Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
So, on gold we see the same slow performance as on EUR. Probably sooner rather than later but activity will come back. Who knows, maybe on next week due to CPI report. This week our report consists of two parts. Yesterday we've discussed recent CBO forecast and clearly has shown that either US Treasury plans will fail or we will get negative GDP numbers in III and IVQ of 2024, or in the beginning of 2025 at best. As one of the factors that are not under full control of the Fed and US Treasury is banking shortfall that could be triggered by real estate market, and devaluation of mortgage bonds. And this could happen not only in the US but in EU either. It seems that the Fed and J. Yellen have reserves, are prepared, but you can't be sure for 100%. BTFP programme is closing on 11th of March... Second is the short-term debt refinancing. US Treasury will have to replace ~$9 Trln of expired debt with the new one. And now impossible to say what demand will be for this debt. Minor rate growth will increase paper loss on banks' balances and this could trigger the chain reaction, when banking problems will push yields higher and higher yields will keep increasing loss on the balances. Here Yellen counts on big banks activity and possible takeovers, when big fish eats small ones.
As you understand, the cornerstone of this plans is at least stable or better decreasing inflation. But this is the most weak point for now. Also it has huge importance for gold market because it directly impacts on real interest rates that supposedly could start dropping again, supporting gold performance.
Market overview
Gold dropped to more than a one-week low on Monday, weighed down by a higher dollar and bond yields after a solid U.S. jobs report and remarks from Federal Reserve officials dashed expectations of early interest rate cuts. The blowout job growth and large wage gains dashed prospects of a Fed rate cut next month. Traders also lowered their bets for a cut in borrowing costs at the end of the U.S. central bank's April 30-May 1 meeting.
Minneapolis Fed President Neel Kashkari said on Monday that a resilient U.S. economy and a possibly higher neutral rate of interest means the central bank can take time before deciding to reduce interest rates. The Fed can be "prudent" in deciding when to cut its policy rate, with a strong economy allowing central bankers time to build confidence that inflation will fall further, Fed Chair Jerome Powell said in an interview.
Traders now see about 61% probability of an interest rate cut from the Fed in May, according to the CME Fedwatch tool, opens new tab. Lower interest rates decrease the opportunity cost of holding non-yielding bullion.
Physical gold dealers in India charged premiums this week for the first time in four months encouraged by a pick-up in purchases as local prices eased, while the approaching Lunar New Year festival boosted activity in China and elsewhere. Wedding season demand has slowly started gaining momentum, encouraging some jewellers to make purchases, said a Mumbai-based bullion dealer with a private bank. Weddings are a major driver of gold purchases in India.
Physical gold and silver sales in China hit six-year high. On the eve of the Lunar New Year in China, gold has become more expensive than ever , but consumers still find many reasons to buy the precious metal.
Gold in China, a major importer, usually commands a premium to the world price, and the yuan is relatively weak , which further increases the cost of the metal for consumers - but does nothing to stop them. Gold jewelry, once considered old-fashioned, is now attracting interest among younger audiences in China. Gold is now being handled by the most modern designers, emphasizes Nikos Kavalis from Metals Focus.
Gold slipped on Friday and was heading for a weekly fall, pressured by elevated Treasury yields, while investors awaited next week's U.S. inflation data for more clues on the timing of the Federal Reserve's interest rate cuts. Benchmark 10-year U.S. Treasury yields rose to a two-week high, and two-year yields hit an almost two-month high.
Revised government data showed on Friday that U.S. monthly consumer prices rose less than initially estimated in December. Market participants now await U.S. consumer price index (CPI) for January, due on Tuesday.
INFLATION
So, right now from everywhere we hear calls that inflation is almost defeated. Central banks make rosy forecast of further inflation drop, especially in EU and its normalizing by the end of 2024. Different surveys show that consumer inflation expectations have improved as in short-term as in long-term period:
The same is in the US - chart of short-term consumer inflation expectations:
If we take a look at investors' survey from Goldman Sachs, it shows scaring low numbers of those who expect higher rates level. In general, only 22% suggest that rate will raise to the end of 2024:
Meantime, J. Yellen said that higher prices will stand and US Treasury now has no intention to decrease prices, because wages are growing... Hmmm. JP Morgan tells the same - Inflation and the U.S. presidential election will be the biggest drivers of global markets this year, while liquidity challenges are a growing focus, according to traders surveyed by JPMorgan. Some 27% of traders see inflation as having the biggest impact, followed by 20% for the November election, the survey published on Tuesday showed.
Liquidity availability neared the top of the list of trading challenges at 24%, up from 22% last year, while access to liquidity remained traders' biggest market structure concern. Chi Nzelu, global head of macro e-Trading at JPMorgan, said as electronic trading grows in prominence, having consistent access to liquidity across a breadth of providers was becoming more important to investors.
