Sive Morten
Special Consultant to the FPA
- Messages
- 18,664
Fundamentals
Geopolitical problems are raising like mushrooms after the rain. That's why nobody has signed in between, the CPI numbers. With started war in Yemen, everybody has forgotten about the Fed and inflation, that is, by the way, start raising again. Media mostly operates with emotional background, reporting about events but do not discover big numbers that stand behind one or another event. When we dig a bit deeper and see numbers - it discovers really scaring consequences of these events. The same is about Taiwan elections, by the way... Everybody knows that pro-US candidate has won but few knows what does it mean... Generally speaking, global situation suggest that demand for the gold hardly will drop any time soon.
Market overview
Gold prices eased on Wednesday ahead of U.S. inflation data that could shape the Federal Reserve's outlook on interest rate cuts this year, although a softer dollar kept a floor under prices. A New York Federal Reserve report revealed that consumers expect a decline in inflation, while Fed Governor Michelle Bowman on Monday stated that the U.S. central bank's monetary policy seems "sufficiently restrictive".
Hotter-than-expected inflation data, and hawkish remarks from Federal Reserve officials fuelled worries that higher interest rates could stay unchanged beyond March. The dollar index (.DXY) extended gains after data showed U.S. consumer prices rose more than expected in December, which could delay a much anticipated U.S. rate cut in March.
Cleveland Fed President Loretta Mester said it would likely be too soon for the central bank to cut its policy rate in March, while Richmond Fed chief Tom Barkin said gains on inflation have been too narrowly focused on goods. Traders see an 80% probability of an interest rate cut in March, according to the CME Fedwatch tool.
Gold prices scaled a one-week peak on Friday as an escalation in the Middle East conflict fuelled safe-haven buying, while softer U.S. producer price inflation boosted bets that the Federal Reserve might cut interest rates sooner. Bullion was mostly flat on the week, but extended its run above the $2,000 level to nearly a month. U.S. gold futures settled 1.6% higher at $2,051.60.
U.S. and Britain launched air strikes across Yemen in retaliation against Houthi forces for attacks on Red Sea shipping that the Iran-backed fighters cast as a response to the war in Gaza. Iran condemned the attacks, warning that it will fuel "insecurity and instability" in the region. A rise in geopolitical risk is pushing gold prices up, and at the same time, the U.S. central bank may be getting ready to start moderating its restrictive monetary policy, said Bart Melek, head of commodity strategies at TD Securities.
U.S. producer prices unexpectedly fell in December amid declining costs for goods such as diesel fuel and food, suggesting inflation would continue to subside. Investors typically seek haven in gold in times of geopolitical and economic uncertainty. At the same time, they want to own the precious metal in a rate-cutting cycle. Bullion usually has an inverted relationship with rates — the lower rates, the higher it climbs.
While recent US economic data point to a bumpy path ahead for policymakers trying to bring down inflation to a 2% target, traders appear to be focused on the timing and size of the Federal Reserve’s shift to lowering borrowing costs.
Results of the week
As we've mentioned yesterday, the Fed has got bad surprise, because their long term plan could fail. The Fed now sees the major task as to spend 2024 Election year without big jump in inflation and simultaneously with stable households' wealth. As personal savings are melting, somewhere in April-May the Fed supposedly should come with some type of QE, no matter what it will be. In this case, they could last time to postpone aggressive inflation spike on 2025. Now, with raising CPI everything is breaking apart - they haven't started yet to cut rates but inflation is already raising. Oil is turning up again due widening Middle East conflict. And it is total disaster in Global logistics:
Every second ton of cargo passing through the Red Sea (Suez, Bab El Mandeb) travels in a container, he most marginal market of all listed is the transportation of containers, and the Red Sea is the most important artery connecting European and Asian markets.
Economical consequences are awful. First is, a military operation in the Bab el-Mandeb Strait and the Red Sea could stop all sea traffic between Europe and Asia that goes through the Suez Canal, which is almost 15% of all world trade. This route transports 12% of all marine oil and 8% of all natural gas annually. Brent oil, for example, has already responded with a sharp rise and rose 2% overnight to $78.86 .
Many shipping companies have already begun sending ships around Africa, but this adds 10 days to delivery times and at least $1 million in extra fuel per ship. The insurance premium will naturally increase.
Europe will feel the logistical blow the most. In “normal” times, maritime import logistics accounts for about 7% of the cost of goods, but now this figure can easily exceed 20% . In Covid 2021, when the Evergreen accident occurred in the Suez Canal, this figure reached 25% .
