Sive Morten
Special Consultant to the FPA
- Messages
- 18,936
Fundamentals
It is very interesting time we're living at, no doubts. For gold market this is also the special time. Such an epic events happen once in a few decades, and they are major drivers for performance of the gold because it is a great indicator of tectonic shifts in artificial human-made value, the breaking of its foundation and valuation principles. This collapse is spreading like a wave in the space with an echo of geopolitical conflicts and big motion in people masses. Today we continue discussion of big shifts in the US economy, started yesterday. You saw already many of charts that we show you today. But they are spread in time and among our multiple reports. Now you will be surprised by effect when you will see it all together in very tight report. It is very impressive picture that explains many things.
Market overview
Gold prices rose on Monday, helped by a pullback in the dollar. Gold is in consolidation mode and there is active buying on dips, said David Meger, director of alternative investments and trading at High Ridge Futures, adding that investors are looking for the trajectory of interest rates moving forward and the timing of those potential rate cuts.
Chicago Fed President Austan Goolsbee said in a CNBC interview on Monday that he was still looking for inflation to cool further as part of the process that would open the door to a rate cut. Fed Governor Michelle Bowman said on Tuesday that holding the policy rate steady "for some time" would probably be enough to bring inflation under control, but reiterated a willingness to raise borrowing costs if needed.
Gold prices rose more than 1% on Thursday from the over two-week low touched in the previous session, as the dollar softened and the spotlight shifted to key U.S. inflation data for clues on the Federal Reserve's policy path. Ebbing economic momentum was underscored by data showing business spending on equipment declined in May, while a slump in exports pushed up the goods trade deficit. In its third estimate of gross domestic product for the January to March quarter, the government confirmed that economic growth moderated sharply in the first quarter.
Investors have largely stuck to their view of around two interest-rate cuts this year, according to LSEG's FedWatch data, even though the U.S. central bank has projected only one. On Friday, market bets rose on hopes that the Federal Reserve would cut interest rates by September and again in December, after the Personal Consumption Expenditures Index showed inflation did not rise at all from April to May. Traders are currently pricing in about a 68% chance of a Fed rate cut in September, compared with 64% before the release of the inflation data, according to the CME FedWatch tool.
San Francisco Federal Reserve Bank President Mary Daly - also a member of the 2024 Federal Open Market Committee - said the latest inflation data was "good news that policy is working".
CHINA TAKES A PAUSE. WHAT'S NEXT?
So, China’s central bank — which has been blamed or credited with the rising gold price in recent months — has recently taken a breather from buying. The news is - "Bank of China did not add gold to its reserves in May". In fact, the reaction is exaggerated. China has been buying gold for 18 months in a row. It was considered the largest central bank gold buyer in 2023. Officially, the People's Bank of China has added more than 300 tons of gold to reserves during its activity.
Many analysts have long believed that China has much more gold than officially reported. They believe that the PRC keeps several thousand tons of gold "unaccounted for" in a separate institution called the State Administration of Foreign Exchange (SAFE).
Chen Long, founder and leading economist at Plenum, a specialist on China, wrote an entire article on this topic and points out that gold purchases by the Chinese central bank are a drop in the ocean compared to gold imports into the country . In 2023, the country imported more than 1,400 tons of gold. This is despite the fact that China is considered the world's largest gold producer. In 2023, Chinese mines produced 375 tons of gold. In other words, China receives a lot of gold, but the country exports very little.
As we know the Bank of America team put out a note suggesting that gold could hit $3,000 an ounce over the next 12 to 18 months. This is no less than 28% upside potential and ~ 18% of annual yield. It is difficult to understand the real reasons of this issue - either BofA would like to sell its gold reserves off the balance or, indeed, they expect this level. But definitely this is a sentiment test. Once upon a time, $3,000 an ounce for gold would have seemed a bit like $200 oil — an extreme call, and likely a sign of a top. Now that $3,000 is less than 30% away, it doesn’t seem as drastic.
