Sive Morten
Special Consultant to the FPA
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Fundamentals
For Gold market this week has passed under sign of Israel back strike on Iran. J. Powell's comments that all efforts to defeat inflation haven't brought desirable effect has made no big impact on gold price. And even with yields has jumped to 4.7% - gold was keep going higher. This is very good sign. At the same time we start signing more volatility and choppiness on gold market, which is an indicator of increased amount of speculators. This should not surprise us, because if you have activity and great rally - there are always a lot of speculators around. It means that price performance could become sharper and faster, swings are wider and less gradual. But, all these consequences are not vital. Today we do not have any special topic for discussion, thus just take a look on what is going on in general.
Market overview
Gold rose as demand for the haven asset grew amid fears of escalating tensions in the Middle East following Iran’s unprecedented attack on Israel over the last weekend. The latest developments in the Middle East rekindled the flight to safety, with fears over a potential retaliation by Israel likely to support gold in the near term.
Gold has surged by almost 20% since mid-February in a rally that’s taken many investors by surprise. Swaps markets suggest that investors have lowered their expectations for the scope and pace of Federal Reserve cuts to interest rates this year. Nevertheless, the metal has gained support from other factors including robust buying by central banks and increased demand from Chinese consumers. A number of Wall Street banks have also recently lifted their price forecasts for gold, with Goldman Sachs Group Inc. on Monday raising its year-end forecast to $2,700 an ounce.
Dominic Schnider, head of global commodities and foreign exchange at UBS Global Wealth Management, discusses the prospects for commodities including copper, gold and silver, suggests that Gold could reach $2500 level.
Covenant Capital’s Edward Lim says he’s bullish on gold and is planning to make it a permanent fixture of his portfolio following intermittent periods of trading the metal. A number of Wall Street banks have also recently lifted their price forecasts, with Goldman Sachs raising its year-end forecast to $2,700 an ounce.
Gold is set to reach $3,000 an ounce over the next six to 18 months on increasing investor inflows amid expectations that the Federal Reserve will eventually cut interest rates, Citigroup Inc. said, adding to a roll call of Wall Street banks that have raised forecasts.
According to Citigroup, gold will be driven by increased flows from managed money players, who are already showing signs of catching up with demand from physical consumers in China and central banks. The start of a Fed cutting cycle — or a potential recession scenario — into 2025 will provide further impetus for investment demand. Inflows into gold-backed exchange traded funds — largely absent in recent years — will “buffer the path to $3,000,” the analysts wrote. Citi sees increased prospects for a pullback in prices around May or June, but expects “strong buying support” at the $2,200 an ounce threshold.
Powell said Tuesday that it will likely take longer to gain confidence that price growth is heading toward the Fed’s goal, remarks that followed a string of surprisingly strong US inflation readings. The Fed chief also said it’s appropriate to give the US central bank’s restrictive policy further time to work. For gold traders, Powell’s remarks didn’t break much new ground, although his comments suggested a May rate cut is off the table and June is increasingly unlikely. Swap markets show the Fed will only begin easing in September, after indicating July a week ago. Lower rates are generally positive for gold as it pays no interest.
The Reserve Bank of India continued its gold purchases in March, according to a post on X from Krishan Gopaul, investment research analyst at the World Gold Council. Year-to-date purchases of nearly 19 tonnes now exceed its 2023 net purchases of 16 tonnes, he added. China and India have typically vied over the title of world’s biggest buyer. But that shifted last year as Chinese consumption of jewelry, bars and coins swelled to record levels. China’s gold jewelry demand rose 10% while India’s fell 6%. Chinese bar and coin investments, meanwhile, surged 28%.
And there’s still room for demand to grow, said Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd. Amid limited investment options in China, the protracted crisis in its property sector, volatile stock markets and a weakening yuan are all driving money to assets that are perceived to be safer.
Although China mines more gold than any other country, it still needs to import a lot and the quantities are getting larger. In the last two years, overseas purchases totaled over 2,800 tons — more than all of the metal that backs exchange-traded funds around the world, or about a third of the stockpiles held by the US Federal Reserve.
The People’s Bank of China has been on a buying spree for 17 straight months, its longest-ever run of purchases, as it looks to diversify its reserves away from the dollar and hedge against currency depreciation. It’s indicative of gold’s allure that Chinese demand remains so buoyant, despite record prices and a weaker yuan that robs buyers of purchasing power. As a major importer, gold buyers in China often have to pay a premium over international prices. That jumped to $89 an ounce at the start of the month. The average over the past year is $35 versus a historical average of just $7.