The Shanghai container shipping index very quickly grew from 1 to 2.2 thousand points, and the cost of delivering one 40-foot container from China to Europe rose from $1,148 to $4,000 . In general, if Western countries fail to quickly resolve the issue with Yemen, then inflation in an already unhappy Europe will begin to rise, and population consumption will rapidly fall.
Cargo ship traffic is down 50% since the end of November. Shipping insurance does not cover war risks. Insurance increased by 300–500% (0.2–0.7% of the value of the vessel/cargo). Cargo ships, not tankers, are hit the hardest. Egypt loses about $10 million a day on this. While Volvo and Tesla already report on interruption of parts delivery and stop production until mid February, because bulk of components are made in China. In Volvo case, this is transmission parts.
Maersk, in a desperate situation, is trying to compensate for the double blow - the blocking of transit in the Red Sea and the drying up of the Panama Canal . To solve the problem, the company is moving some of the containers to the railway running through Panama. But all these efforts are doomed.
Due to Red Sea crisis, the cargo shipping market is reshaping. 4 of the top 5 world leaders in container shipping have their headquarters in continental Europe. Only the Chinese operator Cosco was randomly included in this list:
- Mediterranean Shipping Company (MSC) Geneva, Switzerland;
- AP Moller-Maersk Group (Maersk) – Copenhagen, Denmark;
- CMA CGM Group (CMA) – Marseille, France;
- Hapag Lloyd – Hamburg, Germany.
The world's largest logistics container operators do not include companies from the United States or Great Britain, but the navies of these countries have been protecting commercial shipping through the Red Sea, chasing Houthi drones for almost a month.
As a result of this mess, Chinese operators Cosco and Evergreen have already received huge competitive advantages: there has been a multiple increase in prices for transporting containers from Asia to Europe. At the same time, Cosco and Evergreen maintained their traditional sailing routes through the Red Sea, that is, they kept costs at pre-war levels.
But this is not the end of the story yet. Petrodollar system is broken. It means that the US now can't export inflation in other countries and finance it by devaluation of other currencies. For decades, the petrodollar played on the financial system of the US and its allies - Japan, EU etc. To combat inflation, the Fed begins to raise rates, which leads to an influx of capital into the American dollar. This influx raises the dollar's value against other currencies, primarily developing countries.
The rising dollar, among other things, reduced the cost of oil, the main resource of civilization. Cheaper oil had a deflationary effect on the dollar. Dollar inflation slowed sharply, but living standards fell in oil-exporting countries. The petrodollar is one way to transmit inflation from the United States to the developing world.
This instrument, as been broken. The dollar has risen in price in recent months, but oil has held back from falling and vice versa.
Taking in consideration the scale of ongoing processes and that the war in Yemen has not even started yet, we suspect that it will be nightmare effect, when real interest rates could drop under the floor and even deeper. So, the second stage of inflationary spiral unavoidable.
If the acceleration of inflation begins in 2024 and reaches its peak by the winter of 2024-2025, then a third peak can be expected in 2026, and a fourth in winter 2027-2028. At the first peak, the official CPI was 8-9%, the second - the minimum is worth waiting for 10-12%, about the third and fourth it is still difficult to say - if everything does not go into hyper, then it is possible that the CPI will go somewhere for the rest of the period range 10-15%.
Simple question is - what the Fed could do to avoid it? Could it, say, raise rate more? Nope, besides, 0.25-0.5% rate hike will not help at all. While the Fed is already at the edge. Economy is breaking apart. And here is valuable comments come.
First is, from Commerzbank, but for the truth sake, it is needed to say that this is the only meaningful comment.
Former PIMCO boss, Bill Gross aka "Bond King" tells that US Treasuries are not attractive right now and overpriced. He does not consider its purchase for now.
BlackRock, the heart of the shadow banking system, has stepped up its infrastructure/real asset purchases. The largest private manager in the world is buying the investment fund Global Infrastructure Partners for $12.5 billion.
“In terms of its potential consequences for the United States and Great Britain, this event may turn out to be more significant than demonstrative attacks on Houthi positions and Rishi Sunak’s no less demonstrative visit to Kiev.”
GIP’s portfolio includes investments in the assets of London Gatwick Airport, Edinburgh and Sydney airports, the ports of Melbourne and Brisbane, the SUEZ Group of companies, etc.” + add: Saavi Energía, the largest private electricity supplier in Mexico, LNG plants: Freeport (second largest in the USA) and Rio Grande projects in Texas, Gladstone LNG in Australia, as well as ADNOC gas pipelines (UAE network).