Bill Gross tells the same - yields is too low on US Treasury market. Below you could see that Retail Sales in EU are dropping, together with production and other indicators. EU meantime reports on raising of consumer spending.
We can only note that if the rate of decline in EU sales remains the same as in January, then more than 10 will be released per year.% … This is already a financial disaster.
While Central Banks report on raising consumer confidence, the reality could be different. According to the latest consumer credit data released by the Federal Reserve, in the last month of 2023, total consumer debt rose by a paltry $1.561 billion, which is not only nearly 90% short of the consensus of $15.9 billion, but also 22 billion lower than in November. It could mean that the American consumer finally running out of steam:
Now we're coming to some data that looks not pleasant as for ECB as for the Fed. Mostly it relates to commodity prices.
It seems, guys that we will get faster and sharper inflation spike than in 2021 year. Attacks on waterways lead to major changes in energy flows - we already have shown many times that shipping costs have increased ~4 times. The separation of global financial markets are going with the forecast - $1.7 trillion has left China, while $1.4 trillion came to the USA. DXY rose from 102 to 104 in a month. It could grow more if the yuan would drop more), but it’s not over yet.
At the same time, the problems in the US banking sector have not gone away - that is, money went only to large banks, while small ones suffered and continue to suffer. On the upper floors of the financial pyramid there is a flood, on the lower floors they are thirsty. Let me remind you that a reversal on the DXY will mean the end of the capital separation process and, at best, will trigger stagflationary sideways trend almost everywhere. and at worst - a collapse.
f everything is as wonderful in the United States as news makers, official macro statistics and market sentiment are trying to convince us, why do alternative indicators of business activity remain at depressive levels?
Commodity prices rose sharply in January compared to last month. In the future, raw material prices are expected to continue to rise at a faster rate than finished product prices, resulting in margin compression. The composite index of industrial activity from the regional offices of the Fed fell sharply in January to the level at which the crisis had always previously occurred, repeating the minimum values since Covid-19 May 2020. Somehow the strongest recovery impulse since the late 90s is not visible? The real manufacturing economy is in crisis, at least according to the perception of managers.
In general we see a radical change in the structure of the US spending, which is becoming a major change in the vector of US policy from “internal”, when the main recipients of budget money are American businesses and citizens, to “external”, when creditors, often located in another (sometimes hostile) jurisdiction, begin to receive a huge part of the American budget - Japan, China, etc. From some point of view, the US is loosing its financial independence:
On a background of all these stuff, we start hearing statements about scaring Debt level, not just from some secondary analysts, but from the primary persons, such as J. Yellen, J. Dimon, N. Taleb and others. By the way, JP Morgan is undergoing personnel changes. There is one of two things here - either they change the team to match the current and future economic situation, or they take the team out of harm's way so that there is someone to blame the consequences on. Speculation about his departure is already underway. So if, under such conditions (this has not yet been written about annual bonuses and options), he, as a billionaire, by the way, also leaves, then for sure he is running away from responsibility.
Conclusion:
By our view we see huge underestimation of inflationary risk and higher rates level among market society. Usually, when some event is widely ignored - it is going to happen. Now the Fed and US Treasury stand on the razor thin way and have to pray for inflation spike doesn't happen until election day. Active manipulation by statistics data by US statistics authorities and ~ $1.4Trln cash reserves let the J&J (Powell and Yellen) keep vision of improvement, providing cash to raising stock markets and supporting it hypertrophy growth. These factors make holding effect on gold market, do not let it to show active growth. Still, gold has uncontrolled geopolitical factor and US inner political factor where we see a lot of absolutely amazing events.
If our theory is correct, gold in most part of 2024 could spend in wide range, with potentially deeper retracement on weekly/daily charts, but without braking major upside tendency. We treat this period as a good one for accumulation. As longer gold stands sideways, as more explosive rally could happen later. To make it starting, we consider few factors - inflationary spike (which is ripening already), huge drop in the US GDP which is unavoidable by our opinion in late 2024 early 2025, US Dollar devaluation. By products on these event will be crush of stock market and drop of real interest rates.