The key, says Bank of America, is investment demand. Data from the trade body, the World Gold Council, suggests that central banks are feeling increasingly warm towards gold as a useful financial asset rather than a historic keepsake. But it’s not just central banks. When and if the Federal Reserve eventually starts cutting US interest rates, that may give a boost to demand from developed-market investors. During the current rally they have mostly been selling down their holdings of exchange-traded funds, but total ETF holdings appear to have steadied over the last two months, as the chart below suggests.
Another point made by the Bank of America team is that a nasty shock in the US Treasury market is a “building tail risk”. In other words, it’s not very likely, but it is becoming a bit more likely as time goes by. When you take a more fragile Treasury market and throw in the sticky political situation in the US, combined with a high and arguably unsustainable debt trajectory, you have fertile ground for fear of accidents.
All of this debt is another good reason to believe that government policy across the board will err on the side of the inflationary. Because if deflation takes hold, then the debt only gets bigger (in “real” terms) and thus more crushing. And as long as we’re in a more inflation-prone environment, the “precautionary” bid for gold seems likely to endure.
DEGLOBALIZATION FRUITS
When we talk about deglobalization, we mean that this process began immediately after Covid. Oddly enough, it actually began at the same time as dedollarization - in 2008. Pay attention to the statistics on global trade. In 2008, the volume was $16.1 trillion. In 2022, there was a post-Covid surge and the figure reached $22.3 trillions, but if we make a small adjustment for delayed Covid era demand, we get about $21 trillions. It would seem that there is no reduction...
But this is deceptive, since the accumulated inflation over the years was 36%.Moreover, look at the trajectory. From 2000 to 2008, the volume grew 2.5 times. That is, the slowdown is obvious. Finally, it is the ratio of World trade to world GDP. In 2008 it was 25%, and in 2022 it was 21%. So, this is further confirmation of the thesis that the existing system broke down back in 2008 with no hope of recovery. Otherwise it would have been fixed already. If you also take in consideration population growth by more than 1 billion people during this period, it will be even more eloquent.
Here is very interesting charts of real disposable income of the population without budget transfers. As you can see, since Covid, incomes began to lag behind the trend, which precisely means that everything in the economy is not as good as it seems. If we take into account that the gap is only growing, and transfers are no longer increasing, then at some point the economy will begin to contract due to the fall in consumer demand.
If you look at 30 years of data, it becomes clear that everything broke not because of Covid, then everything only got worse, but in 2008. Since then, the gap has only been growing, and the economy, as I have said many times, is not falling just because the government debt is increasing. Before this, everything really depended on the inflation of the mortgage bubble and, in general, on the expansion of consumer credit.
The financial system and globalization broke down in 2008, and in 2020 everything has only intensified. The crisis that we see is a fundamental crisis of the system of global division of labor, coupled with a crisis of the financial system, the main task of which was to serve globalization.
Taking it all together
Traders in the US rates options market are embracing a nascent wager on the Federal Reserve’s interest-rate path: a whopping 3 percentage points worth of cuts in the next nine months, thrilling Fed's nerves. At first glance, such an outcome seems unlikely, unless the U.S. economy collapses into a sudden recession. The Fed forecasts a rate cut of only 25 bps by the end of 2024 (125 bps by the end of 2025), and futures market players - about 45 bps.
And what about inflation?
Stock Market.
The last remaining Wall Street bears are struggling to convince optimistic customers. The few analysts who are still warning of a downturn in the U.S. market say investors are holding a "fanatical mindset." Peter Berezin, chief equity strategist at BCA Research, said that his main leading economic indicators "point to a recession in the next 9 months," but many of his clients see the situation differently. Say "Hi" to Nike company.
Credit spreads are widening for the first time since 2021, despite the fact that US stocks have reached record highs.
Will there be no recession, firmly and clearly? Expected home sales, a typical leading indicator of housing construction with powerful multiplier effects, fell by -2.1% over the month in May. In 2021, the excess savings of American households reached $2.1 trillion. A few months ago, poof - and there are none (minus $170 billion).
And what about corporations/CAPEX? Adjusted for inflation, the volume of orders for capital goods (durable goods) in the United States continues to stagnate. Do not forget about the CRE crisis. According to new Moody's estimates, by 2026, almost a quarter of all office space in the United States will be vacant, as remote operation will continue. This will lead to a drop in the value of commercial real estate by $250 billion.