Deutsche Bank raised its gold price forecast to an average of $2,400 an ounce for the fourth quarter of 2024 and to $2,600 for fourth quarter of 2025, citing a durable impact from recent investment inflow. Its strategist Michael Hsueh sees tension in the South China Sea as a potential flashpoint that could garner greater attention for gold.
Gold prices rose on Friday and logged a fifth consecutive weekly rise, as fears of further tit-for-tat retaliation between Iran and Israel triggered safe-haven demand.
SILVER IN FOCUS
As it usually happens on stock market, when blue chips rally is slowing, traders start looking for other undervalued shares - silver is becoming interesting as it is lagging behind gold market. After a strong start to the year, silver should remain supported by record industrial usage and a supply deficit, according to the Silver Institute.
Industrial consumption hit an all-time high in 2023 and is expected to expand another 9% this year, driven by green-related applications such as solar panels, the institute said in its World Silver Survey report on Wednesday. That will help the metal record a fourth straight annual supply shortage.
Silver, known as the devil’s metal because of its often wild swings, is trading near a three-year high as it tracks a rally in gold that has partly been fueled by demand for a haven amid geopolitical tensions.
TACTICAL GOLD DRIVERS
Concern about the rapidly rising U.S. government debt is partly behind recent surges in gold prices and bitcoin, even as the Treasury market so far remains relatively sanguine about the country's fiscal path, market observers say. The U.S. budget deficit widened to $1.7 trillion in fiscal year 2023 and is on track to reach $2.6 trillion by 2034, according to the Congressional Budget Office.
U.S. government debt held by the public, meanwhile, is on pace to reach a record 106% of gross domestic product (GDP) in 2028, up from 97% in fiscal year 2023. It has soared to $27 trillion from $17 trillion in early 2020 and $5 trillion in 2007. he unchecked growth of U.S. government debt is gaining more attention as interest rate payments also take a larger bite of the government's budget - in some months exceeding spending on national defense. This worsening trajectory has boosted demand for bitcoin and gold, which are often used as a hedge against inflation and the depreciating purchasing power of the U.S. currency.
At the same time, it is interesting that US Treasury reports on raising of foreign holding of the US debt, while we see record sell-off by Hedge funds. Among buyers there are no more "foreign investors" such as China, Arab countries as they were previously, but only puppet Japan and EU countries (mostly Belgium). UK has no more free cash to buy the US debt. Obviously, with all respect to Japan and EU - this burden is too heavy to carry it in long term.
So far, however, several Treasury market indicators show that bonds are not pricing in a worsening fiscal outlook, said Nicholas Colas, co-founder of DataTrek Research.
These include 10-year Treasury yields trading well below those on three-month notes. Real 10-year yields, which “reflect all risks other than future inflation,” are also around the same level as from 2003–2007, when the debt to GDP ratio was half of what it is now.
US Treasuries yields are rising rapidly. Visually, it is clear that the United States has stopped managing its debt, and the situation is out of control. While the financial world behaves like nothing terrible is happening. However, the cost of servicing government debt has doubled since 2020 – to $1 trillion in 2023. BofA forecasts that servicing US debt this year will cost $1.6 trillion if the Fed doesn't cut rates. Interest will become the most expensive budget item, doubling the Pentagon budget.
The problem has no simple solutions: it is impossible to devalue the US dollar, its exchange rate will fall with the rates of other currencies (yen, euro, yuan); default on US Treasuries will lead to financial, and then political and military disasters. Therefore, the only way is prolonged dollar inflation, which will eat up the American debt, and with it capital, savings and income, equalizing the rights and opportunities of the hegemon with those of Argentina. However, the robbery of a country very rich in resources (Russia, China, Iran) will push the problem back for a couple of decades. But this seems hardly possible now.
Inflation undermines confidence in the dollar as an instrument of trade, savings and investment - something on which its hegemony rests. The Fed does not have a plan on how to slow down inflation without breaking the global financial system into small pieces due to the fall in the value of US Treasuries. And this is financial zugzwang.
Along with construction and transport, fast food is a kind of basket of goods and services (groceries, wages, utilities, rent, delivery), and therefore reflects trends well. Try to find deflation there, for example, the threat of which was discussed a lot six months ago.
The sanctions on Russian non-ferrous metals, just introduced by England and the USA, will definitely not reduce inflation, but rather accelerate it. And the growth of oil by 22% from local lows also seems to hint that the “beard of expectations” this time will bristle straight upward. According to the chart below, it will be about 10-12% by January 2025, and according to BigMacMcDuck, another 20-25 percent at least.