So, on gold we see the same slow performance as on EUR. Probably sooner rather than later but activity will come back. Who knows, maybe on next week due to CPI report. This week our report consists of two parts. Yesterday we've discussed recent CBO forecast and clearly has shown that either US Treasury plans will fail or we will get negative GDP numbers in III and IVQ of 2024, or in the beginning of 2025 at best. As one of the factors that are not under full control of the Fed and US Treasury is banking shortfall that could be triggered by real estate market, and devaluation of mortgage bonds. And this could happen not only in the US but in EU either. It seems that the Fed and J. Yellen have reserves, are prepared, but you can't be sure for 100%. BTFP programme is closing on 11th of March... Second is the short-term debt refinancing. US Treasury will have to replace ~$9 Trln of expired debt with the new one. And now impossible to say what demand will be for this debt. Minor rate growth will increase paper loss on banks' balances and this could trigger the chain reaction, when banking problems will push yields higher and higher yields will keep increasing loss on the balances. Here Yellen counts on big banks activity and possible takeovers, when big fish eats small ones.
As you understand, the cornerstone of this plans is at least stable or better decreasing inflation. But this is the most weak point for now. Also it has huge importance for gold market because it directly impacts on real interest rates that supposedly could start dropping again, supporting gold performance.
Market overview
Gold dropped to more than a one-week low on Monday, weighed down by a higher dollar and bond yields after a solid U.S. jobs report and remarks from Federal Reserve officials dashed expectations of early interest rate cuts. The blowout job growth and large wage gains dashed prospects of a Fed rate cut next month. Traders also lowered their bets for a cut in borrowing costs at the end of the U.S. central bank's April 30-May 1 meeting.
Minneapolis Fed President Neel Kashkari said on Monday that a resilient U.S. economy and a possibly higher neutral rate of interest means the central bank can take time before deciding to reduce interest rates. The Fed can be "prudent" in deciding when to cut its policy rate, with a strong economy allowing central bankers time to build confidence that inflation will fall further, Fed Chair Jerome Powell said in an interview.
Traders now see about 61% probability of an interest rate cut from the Fed in May, according to the CME Fedwatch tool, opens new tab. Lower interest rates decrease the opportunity cost of holding non-yielding bullion.
Physical gold dealers in India charged premiums this week for the first time in four months encouraged by a pick-up in purchases as local prices eased, while the approaching Lunar New Year festival boosted activity in China and elsewhere. Wedding season demand has slowly started gaining momentum, encouraging some jewellers to make purchases, said a Mumbai-based bullion dealer with a private bank. Weddings are a major driver of gold purchases in India.
Physical gold and silver sales in China hit six-year high. On the eve of the Lunar New Year in China, gold has become more expensive than ever , but consumers still find many reasons to buy the precious metal.
Gold in China, a major importer, usually commands a premium to the world price, and the yuan is relatively weak , which further increases the cost of the metal for consumers - but does nothing to stop them. Gold jewelry, once considered old-fashioned, is now attracting interest among younger audiences in China. Gold is now being handled by the most modern designers, emphasizes Nikos Kavalis from Metals Focus.
Gold slipped on Friday and was heading for a weekly fall, pressured by elevated Treasury yields, while investors awaited next week's U.S. inflation data for more clues on the timing of the Federal Reserve's interest rate cuts. Benchmark 10-year U.S. Treasury yields rose to a two-week high, and two-year yields hit an almost two-month high.
Revised government data showed on Friday that U.S. monthly consumer prices rose less than initially estimated in December. Market participants now await U.S. consumer price index (CPI) for January, due on Tuesday.
INFLATION
So, right now from everywhere we hear calls that inflation is almost defeated. Central banks make rosy forecast of further inflation drop, especially in EU and its normalizing by the end of 2024. Different surveys show that consumer inflation expectations have improved as in short-term as in long-term period:
The same is in the US - chart of short-term consumer inflation expectations:
If we take a look at investors' survey from Goldman Sachs, it shows scaring low numbers of those who expect higher rates level. In general, only 22% suggest that rate will raise to the end of 2024:
Meantime, J. Yellen said that higher prices will stand and US Treasury now has no intention to decrease prices, because wages are growing... Hmmm. JP Morgan tells the same - Inflation and the U.S. presidential election will be the biggest drivers of global markets this year, while liquidity challenges are a growing focus, according to traders surveyed by JPMorgan. Some 27% of traders see inflation as having the biggest impact, followed by 20% for the November election, the survey published on Tuesday showed.
Liquidity availability neared the top of the list of trading challenges at 24%, up from 22% last year, while access to liquidity remained traders' biggest market structure concern. Chi Nzelu, global head of macro e-Trading at JPMorgan, said as electronic trading grows in prominence, having consistent access to liquidity across a breadth of providers was becoming more important to investors.
Bill Gross tells the same - yields is too low on US Treasury market. Below you could see that Retail Sales in EU are dropping, together with production and other indicators. EU meantime reports on raising of consumer spending.
We can only note that if the rate of decline in EU sales remains the same as in January, then more than 10 will be released per year.% … This is already a financial disaster.