Moody's has determined that office workers need about 14% less office space today than they did before the pandemic. This figure corresponds to research by McKinsey, which concluded that by 2030, the demand for office space in a typical city worldwide will decrease by 13%. At the same time, the cost of office real estate will decrease by $800 billion to $1.3 trillion.
So, now it seems that option traders are not a full stupids, right? And maybe we also, because of our rate cut expectation in July...
Two cents on Debates
This is not our subject in general, it was said a lot in media and will be said even more. The content of debates is absolutely not interesting. There are another things that raising interest. If we go aside from mutual piking of candidates like in kinder garden, it is reasonable to ask - what political project every candidate does have? D. Trump during his 1st term had the one - to rebuild and recover domestic industrial sector. He was not able to realize it and now this project needs big adjustment. J. Biden has no projects at all. So, when they speak about resolving particular problems - "I will defeat inflation", I will close the border", I will stop war in Ukraine, "I will this and I will that" - they can't tell how they will do this.
In the history of the US were many presidents in, say, "difficult physical conditions" after insults etc, such as Eisenhauer or V. Wilson, but they had teams of professionals who cared about the project and were able to realize it. It means that it is absolutely doesn't matter who will replace J. Biden. Without a political project this will give nothing. The project is the first thing. If people like it - they will vote for any more or less public popular person.
Second is, about J. Biden place. Here we have to ask reasonable question. Those who stand behind J. Biden... whether they can't predict the results of debates? Hardly. It could be done intentionally. To frame and change J. Biden? They do not need this, as they change the candidate at any time. What if they leave J. Bi grandpa like that? For some reason they dragged him to the debate, although it was clear to absolutely everyone how it would end. Why was this shame necessary? Some analysts suggest that pushing Biden to a second term will be a very beautiful move by the deep state of American politics. They say we do what we want and we can put even a walking dead on the throne.
Indeed, Biden's main voters don't care at all about his performance. The most important voting bloc in the United States voted for Biden (as well as for Kennedy in his time): American cemeteries, with the support of the American Post Office (which is actually a branch of the US Democratic Party) and security forces. So Biden did not suffer any truly significant electoral losses, and only made the task for his main “voters” (well, those who extract votes from cemeteries, engage in ballot harvesting and other similar tricks) a little more difficult. Meantime, people start asking uncomfortable questions to the Fed and US Treasury.
My thought that now the situation stands so that it is not a particular person determines the prosperity of the US. Nothing depend on either D. Trump or J. Biden. Hardly D. Trump will be much better. He is a good showman, knowing how to perform on public but his 2016-2020 term results were arguable. Don't forget that Covid started in D. Trump era and he also responsible for its legacy. If we suggest that CV19 was global collusion, it means that he was a major initiator or among them.
Keeping it short, I suggest that the best leader for the US will the one, who will be able to reach compromises on global arena with minimal loss to the US domination, it's economy, political weight etc. Those who will be effective negotiator, and find optimal balance of admissible concessions and least hurt for the nation. But first, the US have to start thinking about this concessions, but they don't. Correspondingly no relief will come by itself from just nowhere. As longer they will wait as worse situation will become. Now everything is rolling to a big war. To be stubborn by all means is not always the best policy...
It is very interesting time we're living at, no doubts. For gold market this is also the special time. Such an epic events happen once in a few decades, and they are major drivers for performance of the gold because it is a great indicator of tectonic shifts in artificial human-made value, the breaking of its foundation and valuation principles. This collapse is spreading like a wave in the space with an echo of geopolitical conflicts and big motion in people masses. Today we continue discussion of big shifts in the US economy, started yesterday. You saw already many of charts that we show you today. But they are spread in time and among our multiple reports. Now you will be surprised by effect when you will see it all together in very tight report. It is very impressive picture that explains many things.
Market overview
Gold prices rose on Monday, helped by a pullback in the dollar. Gold is in consolidation mode and there is active buying on dips, said David Meger, director of alternative investments and trading at High Ridge Futures, adding that investors are looking for the trajectory of interest rates moving forward and the timing of those potential rate cuts.