Strategical Issues
Finally, let's just briefly mention recent House decision to expropriate Russian assets and force to TikTok to sell business in China under the hazard of blocking. It reality this decision is much deeper than it seems. First is, the confiscation of Russian assets makes no big fiscal sense, because the US has only $5Bln which is like the pie for the elephant. Foreign investors already are not buying the US debt. With this decision the US has buried principles of "inviolability of private property" which is suicide for global reserve currency. As principle of fair competition, trying to steal Chinese company.
Although Russia has ~ 20 times more the US assets on its territory, we're interested in a bit different thing. What particular reason has forced to unite Republicans with democrats and approve this initiative? Under what reason two domestic political rivals start acting together? We suggest that the only one explanation could be. it means that really big problems stand inside, the question of survival on the table, that exclude any future strategical planning and cooperation. Apparently, there is no hope of getting out of the tangle of problems, so you need to take everything you can get your hands on.
We consider this precedent as a gift for gold market. Now US Dollar instead starts getting some toxic features - doesn't guaranty safety and inviolability, doesn't guarantee inflation protection, becoming the political tool and weapon for resolving US problems. Hardly this collection of features will be attractive in long term among investors. Dollar mass start returning back in the US as soon as major owners of global commodity reserves stop using it for pricing. And effect of dollar weakness accumulation will be long-term and spin up in time.
Thus, we do not see any signs that our long-term bullish strategy is coming to an end. We even see more long term supportive factors for further gold appreciation. Yes, for day by day trading gold is becoming more volatile and difficult, as sharp swings are becoming stronger and less predictable due speculative multiplication. But for investing and wealth preservation we see no flaws in gold by far.
For Gold market this week has passed under sign of Israel back strike on Iran. J. Powell's comments that all efforts to defeat inflation haven't brought desirable effect has made no big impact on gold price. And even with yields has jumped to 4.7% - gold was keep going higher. This is very good sign. At the same time we start signing more volatility and choppiness on gold market, which is an indicator of increased amount of speculators. This should not surprise us, because if you have activity and great rally - there are always a lot of speculators around. It means that price performance could become sharper and faster, swings are wider and less gradual. But, all these consequences are not vital. Today we do not have any special topic for discussion, thus just take a look on what is going on in general.
Market overview
Gold rose as demand for the haven asset grew amid fears of escalating tensions in the Middle East following Iran’s unprecedented attack on Israel over the last weekend. The latest developments in the Middle East rekindled the flight to safety, with fears over a potential retaliation by Israel likely to support gold in the near term.
Gold has surged by almost 20% since mid-February in a rally that’s taken many investors by surprise. Swaps markets suggest that investors have lowered their expectations for the scope and pace of Federal Reserve cuts to interest rates this year. Nevertheless, the metal has gained support from other factors including robust buying by central banks and increased demand from Chinese consumers. A number of Wall Street banks have also recently lifted their price forecasts for gold, with Goldman Sachs Group Inc. on Monday raising its year-end forecast to $2,700 an ounce.
Dominic Schnider, head of global commodities and foreign exchange at UBS Global Wealth Management, discusses the prospects for commodities including copper, gold and silver, suggests that Gold could reach $2500 level.
Covenant Capital’s Edward Lim says he’s bullish on gold and is planning to make it a permanent fixture of his portfolio following intermittent periods of trading the metal. A number of Wall Street banks have also recently lifted their price forecasts, with Goldman Sachs raising its year-end forecast to $2,700 an ounce.
Gold is set to reach $3,000 an ounce over the next six to 18 months on increasing investor inflows amid expectations that the Federal Reserve will eventually cut interest rates, Citigroup Inc. said, adding to a roll call of Wall Street banks that have raised forecasts.
According to Citigroup, gold will be driven by increased flows from managed money players, who are already showing signs of catching up with demand from physical consumers in China and central banks. The start of a Fed cutting cycle — or a potential recession scenario — into 2025 will provide further impetus for investment demand. Inflows into gold-backed exchange traded funds — largely absent in recent years — will “buffer the path to $3,000,” the analysts wrote. Citi sees increased prospects for a pullback in prices around May or June, but expects “strong buying support” at the $2,200 an ounce threshold.
