Sive Morten
Special Consultant to the FPA
- Messages
- 18,771
Fundamentals
Yesterday we've taken a look at recent NFP data and some secondary indicators that show a bit "different" picture. Besides, problems in the US economy become more evident. In gold report we take a look at some points of Chinese economy, which is just a mirror of the US one. It is naive to suggest that the US and China economies could show different direction. They are two sides of the same medal. And performance of Chinese economy confirms this statement. Second is, we take a look at some moments of gold market itself.
Market overview
Gold fell more than 2% after hitting an all-time high on Monday, but zero-yield bullion's retreat halted above $2,000 an ounce after traders trimmed bets for the first rate cut by the U.S. Federal Reserve in early 2024. The Fed appears on track to end the year with interest rate hikes as a thing of the past, but with a coming challenge over when and how to signal a turn to rate cuts.
"Despite the fact that we are closer to a Federal Reserve pivot, it may be premature to see these prices being sustained... this market is getting a little tired," said Bart Melek, head of commodity strategies at TD Securities. We're going to need more catalysts, and they will come in the form of weak economic data."
Safe-haven inflows driven by wars in Ukraine and the Middle East, coupled with the rate cut bets, have driven a more than 10% rise in bullion prices. Lower interest rates make zero-yield gold more attractive than competing assets such as bonds and the dollar.
Anticipation of monetary easing is the biggest driver of gold now and prices should move higher into next year, said Daniel Pavilonis, senior market strategist at RJO Futures.
The momentum that propelled gold to a record high on Monday may fizzle in the short term due to uncertainty over the timing of U.S. monetary easing, but wider geopolitical risks should give a boost towards fresh peaks, analysts said. Data showed U.S. job openings fell to a more than two-and-a-half year low in October, signalling that higher interest rates were dampening demand for workers.
Reuters poll saw rates unchanged until at least July. The market consensus is for a soft landing in the U.S., which historically makes gold less attractive. Still, geopolitical tensions in a critical election year alongside central bank buying could support gold in 2024, the World Gold Council said.
Gold retreated back under $2,000 an ounce on Friday as the dollar and Treasury yields strengthened after traders trimmed bets for U.S. interest rate cuts to materialize by March following stronger-than-expected jobs data. U.S. job growth accelerated in November while the unemployment rate fell to 3.7%, signaling underlying labor market strength that made traders bet that it could take the Federal Reserve until May to deliver the first reduction in a series of interest-rate cuts next year.
"Gold has slumped as the U.S. employment report showed strength across the board," said Tai Wong, a New York-based independent metals trader. This close at lows, $150 below Sunday's all-time high, has shifted the narrative on the Fed meeting. Now, gold bulls are hoping for a friendly Fed result that will prevent a deeper correction, if not a rout."
Traders awaited up-to-date interest rate projections for next year from the Fed policy meeting on Dec. 12-13.
CHINA
Partially we've touched this topic last time and shown that despite all government efforts, they can't boost the economy. In fact China now is coming on the same slip way where the US has passed - trying to boost economy with budget spending and stimulus. In fact, Japan does the same. But with the debt around 260% GDP Japan now is reaping bitter fruits of this policy - inflation jumps to the all time highs, consumption drops, population is loosing wealth. Everybody tells about the US debt problems. But China's debt in terms of percent of GDP almost the same as in the US. And they do not have big space for maneuver.
As the US as China understand that they need external demand, consumption to stimulate economy, despite that China's population 3-4 times greater than in the US. Unfortunately the wealth degree is also different, so both countries are aimed on Middle and South Asia markets where concentrated 40% of population in the world.
Deflationary processes in China continue to expand; in November, consumer prices showed the strongest annual decline since 2009 -0.5% y/y ; over the month prices also decreased by 0.5%, and these are not individual categories. Consumer goods remained one of the main factors of decline (-0.5% m/m and -1.4% y/y), food also plays a role (-0.9% m/m and -4.2% y/y), but there is last year's base effect. Services also recorded a price decline of 0.4% m/m in November; as a result, the annual dynamics here slowed down to 1% y/y.