Global physically backed gold exchange-traded funds (ETFs), a crucial category of demand, saw inflows last week of $212 million, or 2.1 metric tons, according to the World Gold Council."We believe gold can hit $3,000/oz over the next 12-18 months, although flows do not justify that price level right now," BofA said in a research note. "Achieving this would require non-commercial demand to pick up from current levels, which in turn needs a Fed rate cut to happen. An inflow into physically backed ETFs and a pick-up in LBMA clearing volumes would be an encouraging first signal."
Chicago Fed President Austan Goolsbee said in a CNBC interview on Monday that he was still looking for inflation to cool further as part of the process that would open the door to a rate cut. Fed Governor Michelle Bowman said on Tuesday that holding the policy rate steady "for some time" would probably be enough to bring inflation under control, but reiterated a willingness to raise borrowing costs if needed.
Data out on Tuesday showed U.S. consumer confidence eased in June amid worries about the economic outlook, but households remained upbeat about the labor market and expected inflation to moderate over the next year."There's still a lot of physical demand from central banks and there's that Asian demand ... ultimately the expectation is that the Fed will cut rates and investors are very reluctant to get short on gold," said Ryan McKay, senior commodity strategist at TD Securities.
"At this point, market may very well be responding to the firmer U.S. dollar and we continue to price in the possibility that the U.S. Federal Reserve is unlikely to move (interest rates) earlier in the summer," said Bart Melek, head of commodity strategies at TD Securities.
Gold prices rose more than 1% on Thursday from the over two-week low touched in the previous session, as the dollar softened and the spotlight shifted to key U.S. inflation data for clues on the Federal Reserve's policy path. Ebbing economic momentum was underscored by data showing business spending on equipment declined in May, while a slump in exports pushed up the goods trade deficit. In its third estimate of gross domestic product for the January to March quarter, the government confirmed that economic growth moderated sharply in the first quarter.
"Some of the data that came out was supportive to the gold market. It was essentially the wholesale inventories that came in lower than expected. The final GDP figure is significantly lower. So gold futures are getting a boost on dollar index coming off," said Phillip Streible, chief market strategist at Blue Line Futures.
Investors have largely stuck to their view of around two interest-rate cuts this year, according to LSEG's FedWatch data, even though the U.S. central bank has projected only one. On Friday, market bets rose on hopes that the Federal Reserve would cut interest rates by September and again in December, after the Personal Consumption Expenditures Index showed inflation did not rise at all from April to May. Traders are currently pricing in about a 68% chance of a Fed rate cut in September, compared with 64% before the release of the inflation data, according to the CME FedWatch tool.
"We are continuing on trend in a very incremental slow pullback of inflation. As a result, we've seen yields continue to creep lower, bonds creep higher and that is somewhat supportive for the gold market," said David Meger, director of alternative investments and trading at High Ridge Futures.
San Francisco Federal Reserve Bank President Mary Daly - also a member of the 2024 Federal Open Market Committee - said the latest inflation data was "good news that policy is working".
"The price of gold has been trading in a fairly tight range and will probably hold this range until the FOMC confirms they will be cutting rates," said Chris Gaffney, president of world markets at EverBank.
CHINA TAKES A PAUSE. WHAT'S NEXT?
So, China’s central bank — which has been blamed or credited with the rising gold price in recent months — has recently taken a breather from buying. The news is - "Bank of China did not add gold to its reserves in May". In fact, the reaction is exaggerated. China has been buying gold for 18 months in a row. It was considered the largest central bank gold buyer in 2023. Officially, the People's Bank of China has added more than 300 tons of gold to reserves during its activity.
Many analysts have long believed that China has much more gold than officially reported. They believe that the PRC keeps several thousand tons of gold "unaccounted for" in a separate institution called the State Administration of Foreign Exchange (SAFE).
Chen Long, founder and leading economist at Plenum, a specialist on China, wrote an entire article on this topic and points out that gold purchases by the Chinese central bank are a drop in the ocean compared to gold imports into the country . In 2023, the country imported more than 1,400 tons of gold. This is despite the fact that China is considered the world's largest gold producer. In 2023, Chinese mines produced 375 tons of gold. In other words, China receives a lot of gold, but the country exports very little.
