit, providing funds to keep interest rates stable but this is temporal relief and funds will exhaust in 1-2 months. At best case, the Fed could last situation without collapse until elections. But this is not for sure. Cutting rate will be the best scenario for gold but if the Fed will stay on hold, the problems in economy will keep raising. Holes will start to appearing here and there. And at the end they will have to switch on the printer. This anyway will lead to inflation but on a longer term perspective.
Other issues that seem important
The upward trend in inflation, which we noted many times, has finally formed. And this means that it is absolutely impossible to reduce the discount rate. Even taking into account the political objectives. Larry Summers was right that the official authorities would begin to show this growth. There may be several reasons for this phenomenon. It is possible that the increase in inflation turned out to be so strong that officials had to reluctantly admit it. Changing the methodology is difficult and takes a long time, so you can't go anywhere.
However, there is another option that some statisticians have realized that since the crisis cannot be avoided anyway, Summers' strategy "I have warned you" is more promising, so he could appear among experts on the right side. However, here we enter the political field. The inflation situation has become critical. its official scale (about 3.5%) is the main indicator of the change in the discount rate. And given the significant downturn in the industry, the rate needs to be urgently reduced. Well, it's useful for the elections, the mood of consumers is improving.
But rising inflation requires raising the rate. And, accordingly, any discussions on this topic acquire a political character. Plus, the revelations of Summers, which cast doubt on official data. And not only Summers is blowing this tune, there are especially many complaints about labor statistics, we also wrote about this. As a result, all political groups (power groups) in the United States are beginning to use the economic situation to their advantage. And in such situations, any meaningful work of economic experts ends. If we add to this that official experts are well aware of the degree of distortion of real data (although they may not know what indicators are in reality), then the situation becomes quite gloomy.
In particular, within the framework of such a picture, one does not want to invest in long-term industrial projects at all. And, as a result, it is completely unclear how to ensure production in those industries (defense industry, microelectronics) in which it is absolutely necessary. Well, entrepreneurs and citizens find themselves in an extremely difficult situation when it is absolutely impossible to make informed decisions.
All these stuff we should put on reality. By looking at this picture we could say that we're not at the end of the hawkish cycle, but in the beginning. Everytime, when credit spreads fall to minimum - the upside rate cycle starts, which, in turn triggers the tension in economy, defaults raising and following policy easing. Now creadit spreads stand at minimum levels:
Very soon we will witness something previously unprecedented: the financially divided world will begin to carry out polar monetary policy. The USA and Europe will raise the rate, China and India will lower it. Inflation will rise everywhere. Tensions between the US and China now becoming obvious for everyone. And recent J Yellen and A. Blinken visit once again confirms this. China is accumulating commodities with raising pace. There are many reasons might be, but anyway, if we even exclude real war, the economical impact from the US sanctions and gradual segregation of the whole economy space demands sufficient resources and protection. This is what China doing right now. Recent expropriation of Russian foreign reserves doesn't provide any relief either.
Now we have three major sources of gold demand:
1. Official demand from the Central Bank and individuals
Moreover, the motivation of buyers is different - private investors do not see alternatives, especially in China, where the stock markets and real estate have been trampled into the mud, and money cannot be taken abroad so easily. Central banks, in turn, are diversifying reserves - the notorious de-dollarization (albeit slow and creeping) + a good nest egg for a rainy day (to support the currency or exchange bullion for food and AI chips). The main demand, naturally, is in Asia. Bloomberg, for example, is horrified - Chinese imports of investment gold over 2 years suddenly exceeded 2,800 tons, which is already more than the reserves of all Western metal ETFs.
2. The paper gold market cannot withstand real physical demand, so at the beginning of 2024 speculators actually capitulated. Here geopolitics adds fuel to the fire - escalation in the Middle East, trade wars, etc.
3. Unofficial purchases of gold by central banks are growing, despite previous records. According to GWC, quarterly volumes of gray supplies are already significantly higher than public purchases. There is a wonderful theory that 80% of all undisclosed purchases come from the PBoC:
As a result, we have a change in market narratives:
– In 2022-2023, the relationship between real interest rates (the Federal Reserve rate minus inflation) and the price of gold broke down. The metal did well when real government bond yields rose.
– In 2024, the inverse correlation between the DXY dollar index and the price of gold in dollars broke down. The strengthening of the dollar went in parallel with the rally in the metal market.