Powell said Tuesday that it will likely take longer to gain confidence that price growth is heading toward the Fed’s goal, remarks that followed a string of surprisingly strong US inflation readings. The Fed chief also said it’s appropriate to give the US central bank’s restrictive policy further time to work. For gold traders, Powell’s remarks didn’t break much new ground, although his comments suggested a May rate cut is off the table and June is increasingly unlikely. Swap markets show the Fed will only begin easing in September, after indicating July a week ago. Lower rates are generally positive for gold as it pays no interest.
The Reserve Bank of India continued its gold purchases in March, according to a post on X from Krishan Gopaul, investment research analyst at the World Gold Council. Year-to-date purchases of nearly 19 tonnes now exceed its 2023 net purchases of 16 tonnes, he added. China and India have typically vied over the title of world’s biggest buyer. But that shifted last year as Chinese consumption of jewelry, bars and coins swelled to record levels. China’s gold jewelry demand rose 10% while India’s fell 6%. Chinese bar and coin investments, meanwhile, surged 28%.
And there’s still room for demand to grow, said Philip Klapwijk, managing director of Hong Kong-based consultant Precious Metals Insights Ltd. Amid limited investment options in China, the protracted crisis in its property sector, volatile stock markets and a weakening yuan are all driving money to assets that are perceived to be safer.
Although China mines more gold than any other country, it still needs to import a lot and the quantities are getting larger. In the last two years, overseas purchases totaled over 2,800 tons — more than all of the metal that backs exchange-traded funds around the world, or about a third of the stockpiles held by the US Federal Reserve.
The People’s Bank of China has been on a buying spree for 17 straight months, its longest-ever run of purchases, as it looks to diversify its reserves away from the dollar and hedge against currency depreciation. It’s indicative of gold’s allure that Chinese demand remains so buoyant, despite record prices and a weaker yuan that robs buyers of purchasing power. As a major importer, gold buyers in China often have to pay a premium over international prices. That jumped to $89 an ounce at the start of the month. The average over the past year is $35 versus a historical average of just $7.
Money has flowed into gold ETFs in mainland China during almost every month since June, according to Bloomberg Intelligence. That compares with chunky outflows in gold funds in the rest of the world. Chinese demand could continue to rise as investors look to diversify their holdings with commodities, BI analyst Rebecca Sin said in a note.
Deutsche Bank raised its gold price forecast to an average of $2,400 an ounce for the fourth quarter of 2024 and to $2,600 for fourth quarter of 2025, citing a durable impact from recent investment inflow. Its strategist Michael Hsueh sees tension in the South China Sea as a potential flashpoint that could garner greater attention for gold.
Gold prices rose on Friday and logged a fifth consecutive weekly rise, as fears of further tit-for-tat retaliation between Iran and Israel triggered safe-haven demand.
SILVER IN FOCUS
As it usually happens on stock market, when blue chips rally is slowing, traders start looking for other undervalued shares - silver is becoming interesting as it is lagging behind gold market. After a strong start to the year, silver should remain supported by record industrial usage and a supply deficit, according to the Silver Institute.
Industrial consumption hit an all-time high in 2023 and is expected to expand another 9% this year, driven by green-related applications such as solar panels, the institute said in its World Silver Survey report on Wednesday. That will help the metal record a fourth straight annual supply shortage.
Silver, known as the devil’s metal because of its often wild swings, is trading near a three-year high as it tracks a rally in gold that has partly been fueled by demand for a haven amid geopolitical tensions.
Here are some key figures from the report:
- Silver industrial demand is expected to reach 711 million ounces this year, with usage in solar panels climbing 20% to 232 million ounces.
- Jewelry purchases are seen rising 4%, while bar and coin demand will drop 13%.
- Total silver supply will ease slightly, leading to a deficit of 215 million ounces, the second-highest on record.
TACTICAL GOLD DRIVERS
Concern about the rapidly rising U.S. government debt is partly behind recent surges in gold prices and bitcoin, even as the Treasury market so far remains relatively sanguine about the country's fiscal path, market observers say. The U.S. budget deficit widened to $1.7 trillion in fiscal year 2023 and is on track to reach $2.6 trillion by 2034, according to the Congressional Budget Office.
U.S. government debt held by the public, meanwhile, is on pace to reach a record 106% of gross domestic product (GDP) in 2028, up from 97% in fiscal year 2023. It has soared to $27 trillion from $17 trillion in early 2020 and $5 trillion in 2007. he unchecked growth of U.S. government debt is gaining more attention as interest rate payments also take a larger bite of the government's budget - in some months exceeding spending on national defense. This worsening trajectory has boosted demand for bitcoin and gold, which are often used as a hedge against inflation and the depreciating purchasing power of the U.S. currency.