As we know the Bank of America team put out a note suggesting that gold could hit $3,000 an ounce over the next 12 to 18 months. This is no less than 28% upside potential and ~ 18% of annual yield. It is difficult to understand the real reasons of this issue - either BofA would like to sell its gold reserves off the balance or, indeed, they expect this level. But definitely this is a sentiment test. Once upon a time, $3,000 an ounce for gold would have seemed a bit like $200 oil — an extreme call, and likely a sign of a top. Now that $3,000 is less than 30% away, it doesn’t seem as drastic.
The key, says Bank of America, is investment demand. Data from the trade body, the World Gold Council, suggests that central banks are feeling increasingly warm towards gold as a useful financial asset rather than a historic keepsake. But it’s not just central banks. When and if the Federal Reserve eventually starts cutting US interest rates, that may give a boost to demand from developed-market investors. During the current rally they have mostly been selling down their holdings of exchange-traded funds, but total ETF holdings appear to have steadied over the last two months, as the chart below suggests.
Another point made by the Bank of America team is that a nasty shock in the US Treasury market is a “building tail risk”. In other words, it’s not very likely, but it is becoming a bit more likely as time goes by. When you take a more fragile Treasury market and throw in the sticky political situation in the US, combined with a high and arguably unsustainable debt trajectory, you have fertile ground for fear of accidents.
All of this debt is another good reason to believe that government policy across the board will err on the side of the inflationary. Because if deflation takes hold, then the debt only gets bigger (in “real” terms) and thus more crushing. And as long as we’re in a more inflation-prone environment, the “precautionary” bid for gold seems likely to endure.
DEGLOBALIZATION FRUITS
When we talk about deglobalization, we mean that this process began immediately after Covid. Oddly enough, it actually began at the same time as dedollarization - in 2008. Pay attention to the statistics on global trade. In 2008, the volume was $16.1 trillion. In 2022, there was a post-Covid surge and the figure reached $22.3 trillions, but if we make a small adjustment for delayed Covid era demand, we get about $21 trillions. It would seem that there is no reduction...
But this is deceptive, since the accumulated inflation over the years was 36%.Moreover, look at the trajectory. From 2000 to 2008, the volume grew 2.5 times. That is, the slowdown is obvious. Finally, it is the ratio of World trade to world GDP. In 2008 it was 25%, and in 2022 it was 21%. So, this is further confirmation of the thesis that the existing system broke down back in 2008 with no hope of recovery. Otherwise it would have been fixed already. If you also take in consideration population growth by more than 1 billion people during this period, it will be even more eloquent.
Here is very interesting charts of real disposable income of the population without budget transfers. As you can see, since Covid, incomes began to lag behind the trend, which precisely means that everything in the economy is not as good as it seems. If we take into account that the gap is only growing, and transfers are no longer increasing, then at some point the economy will begin to contract due to the fall in consumer demand.
If you look at 30 years of data, it becomes clear that everything broke not because of Covid, then everything only got worse, but in 2008. Since then, the gap has only been growing, and the economy, as I have said many times, is not falling just because the government debt is increasing. Before this, everything really depended on the inflation of the mortgage bubble and, in general, on the expansion of consumer credit.
The financial system and globalization broke down in 2008, and in 2020 everything has only intensified. The crisis that we see is a fundamental crisis of the system of global division of labor, coupled with a crisis of the financial system, the main task of which was to serve globalization.
Taking it all together
Traders in the US rates options market are embracing a nascent wager on the Federal Reserve’s interest-rate path: a whopping 3 percentage points worth of cuts in the next nine months, thrilling Fed's nerves. At first glance, such an outcome seems unlikely, unless the U.S. economy collapses into a sudden recession. The Fed forecasts a rate cut of only 25 bps by the end of 2024 (125 bps by the end of 2025), and futures market players - about 45 bps.
And what about inflation?
Stock Market.
The last remaining Wall Street bears are struggling to convince optimistic customers. The few analysts who are still warning of a downturn in the U.S. market say investors are holding a "fanatical mindset." Peter Berezin, chief equity strategist at BCA Research, said that his main leading economic indicators "point to a recession in the next 9 months," but many of his clients see the situation differently. Say "Hi" to Nike company.