Now the gold market is controlled not by Western speculative funds, but by real demand in the East.
As US Treasury yields are constantly raising right now, it is an empirical question, what yield level will start bringing big problems? Goldman calculates that a change of 2 standard deviations in the US 10-year yield, equivalent to about 60 bps today, exceeds a month - this is the point when the tough moves really begin, and "given that we closed books at the end of March books at 4.20%, this simple rule of thumb states that a move in the 10-year yield towards 4.80%-5% will lead to noticeable difficulties in the stock market.
As we've mentioned above, government has tax revenues that could help to hold US yields at some lower levels, at leas for some time. But as we keep going closer to 5%, as more tension will be on stock market and any sharp pullback could trigger cascade reaction, boosting gold demand... (continuation is below)...
This week gold mostly reacted on easing of Middle East tensions rather that on the US statistics. Although we think that this is temporary and very soon recent GDP and PCE numbers also will make impact as on US Dollar as on Gold. Yesterday we've explained why we think these numbers are of extreme importance. In short-term this could make holding effect on gold market as US yields will continue to raise, but in longer term, real rates should start falling and overall worsening situation in the US economy which should provide bullish effect on Gold. Big the US military spending to Ukraine and Israel will keep geopolitical tensions at high degree. And as soon as we come closer to election day the measure of entropy will increase.
Market overview
On Monday bullion dropped as much as 2.8% in its biggest intraday decline since June 2022. While Israel and Iran have traded attacks, raising concerns about an all-out-war in the region, Tehran has played down the impact and significance of Israel’s recent strike, saying on Monday that Israel has received the “necessary response at this stage.” The fact that the Iran regime downplayed Israel’s response — and signaled no retaliation — has taken some risk premium out of the gold market, according to Nicholas Frappell, global head of institutional markets at ABC Refinery in Sydney. Monday’s bearish sentiment on oil also supported the idea of easing tensions in the Middle East, he added.
US business activity expanded in April at the slowest pace this year on a pullback in demand that led to the first employment decline since 2020. Gold pared losses after weaker-than-expected US business activity data helped underpin the case for Federal Reserve rate cuts this year.
Gold’s record-setting rally has been defying the sort of headwinds that normally would have held it back -- and this week's retreat has done little to clarify matters. China could be the answer, though, according to several prominent figures in the world bullion market. They are coming to the conclusion that the major new driving force is a legion of fleet-footed retail investors on the Shanghai Futures Exchange. In a matter of weeks, the bourse has gone from a sedate futures venue to a nexus of the global gold market.
After weeks of debate about whether a mystery buyer was stoking the rally, several prominent figures in the global gold market are coming to the conclusion that the major new driving force is a legion of fleet-footed retail investors on the Shanghai Futures Exchange.
In a matter of weeks, the SHFE has gone from a sedate futures venue to a nexus of the global gold market. While rival centers such as London and New York have also seen activity rise, the fact that SHFE volumes have spiked from a low base offers a compelling sign that a newly arrived cohort of Chinese investors has helped drive prices sharply higher.
For months, consumers and institutional investors in China have been snapping up physical bullion, while the People’s Bank of China has been on a 17-month buying spree. Those two forces, which helped buoy international prices, have now been augmented by surging speculative demand. Numbers back up the theory. Trading on the SHFE has exploded, with average daily volume almost tripling in April compared with the preceding 12 months. It peaked at about 1,200 tons on April 15, the highest since 2019, before prices started to sag this week.
It’s notable that while SHFE volumes have soared, the number of outstanding contracts has hardly moved. That indicates participants day-trading, not taking a long-term view. But not everyone thinks Chinese investors are the major driver behind gold’s ascent.
Gold may be in favor as higher-for-longer US interest rates to tame inflation may tip the economy into recession, according to Christian.
Samson Li, a Hong Kong-based analyst at Commodity Discovery Fund, sees a more nuanced picture. Rather than being a direct driver of prices, the frenzied demand in China has encouraged western speculators to ramp up bets on gains in New York, he said. Daniel Ghali, a senior commodity strategist at TD Securities, has also been on the hunt to identify gold’s mystery buyer, and he still thinks that the dominant force is likely to be a deep-pocketed buyer in the so-called official sector, which covers state-linked institutions such as central banks and sovereign wealth funds. But he says buying activity there has also been closely correlated with weakness in the yuan, and investors on SHFE may be acting with the same underlying motivations.