Without taking into account energy and food, consumer inflation in China recorded -0.3% m/m and +0.6% y/y.
Producer prices for the month decreased by 0.3% m/m, and showed a decrease of 3% y/y. At the same time, as for goods in terms of consumption: non-durable goods increased in price by only 0.2% y/y, durable goods remain in a deflationary cycle of -2.2% y/y. Those. from this side, there are no hints of accelerating inflation yet, because production capacity is excessive.
As long as China lacks the courage to pursue more aggressive monetary and fiscal stimulus , the end result is that the real rate does nothing to encourage a shift away from the savings model. This is increasingly moving history towards the “Japaneseization” of the economy. Although their caution is also understandable - it is difficult to soften policy when it is tough throughout the rest of the world. They are simply trying to wait for the stakes in the world to unfold.
In a good way, they need to both stimulate domestic demand and begin to actively pump up external demand (for their production) with cheap loans in yuan for their exports, but the administrative system, it seems, is simply not ready for such “creativity.” Measures so far, have for the most part fallen short, with confidence fragile among consumers and factory managers. Beijing needs a return of animal spirits to fill the hole left by patchy property market growth.
Retail sales data on Dec. 15 will provide an update, after figures out in recent days showed a surprise contraction for imports - suggesting subdued domestic demand - even as exports unexpectedly rebounded. Real estate remains the elephant in the room though, and was at the heart of a Moody's decision to cut the outlook for China's debt rating - a move reverberating through Chinese capital markets all week.
Meantime, Beijing is preparing for a record bond issuance this year. Data last week showed that activity in both manufacturing and services contracted in November. This reinforces the belief that more government action is needed to support the faltering economic recovery. Xi Jinping recently made it clear that a sharp slowdown in growth and persistent deflationary risks are unacceptable. As a result, the deficit-to-GDP ratio in 2023 will be 3.8%, well above the long-held limit of 3%.
But this is not all yet. Moody's has cut outlook for Hong Kong and Macao as well. Moody's said the moves for Hong Kong and Macau reflected their tight political, institutional, economic and financial links with China under their "One Country, Two Systems" arrangements. Of course, nobody believes in "independence" of the US rating agencies. They always were and will be a political tool.
Moody’s lowered the rating of the United States for a reason. China will continue to be undermined. And yet, yes, they began to put them down. True, there is a nuance - if you cut the rating, and there are still funds in Chinese securities, this will only lead to an increase in their losses and nothing else. And this is not “terrible Russia”, where there wasn’t much money, and if there were, it was insignificant combat losses. But with China everything is much more complicated. However, only cowards pay back loans; the Americans are definitely not afraid of difficulties; on the contrary, they themselves create them for everyone where they need them and where they don’t need them.
So, China has no choice other than lowering the rate and pumping up external demand. Because domestic consumer demand is not only a function of monetary and fiscal policy, but also a function of the unknown sentiments of the population. Whatever money they have. The savings model as a consequence of three years of lockdowns is quite understandable. Young people especially have fallen into apathy. They don’t want anything, neither work, nor consume, nor achieve anything. I believe that those who are older, realizing that the state can go for lockdowns, began to save for rainy days.
Therefore, the method of stimulating the economy through external demand by lending yuan to buyers of Chinese products is the only way out. This, by the way, is more similar to the model of a conditional Germany than to the USA.
But this is a departure from the usual export model. But to do this the entire financial system must be restructured. Because it is one thing in Zimbabwe to build a mine for yuan, supply Chinese equipment and workers there, and transport the products to China, and another thing is to take on the credit risk of a borrower in another currency zone. In general, they will have to open up and they are not ready for this.
The major conclusion that we could make concerning China that relates to the Gold market - with insufficient inner consumer power and external restrictions from the West, despite what efforts government will do - they will not be able to boost domestic growth. This, in turn, will make impact primarily on the US, but indirectly on the whole Globe economy. As things will go worse, as higher degree of confrontation between the US and China will be. In long-term perspective, this could become one of the major drivers of Gold market.
Other drivers that we have considered last week (if you remember we've considered a big bulk of gold drivers, which are very important), mostly are derivative ones from this particular issue. Because as raising demand for physical gold among central banks, as problems with holding a "paper" short position in COMEX futures just are consequences.