The rapidly worsening U.S. fiscal situation remains a key driver for some investors.Michael Hartnett, investment strategist at Bank of America, said in a recent report that recent highs in gold and tech stocks are indicating that the “parlous state of US govt finances" will inevitably lead to policies including yield curve control “to prevent (a) debt crisis.” In yield curve control a central bank buys bonds in order to maintain a target interest rate, which can reduce government borrowing costs.
At the same time, it is interesting that US Treasury reports on raising of foreign holding of the US debt, while we see record sell-off by Hedge funds. Among buyers there are no more "foreign investors" such as China, Arab countries as they were previously, but only puppet Japan and EU countries (mostly Belgium). UK has no more free cash to buy the US debt. Obviously, with all respect to Japan and EU - this burden is too heavy to carry it in long term.
So far, however, several Treasury market indicators show that bonds are not pricing in a worsening fiscal outlook, said Nicholas Colas, co-founder of DataTrek Research.
These include 10-year Treasury yields trading well below those on three-month notes. Real 10-year yields, which “reflect all risks other than future inflation,” are also around the same level as from 2003–2007, when the debt to GDP ratio was half of what it is now.
US Treasuries yields are rising rapidly. Visually, it is clear that the United States has stopped managing its debt, and the situation is out of control. While the financial world behaves like nothing terrible is happening. However, the cost of servicing government debt has doubled since 2020 – to $1 trillion in 2023. BofA forecasts that servicing US debt this year will cost $1.6 trillion if the Fed doesn't cut rates. Interest will become the most expensive budget item, doubling the Pentagon budget.
The problem has no simple solutions: it is impossible to devalue the US dollar, its exchange rate will fall with the rates of other currencies (yen, euro, yuan); default on US Treasuries will lead to financial, and then political and military disasters. Therefore, the only way is prolonged dollar inflation, which will eat up the American debt, and with it capital, savings and income, equalizing the rights and opportunities of the hegemon with those of Argentina. However, the robbery of a country very rich in resources (Russia, China, Iran) will push the problem back for a couple of decades. But this seems hardly possible now.
Inflation undermines confidence in the dollar as an instrument of trade, savings and investment - something on which its hegemony rests. The Fed does not have a plan on how to slow down inflation without breaking the global financial system into small pieces due to the fall in the value of US Treasuries. And this is financial zugzwang.
Along with construction and transport, fast food is a kind of basket of goods and services (groceries, wages, utilities, rent, delivery), and therefore reflects trends well. Try to find deflation there, for example, the threat of which was discussed a lot six months ago.
The sanctions on Russian non-ferrous metals, just introduced by England and the USA, will definitely not reduce inflation, but rather accelerate it. And the growth of oil by 22% from local lows also seems to hint that the “beard of expectations” this time will bristle straight upward. According to the chart below, it will be about 10-12% by January 2025, and according to BigMac
Strategical Issues
Finally, let's just briefly mention recent House decision to expropriate Russian assets and force to TikTok to sell business in China under the hazard of blocking. It reality this decision is much deeper than it seems. First is, the confiscation of Russian assets makes no big fiscal sense, because the US has only $5Bln which is like the pie for the elephant. Foreign investors already are not buying the US debt. With this decision the US has buried principles of "inviolability of private property" which is suicide for global reserve currency. As principle of fair competition, trying to steal Chinese company.
Although Russia has ~ 20 times more the US assets on its territory, we're interested in a bit different thing. What particular reason has forced to unite Republicans with democrats and approve this initiative? Under what reason two domestic political rivals start acting together? We suggest that the only one explanation could be. it means that really big problems stand inside, the question of survival on the table, that exclude any future strategical planning and cooperation. Apparently, there is no hope of getting out of the tangle of problems, so you need to take everything you can get your hands on.
We consider this precedent as a gift for gold market. Now US Dollar instead starts getting some toxic features - doesn't guaranty safety and inviolability, doesn't guarantee inflation protection, becoming the political tool and weapon for resolving US problems. Hardly this collection of features will be attractive in long term among investors. Dollar mass start returning back in the US as soon as major owners of global commodity reserves stop using it for pricing. And effect of dollar weakness accumulation will be long-term and spin up in time.
Thus, we do not see any signs that our long-term bullish strategy is coming to an end. We even see more long term supportive factors for further gold appreciation. Yes, for day by day trading gold is becoming more volatile and difficult, as sharp swings are becoming stronger and less predictable due speculative multiplication. But for investing and wealth preservation we see no flaws in gold by far.