Gold traded steady Wednesday after a two-day decline as traders await key US inflation data due later this week that may shed more light on the Federal Reserve’s path for interest rates.
The odds of a reduction in US borrowing costs in June — the base-case scenario earlier in the year — have dropped sharply over the last few weeks, with the swaps market now pricing in just a 14% chance. Some traders in the rates market are now putting on wagers that the Fed won’t cut at all this year.
Gold is headed for its first weekly loss in six as investors booked profits after the metal’s months-long rally. Fresh inflation data released Friday reinforced the view that high interest rates are here to stay for now. The metal’s robust performance has been linked to central-bank buying, surging interest in some Asian markets including China, and the possibility that investors may be seeking protection against sticky inflation.
The Fed’s preferred gauge of underlying inflation climbed 0.3% in March and 2.8% from a year earlier, the same as the prior month. Figures from earlier this year were also revised up slightly, government data showed Friday. The three-straight months of worrisome inflation data indicate progress toward the central bank’s 2% goal has stalled, and suggest the first interest-rate cut is getting pushed further out.
Overbought gold was also witnessing a technical correction. In the long term, gold will rise further, with 2024 being an election year, persistent geopolitical conflict and increasing U.S. debt, said Jonathan Rose, Genesis Gold Group CEO.
GDP&PCE meaning for Gold
Gross domestic product increased at a 1.6% annualized rate, below all economists’ forecasts, the government’s initial estimate showed. The economy’s main growth engine — personal spending — rose at a slower-than-forecast 2.5% pace. A wider trade deficit subtracted the most from growth since 2022. A closely watched measure of underlying inflation advanced at a greater-than-expected 3.7% clip, the first quarterly acceleration in a year, the Bureau of Economic Analysis report showed Thursday.
The figures represent a notable loss of momentum at the start of 2024 after the economy wrapped up a surprisingly strong year. With the inflation pickup, Federal Reserve policymakers — who were already expected to hold interest rates at a two-decade high when they meet next week — may face renewed pressure to further delay any cuts and even to consider whether borrowing costs are high enough.
Federal government spending subtracted from GDP for the first time in two years (!!). Stripping out inventories, government spending and trade, inflation-adjusted final sales to private domestic purchasers — a key gauge of underlying demand — rose at a 3.1% rate. Residential investment jumped at a nearly 14% annual rate, the fastest since the end of 2020 and underscoring builder efforts to boost inventory.
The record price of gold signals that the current fiat money order, based on the dollar as the world's reserve currency, is coming to an end... And the end is never peaceful...Although the rise in gold prices reached a nominal maximum, in real terms gold and silver prices never surpassed the record highs of 1980. Adjusted for inflation, gold should rise to around $3,590 an ounce and silver should rise above $50 an ounce.
️Precious metals will continue to rise unless the Federal Reserve radically changes its interest rate policy to combat inflation, as former Fed Chairman Paul Volcker once did. Volcker raised interest rates to double digits, causing gold prices to fall. While Volcker could get away with such actions (because the US was still a creditor country at the time), current Chairman Jerome Powell cannot due to massive public and private debt. Double-digit interest rates would destroy the economy and plunge millions of Americans into bankruptcy.
In fact, recent sharp slowdown of the US economy with rapid raising of budget deficit shows low efficiency of spending stimulus. Economy conditions demand rate cut. At the same time, inflation remains too high and will increase more, based on recent tendencies with commodities and fuel, not speaking about US budget spending. This makes really terrible situation and headache for the Fed and US Treasury. $250 Bln of taxes that have been recieved recently will smooth situation a bit, providing funds to keep interest rates stable but this is temporal relief and funds will exhaust in 1-2 months. At best case, the Fed could last situation without collapse until elections. But this is not for sure. Cutting rate will be the best scenario for gold but if the Fed will stay on hold, the problems in economy will keep raising. Holes will start to appearing here and there. And at the end they will have to switch on the printer. This anyway will lead to inflation but on a longer term perspective.
Other issues that seem important
The upward trend in inflation, which we noted many times, has finally formed. And this means that it is absolutely impossible to reduce the discount rate. Even taking into account the political objectives. Larry Summers was right that the official authorities would begin to show this growth. There may be several reasons for this phenomenon. It is possible that the increase in inflation turned out to be so strong that officials had to reluctantly admit it. Changing the methodology is difficult and takes a long time, so you can't go anywhere.