... and 2 cents on politics
This week we've got, I would say, local culmination of recent events. They are twofold. First is, The United Arab Emirates has announced that it will no longer sell oil for dollars. This is an important fact, especially given the visit of the Russian President to the UAE and Saudi Arabia, followed by a meeting the next day (already in Moscow) with Iranian President Raisi.
All these events mean the continuation of the destruction of US political dominance, which, of course, is based on the deterioration of the economic situation (see the next section of the Review). At the same time, the deterioration is not yet critical, since pricing in the main markets (including the oil market) is still taking place in US dollars. But this is only half of the story.
This week V. Putin has officially announced his participation in President's run in next year. This tells very important thing - now he could focus on local affairs, which means that he's got some "agreement on foreign arena. If you track the sequence of mutual meetings, first he comes to UAE, S. Arabia and next day he has met Iranian leader in Moscow. This has happened right on Hanukkah first day celebration. Now we have to add another important detail - J. Biden impeachment theme turns public. The Jewish Diaspora in Russia is totally controlled by UK. While the US and Israel positions are becoming almost opposite in terms of Gaza question. The Palestinian Authority is working with US officials on a plan to run Gaza after the ongoing war is over, with one of its top leaders arguing that Israel’s aim to fully defeat Hamas is unrealistic and the militant group should instead join it under a new governing structure.
UK stands on the back of Gaza (and Venezuela Gayana turmoil) conflict to delay US from focusing on confrontation with China. Saudi Prince has postponed UK visit in favor of V. Putin meeting. US doesn't want to give control over EU in the hands of UK. At the same time, they need stable oil prices and relative stability in Middle East. If we take "2+2" then, it seems that some big agreement is achieved. We should know it in nearest time. For now this is just a suggestion. But, supposedly, Iran agrees to provide stability in MIddle East together with Arabian countries, while Russia, Hungary and Slovakia could start process of re-creation analog of Austria Hungary Empire. Taking in consideration recent shift in policy around Ukraine and raising of far right political forces in Germany, Netherlands, it might be true.
Finally turning J. Biden impeachment topic into public sphere means that under cover of the US domestic political struggle, bankers (liberals) are loosing weight, while followers of MAGA project (i.e. Industrialists) take the lead. Thus, some agreements probably are achieved with this "new" elites that should take the governing of the country in next year.
About Gold
Let's say a little about gold. Pay attention to what happened to the price in 2008. After the crisis began, the price began to decline, although a local maximum was observed at the beginning of 2008. The reason for this was a huge shortage of liquidity (discussed this yesterday), which is why everything that was in the portfolios was sold, just to cover the emerging holes and debts.
Not necessary we'll see a repeat of the pattern. If the Fed reacts in time (as it did with the banking crisis in March) and begins to flood everything with liquidity, then it is likely that we will not see significant fluctuations.
Not necessary we'll see a repeat of the pattern. If the Fed reacts in time (as it did with the banking crisis in March) and begins to flood everything with liquidity, then it is likely that we will not see significant fluctuations. Previously pullbacks on gold market could last longer than the average trader's career. But now situation could go different because of three "D" - Dept, De-dollarization, Deficit (Budget, goods etc). All these "D" are exacerbated during CV19 crisis. And now, when global financial system is used as a "weapon" against Russia, Iran, Afghanistan and other countries is changing the mind of other countries and view on "safety" issue.
Finally, this is just no room to fall any more:
All these moments tell us, that despite current pullback - gold will return back to the top and very soon. As faster events will spin up, as stronger rally will become. We consider current downside drop as a chance to get better entry price and as a "deep to buy"
Yesterday we've taken a look at recent NFP data and some secondary indicators that show a bit "different" picture. Besides, problems in the US economy become more evident. In gold report we take a look at some points of Chinese economy, which is just a mirror of the US one. It is naive to suggest that the US and China economies could show different direction. They are two sides of the same medal. And performance of Chinese economy confirms this statement. Second is, we take a look at some moments of gold market itself.