"The idea of a soft [economic] landing is so ingrained that in meetings, clients challenge me over and over again, saying that I am too bearish," Berezin said.
Credit spreads are widening for the first time since 2021, despite the fact that US stocks have reached record highs.
Will there be no recession, firmly and clearly? Expected home sales, a typical leading indicator of housing construction with powerful multiplier effects, fell by -2.1% over the month in May. In 2021, the excess savings of American households reached $2.1 trillion. A few months ago, poof - and there are none (minus $170 billion).
And what about corporations/CAPEX? Adjusted for inflation, the volume of orders for capital goods (durable goods) in the United States continues to stagnate. Do not forget about the CRE crisis. According to new Moody's estimates, by 2026, almost a quarter of all office space in the United States will be vacant, as remote operation will continue. This will lead to a drop in the value of commercial real estate by $250 billion.
Moody's has determined that office workers need about 14% less office space today than they did before the pandemic. This figure corresponds to research by McKinsey, which concluded that by 2030, the demand for office space in a typical city worldwide will decrease by 13%. At the same time, the cost of office real estate will decrease by $800 billion to $1.3 trillion.
So, now it seems that option traders are not a full stupids, right? And maybe we also, because of our rate cut expectation in July...
Two cents on Debates
This is not our subject in general, it was said a lot in media and will be said even more. The content of debates is absolutely not interesting. There are another things that raising interest. If we go aside from mutual piking of candidates like in kinder garden, it is reasonable to ask - what political project every candidate does have? D. Trump during his 1st term had the one - to rebuild and recover domestic industrial sector. He was not able to realize it and now this project needs big adjustment. J. Biden has no projects at all. So, when they speak about resolving particular problems - "I will defeat inflation", I will close the border", I will stop war in Ukraine, "I will this and I will that" - they can't tell how they will do this.
In the history of the US were many presidents in, say, "difficult physical conditions" after insults etc, such as Eisenhauer or V. Wilson, but they had teams of professionals who cared about the project and were able to realize it. It means that it is absolutely doesn't matter who will replace J. Biden. Without a political project this will give nothing. The project is the first thing. If people like it - they will vote for any more or less public popular person.
Second is, about J. Biden place. Here we have to ask reasonable question. Those who stand behind J. Biden... whether they can't predict the results of debates? Hardly. It could be done intentionally. To frame and change J. Biden? They do not need this, as they change the candidate at any time. What if they leave J. Bi grandpa like that? For some reason they dragged him to the debate, although it was clear to absolutely everyone how it would end. Why was this shame necessary? Some analysts suggest that pushing Biden to a second term will be a very beautiful move by the deep state of American politics. They say we do what we want and we can put even a walking dead on the throne.
Indeed, Biden's main voters don't care at all about his performance. The most important voting bloc in the United States voted for Biden (as well as for Kennedy in his time): American cemeteries, with the support of the American Post Office (which is actually a branch of the US Democratic Party) and security forces. So Biden did not suffer any truly significant electoral losses, and only made the task for his main “voters” (well, those who extract votes from cemeteries, engage in ballot harvesting and other similar tricks) a little more difficult. Meantime, people start asking uncomfortable questions to the Fed and US Treasury.
My thought that now the situation stands so that it is not a particular person determines the prosperity of the US. Nothing depend on either D. Trump or J. Biden. Hardly D. Trump will be much better. He is a good showman, knowing how to perform on public but his 2016-2020 term results were arguable. Don't forget that Covid started in D. Trump era and he also responsible for its legacy. If we suggest that CV19 was global collusion, it means that he was a major initiator or among them.
Keeping it short, I suggest that the best leader for the US will the one, who will be able to reach compromises on global arena with minimal loss to the US domination, it's economy, political weight etc. Those who will be effective negotiator, and find optimal balance of admissible concessions and least hurt for the nation. But first, the US have to start thinking about this concessions, but they don't. Correspondingly no relief will come by itself from just nowhere. As longer they will wait as worse situation will become. Now everything is rolling to a big war. To be stubborn by all means is not always the best policy...