However, there is another option that some statisticians have realized that since the crisis cannot be avoided anyway, Summers' strategy "I have warned you" is more promising, so he could appear among experts on the right side. However, here we enter the political field. The inflation situation has become critical. its official scale (about 3.5%) is the main indicator of the change in the discount rate. And given the significant downturn in the industry, the rate needs to be urgently reduced. Well, it's useful for the elections, the mood of consumers is improving.
But rising inflation requires raising the rate. And, accordingly, any discussions on this topic acquire a political character. Plus, the revelations of Summers, which cast doubt on official data. And not only Summers is blowing this tune, there are especially many complaints about labor statistics, we also wrote about this. As a result, all political groups (power groups) in the United States are beginning to use the economic situation to their advantage. And in such situations, any meaningful work of economic experts ends. If we add to this that official experts are well aware of the degree of distortion of real data (although they may not know what indicators are in reality), then the situation becomes quite gloomy.
In particular, within the framework of such a picture, one does not want to invest in long-term industrial projects at all. And, as a result, it is completely unclear how to ensure production in those industries (defense industry, microelectronics) in which it is absolutely necessary. Well, entrepreneurs and citizens find themselves in an extremely difficult situation when it is absolutely impossible to make informed decisions.
All these stuff we should put on reality. By looking at this picture we could say that we're not at the end of the hawkish cycle, but in the beginning. Everytime, when credit spreads fall to minimum - the upside rate cycle starts, which, in turn triggers the tension in economy, defaults raising and following policy easing. Now creadit spreads stand at minimum levels:
Very soon we will witness something previously unprecedented: the financially divided world will begin to carry out polar monetary policy. The USA and Europe will raise the rate, China and India will lower it. Inflation will rise everywhere. Tensions between the US and China now becoming obvious for everyone. And recent J Yellen and A. Blinken visit once again confirms this. China is accumulating commodities with raising pace. There are many reasons might be, but anyway, if we even exclude real war, the economical impact from the US sanctions and gradual segregation of the whole economy space demands sufficient resources and protection. This is what China doing right now. Recent expropriation of Russian foreign reserves doesn't provide any relief either.
Now we have three major sources of gold demand:
1. Official demand from the Central Bank and individuals
Moreover, the motivation of buyers is different - private investors do not see alternatives, especially in China, where the stock markets and real estate have been trampled into the mud, and money cannot be taken abroad so easily. Central banks, in turn, are diversifying reserves - the notorious de-dollarization (albeit slow and creeping) + a good nest egg for a rainy day (to support the currency or exchange bullion for food and AI chips). The main demand, naturally, is in Asia. Bloomberg, for example, is horrified - Chinese imports of investment gold over 2 years suddenly exceeded 2,800 tons, which is already more than the reserves of all Western metal ETFs.
2. The paper gold market cannot withstand real physical demand, so at the beginning of 2024 speculators actually capitulated. Here geopolitics adds fuel to the fire - escalation in the Middle East, trade wars, etc.
3. Unofficial purchases of gold by central banks are growing, despite previous records. According to GWC, quarterly volumes of gray supplies are already significantly higher than public purchases. There is a wonderful theory that 80% of all undisclosed purchases come from the PBoC:
As a result, we have a change in market narratives:
– In 2022-2023, the relationship between real interest rates (the Federal Reserve rate minus inflation) and the price of gold broke down. The metal did well when real government bond yields rose.
– In 2024, the inverse correlation between the DXY dollar index and the price of gold in dollars broke down. The strengthening of the dollar went in parallel with the rally in the metal market.
Now the gold market is controlled not by Western speculative funds, but by real demand in the East.
As US Treasury yields are constantly raising right now, it is an empirical question, what yield level will start bringing big problems? Goldman calculates that a change of 2 standard deviations in the US 10-year yield, equivalent to about 60 bps today, exceeds a month - this is the point when the tough moves really begin, and "given that we closed books at the end of March books at 4.20%, this simple rule of thumb states that a move in the 10-year yield towards 4.80%-5% will lead to noticeable difficulties in the stock market.
As we've mentioned above, government has tax revenues that could help to hold US yields at some lower levels, at leas for some time. But as we keep going closer to 5%, as more tension will be on stock market and any sharp pullback could trigger cascade reaction, boosting gold demand... (continuation is below)...