Market overview
Gold fell more than 2% after hitting an all-time high on Monday, but zero-yield bullion's retreat halted above $2,000 an ounce after traders trimmed bets for the first rate cut by the U.S. Federal Reserve in early 2024. The Fed appears on track to end the year with interest rate hikes as a thing of the past, but with a coming challenge over when and how to signal a turn to rate cuts.
"Despite the fact that we are closer to a Federal Reserve pivot, it may be premature to see these prices being sustained... this market is getting a little tired," said Bart Melek, head of commodity strategies at TD Securities. We're going to need more catalysts, and they will come in the form of weak economic data."
Safe-haven inflows driven by wars in Ukraine and the Middle East, coupled with the rate cut bets, have driven a more than 10% rise in bullion prices. Lower interest rates make zero-yield gold more attractive than competing assets such as bonds and the dollar.
Anticipation of monetary easing is the biggest driver of gold now and prices should move higher into next year, said Daniel Pavilonis, senior market strategist at RJO Futures.
"Geopolitics can play an important role in moving gold up, for the remainder of this year and next year."
Gold bulls are exhausted and hitting a pause after the rally, said Jim Wyckoff, senior analyst at Kitco Metals, adding that "the $2,000 level is probably going to be the near-term floor under the gold market."
The momentum that propelled gold to a record high on Monday may fizzle in the short term due to uncertainty over the timing of U.S. monetary easing, but wider geopolitical risks should give a boost towards fresh peaks, analysts said. Data showed U.S. job openings fell to a more than two-and-a-half year low in October, signalling that higher interest rates were dampening demand for workers.
"We only expect the (gold) price to rise lastingly to $2,100 per troy ounce in the second half of 2024, when the Fed begins lowering its interest rates," Commerzbank said in a note.
While we expect macro headwinds to weigh on precious metals short positions in the medium term, the current set-up is ripe for a squeeze," analysts at TD Securities said in a note.
"The markets have gotten in front of themselves on the interest rate expectations," said Chris Gaffney, president of world markets at EverBank, adding that the only risk to metals prices next year was if "the Fed has to keep rates higher for longer."
While "drivers for a further gold rally are set in place," gold should consolidate and spend some time testing these new price levels, said Everett Millman, chief market analyst at Gainesville Coins.
Reuters poll saw rates unchanged until at least July. The market consensus is for a soft landing in the U.S., which historically makes gold less attractive. Still, geopolitical tensions in a critical election year alongside central bank buying could support gold in 2024, the World Gold Council said.
Gold retreated back under $2,000 an ounce on Friday as the dollar and Treasury yields strengthened after traders trimmed bets for U.S. interest rate cuts to materialize by March following stronger-than-expected jobs data. U.S. job growth accelerated in November while the unemployment rate fell to 3.7%, signaling underlying labor market strength that made traders bet that it could take the Federal Reserve until May to deliver the first reduction in a series of interest-rate cuts next year.
"Gold has slumped as the U.S. employment report showed strength across the board," said Tai Wong, a New York-based independent metals trader. This close at lows, $150 below Sunday's all-time high, has shifted the narrative on the Fed meeting. Now, gold bulls are hoping for a friendly Fed result that will prevent a deeper correction, if not a rout."
Traders awaited up-to-date interest rate projections for next year from the Fed policy meeting on Dec. 12-13.
"With a great deal of easing already priced into the market, both silver and gold will continue to see periods where convictions could be challenged," Ole Hansen, Saxo Bank's head of commodity strategy, said in a weekly note.
CHINA
Partially we've touched this topic last time and shown that despite all government efforts, they can't boost the economy. In fact China now is coming on the same slip way where the US has passed - trying to boost economy with budget spending and stimulus. In fact, Japan does the same. But with the debt around 260% GDP Japan now is reaping bitter fruits of this policy - inflation jumps to the all time highs, consumption drops, population is loosing wealth. Everybody tells about the US debt problems. But China's debt in terms of percent of GDP almost the same as in the US. And they do not have big space for maneuver.
As the US as China understand that they need external demand, consumption to stimulate economy, despite that China's population 3-4 times greater than in the US. Unfortunately the wealth degree is also different, so both countries are aimed on Middle and South Asia markets where concentrated 40% of population in the world.