While Central Banks report on raising consumer confidence, the reality could be different. According to the latest consumer credit data released by the Federal Reserve, in the last month of 2023, total consumer debt rose by a paltry $1.561 billion, which is not only nearly 90% short of the consensus of $15.9 billion, but also 22 billion lower than in November. It could mean that the American consumer finally running out of steam:
Now we're coming to some data that looks not pleasant as for ECB as for the Fed. Mostly it relates to commodity prices.
It seems, guys that we will get faster and sharper inflation spike than in 2021 year. Attacks on waterways lead to major changes in energy flows - we already have shown many times that shipping costs have increased ~4 times. The separation of global financial markets are going with the forecast - $1.7 trillion has left China, while $1.4 trillion came to the USA. DXY rose from 102 to 104 in a month. It could grow more if the yuan would drop more), but it’s not over yet.
At the same time, the problems in the US banking sector have not gone away - that is, money went only to large banks, while small ones suffered and continue to suffer. On the upper floors of the financial pyramid there is a flood, on the lower floors they are thirsty. Let me remind you that a reversal on the DXY will mean the end of the capital separation process and, at best, will trigger stagflationary sideways trend almost everywhere. and at worst - a collapse.
f everything is as wonderful in the United States as news makers, official macro statistics and market sentiment are trying to convince us, why do alternative indicators of business activity remain at depressive levels?
- ISM Industrial Index at 49.1 - the latest reading means the index has been in contraction territory for 15 straight months ( the longest streak of contractions since the 2008 crisis ) after a 29-month period of growth since June 2020;
- Empire State Manufacturing - The General Business Conditions Index fell twenty-nine points to -43.7, the lowest since May 2020. New orders and shipments also fell significantly;
- Dallas Fed Manufacturing. Activity in Texas fell in January after stabilizing in December. The current value is the lowest since April 2020 and the second worst value during the monetary policy tightening period since March 2022.
- Kansas City Fed Manufacturing – fell sharply in January to its lowest levels in two years, repeating the minimum since June 2020
- Philly Fed Manufacturing Index shows no signs of improvement . For 18 of the last 20 months it has been in the negative area, repeating the anti-record of 2008
- NFIB business optimism Index - the mood index of small and medium-sized businesses has remained motionless at minimum levels since the 2008-2009 crisis.
Commodity prices rose sharply in January compared to last month. In the future, raw material prices are expected to continue to rise at a faster rate than finished product prices, resulting in margin compression. The composite index of industrial activity from the regional offices of the Fed fell sharply in January to the level at which the crisis had always previously occurred, repeating the minimum values since Covid-19 May 2020. Somehow the strongest recovery impulse since the late 90s is not visible? The real manufacturing economy is in crisis, at least according to the perception of managers.
In general we see a radical change in the structure of the US spending, which is becoming a major change in the vector of US policy from “internal”, when the main recipients of budget money are American businesses and citizens, to “external”, when creditors, often located in another (sometimes hostile) jurisdiction, begin to receive a huge part of the American budget - Japan, China, etc. From some point of view, the US is loosing its financial independence:
On a background of all these stuff, we start hearing statements about scaring Debt level, not just from some secondary analysts, but from the primary persons, such as J. Yellen, J. Dimon, N. Taleb and others. By the way, JP Morgan is undergoing personnel changes. There is one of two things here - either they change the team to match the current and future economic situation, or they take the team out of harm's way so that there is someone to blame the consequences on. Speculation about his departure is already underway. So if, under such conditions (this has not yet been written about annual bonuses and options), he, as a billionaire, by the way, also leaves, then for sure he is running away from responsibility.
Conclusion:
By our view we see huge underestimation of inflationary risk and higher rates level among market society. Usually, when some event is widely ignored - it is going to happen. Now the Fed and US Treasury stand on the razor thin way and have to pray for inflation spike doesn't happen until election day. Active manipulation by statistics data by US statistics authorities and ~ $1.4Trln cash reserves let the J&J (Powell and Yellen) keep vision of improvement, providing cash to raising stock markets and supporting it hypertrophy growth. These factors make holding effect on gold market, do not let it to show active growth. Still, gold has uncontrolled geopolitical factor and US inner political factor where we see a lot of absolutely amazing events.
If our theory is correct, gold in most part of 2024 could spend in wide range, with potentially deeper retracement on weekly/daily charts, but without braking major upside tendency. We treat this period as a good one for accumulation. As longer gold stands sideways, as more explosive rally could happen later. To make it starting, we consider few factors - inflationary spike (which is ripening already), huge drop in the US GDP which is unavoidable by our opinion in late 2024 early 2025, US Dollar devaluation. By products on these event will be crush of stock market and drop of real interest rates.