Deflationary processes in China continue to expand; in November, consumer prices showed the strongest annual decline since 2009 -0.5% y/y ; over the month prices also decreased by 0.5%, and these are not individual categories. Consumer goods remained one of the main factors of decline (-0.5% m/m and -1.4% y/y), food also plays a role (-0.9% m/m and -4.2% y/y), but there is last year's base effect. Services also recorded a price decline of 0.4% m/m in November; as a result, the annual dynamics here slowed down to 1% y/y.
Without taking into account energy and food, consumer inflation in China recorded -0.3% m/m and +0.6% y/y.
Producer prices for the month decreased by 0.3% m/m, and showed a decrease of 3% y/y. At the same time, as for goods in terms of consumption: non-durable goods increased in price by only 0.2% y/y, durable goods remain in a deflationary cycle of -2.2% y/y. Those. from this side, there are no hints of accelerating inflation yet, because production capacity is excessive.
As long as China lacks the courage to pursue more aggressive monetary and fiscal stimulus , the end result is that the real rate does nothing to encourage a shift away from the savings model. This is increasingly moving history towards the “Japaneseization” of the economy. Although their caution is also understandable - it is difficult to soften policy when it is tough throughout the rest of the world. They are simply trying to wait for the stakes in the world to unfold.
In a good way, they need to both stimulate domestic demand and begin to actively pump up external demand (for their production) with cheap loans in yuan for their exports, but the administrative system, it seems, is simply not ready for such “creativity.” Measures so far, have for the most part fallen short, with confidence fragile among consumers and factory managers. Beijing needs a return of animal spirits to fill the hole left by patchy property market growth.
Retail sales data on Dec. 15 will provide an update, after figures out in recent days showed a surprise contraction for imports - suggesting subdued domestic demand - even as exports unexpectedly rebounded. Real estate remains the elephant in the room though, and was at the heart of a Moody's decision to cut the outlook for China's debt rating - a move reverberating through Chinese capital markets all week.
Meantime, Beijing is preparing for a record bond issuance this year. Data last week showed that activity in both manufacturing and services contracted in November. This reinforces the belief that more government action is needed to support the faltering economic recovery. Xi Jinping recently made it clear that a sharp slowdown in growth and persistent deflationary risks are unacceptable. As a result, the deficit-to-GDP ratio in 2023 will be 3.8%, well above the long-held limit of 3%.
But this is not all yet. Moody's has cut outlook for Hong Kong and Macao as well. Moody's said the moves for Hong Kong and Macau reflected their tight political, institutional, economic and financial links with China under their "One Country, Two Systems" arrangements. Of course, nobody believes in "independence" of the US rating agencies. They always were and will be a political tool.
Moody’s lowered the rating of the United States for a reason. China will continue to be undermined. And yet, yes, they began to put them down. True, there is a nuance - if you cut the rating, and there are still funds in Chinese securities, this will only lead to an increase in their losses and nothing else. And this is not “terrible Russia”, where there wasn’t much money, and if there were, it was insignificant combat losses. But with China everything is much more complicated. However
So, China has no choice other than lowering the rate and pumping up external demand. Because domestic consumer demand is not only a function of monetary and fiscal policy, but also a function of the unknown sentiments of the population. Whatever money they have. The savings model as a consequence of three years of lockdowns is quite understandable. Young people especially have fallen into apathy. They don’t want anything, neither work, nor consume, nor achieve anything. I believe that those who are older, realizing that the state can go for lockdowns, began to save for rainy days.
Therefore, the method of stimulating the economy through external demand by lending yuan to buyers of Chinese products is the only way out. This, by the way, is more similar to the model of a conditional Germany than to the USA.
But this is a departure from the usual export model. But to do this the entire financial system must be restructured. Because it is one thing in Zimbabwe to build a mine for yuan, supply Chinese equipment and workers there, and transport the products to China, and another thing is to take on the credit risk of a borrower in another currency zone. In general, they will have to open up and they are not ready for this.
The major conclusion that we could make concerning China that relates to the Gold market - with insufficient inner consumer power and external restrictions from the West, despite what efforts government will do - they will not be able to boost domestic growth. This, in turn, will make impact primarily on the US, but indirectly on the whole Globe economy. As things will go worse, as higher degree of confrontation between the US and China will be. In long-term perspective, this could become one of the major drivers of Gold market.
Other drivers that we have considered last week (if you remember we've considered a big bulk of gold drivers, which are very important), mostly are derivative ones from this particular issue. Because as raising demand for physical gold among central banks, as problems with holding a "paper" short position in COMEX futures just are consequences.
... and 2 cents on politics
This week we've got, I would say, local culmination of recent events. They are twofold. First is, The United Arab Emirates has announced that it will no longer sell oil for dollars. This is an important fact, especially given the visit of the Russian President to the UAE and Saudi Arabia, followed by a meeting the next day (already in Moscow) with Iranian President Raisi.
All these events mean the continuation of the destruction of US political dominance, which, of course, is based on the deterioration of the economic situation (see the next section of the Review). At the same time, the deterioration is not yet critical, since pricing in the main markets (including the oil market) is still taking place in US dollars. But this is only half of the story.
This week V. Putin has officially announced his participation in President's run in next year. This tells very important thing - now he could focus on local affairs, which means that he's got some "agreement on foreign arena. If you track the sequence of mutual meetings, first he comes to UAE, S. Arabia and next day he has met Iranian leader in Moscow. This has happened right on Hanukkah first day celebration. Now we have to add another important detail - J. Biden impeachment theme turns public. The Jewish Diaspora in Russia is totally controlled by UK. While the US and Israel positions are becoming almost opposite in terms of Gaza question. The Palestinian Authority is working with US officials on a plan to run Gaza after the ongoing war is over, with one of its top leaders arguing that Israel’s aim to fully defeat Hamas is unrealistic and the militant group should instead join it under a new governing structure.
UK stands on the back of Gaza (and Venezuela Gayana turmoil) conflict to delay US from focusing on confrontation with China. Saudi Prince has postponed UK visit in favor of V. Putin meeting. US doesn't want to give control over EU in the hands of UK. At the same time, they need stable oil prices and relative stability in Middle East. If we take "2+2" then, it seems that some big agreement is achieved. We should know it in nearest time. For now this is just a suggestion. But, supposedly, Iran agrees to provide stability in MIddle East together with Arabian countries, while Russia, Hungary and Slovakia could start process of re-creation analog of Austria Hungary Empire. Taking in consideration recent shift in policy around Ukraine and raising of far right political forces in Germany, Netherlands, it might be true.
Finally turning J. Biden impeachment topic into public sphere means that under cover of the US domestic political struggle, bankers (liberals) are loosing weight, while followers of MAGA project (i.e. Industrialists) take the lead. Thus, some agreements probably are achieved with this "new" elites that should take the governing of the country in next year.
About Gold
Let's say a little about gold. Pay attention to what happened to the price in 2008. After the crisis began, the price began to decline, although a local maximum was observed at the beginning of 2008. The reason for this was a huge shortage of liquidity (discussed this yesterday), which is why everything that was in the portfolios was sold, just to cover the emerging holes and debts.
Not necessary we'll see a repeat of the pattern. If the Fed reacts in time (as it did with the banking crisis in March) and begins to flood everything with liquidity, then it is likely that we will not see significant fluctuations.
Not necessary we'll see a repeat of the pattern. If the Fed reacts in time (as it did with the banking crisis in March) and begins to flood everything with liquidity, then it is likely that we will not see significant fluctuations. Previously pullbacks on gold market could last longer than the average trader's career. But now situation could go different because of three "D" - Dept, De-dollarization, Deficit (Budget, goods etc). All these "D" are exacerbated during CV19 crisis. And now, when global financial system is used as a "weapon" against Russia, Iran, Afghanistan and other countries is changing the mind of other countries and view on "safety" issue.
Finally, this is just no room to fall any more:
All these moments tell us, that despite current pullback - gold will return back to the top and very soon. As faster events will spin up, as stronger rally will become. We consider current downside drop as a chance to get better entry price and as a "deep to buy"