This is no longer a bell, but a beep that we need to escape from government bonds and other bubbles. The sovereign debt crisis is "Nigh", as they say.
This tells very simple thing - the yield of the US bond will be unattractive and insufficient to compensate inflation. Actually they have said this in May 2023.
Liquidity Problems are already here
Meantime, while traders dream about QE, it seems its already here. In recent week the outflows from the Fed REPO accounts have stopped. Despite that now all banks who have free liquidity are making arbitrage:
The rate under the Fed's term bank facility is 4.83% compared to 5.59% in September. ️Institutions with Fed accounts can borrow from BTFP at 4.83% and keep them at the central bank to earn 5.40% interest on reserve balances. This explains why REPO accounts are falling - everybody transfer money to Reserve accounts.
But this week, REPO accounts outflows stops and Fed balance has increased at highest level since March 2023, which is not surprising due massive contraction of M2 :
Frome this point of view coming government shutdown brings a fresh coat of paint. And the US coming to this point with shocking numbers. Besides, things have gotten worse in backyard of the US stock market.
if you look at the jobs created in 2023, you can see that consumer demand was greatly supported by job growth among public sector employees (in a broad sense), although before that the trend was flatter.
By and large, this is a great way to avoid a recession by increasing government spending (and the budget deficit). And this is not very good, because civil servants generally do not create value in the economy, but only redistribute it. I think everyone remembers last year’s story with the hiring of tens of thousands of people in the tax service - the best example of re-distributors.
The shutdown will potentially have a greater and greater effect on demand as time goes on, since when the work of various departments is stopped, more and more government employees will lose income, and jobs in other industries will not appear much.
In a government shutdown, broader spending cuts are more likely to have an impact, since GDP growth is currently driven by a colossal budget deficit of 8% of GDP, which is financed by rising public debt. Take away this deficit and GDP will collapse, and unemployment will fly somewhere to 10-12%.
But in order to start this fatal process, political will and correct timing are needed. Trump said here that he does not want to become the next Herbert Hoover. A seasoned conspiracy theorist will say that this could be a bold hint to the Republican majority that it is necessary to finish negotiating the budget and initiate a recession and crisis, so that Trump, along with the Republicans, will appear as saviors in the next election cycle, raking up the problems created by the Democrats. But this is what conspiracy theorists will say.
So, it seems that it is prosperous time for gold market, and first signs we should see in 2-3 months, when fruits of global collapse will find the way in the US statistics. See, today we were talking about absolutely different topics, at first glance having no relation to the gold market. But, with a deeper look, we could see how everything is related to each other in modern world.
Geopolitical problems are raising like mushrooms after the rain. That's why nobody has signed in between, the CPI numbers. With started war in Yemen, everybody has forgotten about the Fed and inflation, that is, by the way, start raising again. Media mostly operates with emotional background, reporting about events but do not discover big numbers that stand behind one or another event. When we dig a bit deeper and see numbers - it discovers really scaring consequences of these events. The same is about Taiwan elections, by the way... Everybody knows that pro-US candidate has won but few knows what does it mean... Generally speaking, global situation suggest that demand for the gold hardly will drop any time soon.
Market overview
Gold prices eased on Wednesday ahead of U.S. inflation data that could shape the Federal Reserve's outlook on interest rate cuts this year, although a softer dollar kept a floor under prices. A New York Federal Reserve report revealed that consumers expect a decline in inflation, while Fed Governor Michelle Bowman on Monday stated that the U.S. central bank's monetary policy seems "sufficiently restrictive".
Hotter-than-expected inflation data, and hawkish remarks from Federal Reserve officials fuelled worries that higher interest rates could stay unchanged beyond March. The dollar index (.DXY) extended gains after data showed U.S. consumer prices rose more than expected in December, which could delay a much anticipated U.S. rate cut in March.
Cleveland Fed President Loretta Mester said it would likely be too soon for the central bank to cut its policy rate in March, while Richmond Fed chief Tom Barkin said gains on inflation have been too narrowly focused on goods. Traders see an 80% probability of an interest rate cut in March, according to the CME Fedwatch tool.
Gold prices scaled a one-week peak on Friday as an escalation in the Middle East conflict fuelled safe-haven buying, while softer U.S. producer price inflation boosted bets that the Federal Reserve might cut interest rates sooner. Bullion was mostly flat on the week, but extended its run above the $2,000 level to nearly a month. U.S. gold futures settled 1.6% higher at $2,051.60.
U.S. and Britain launched air strikes across Yemen in retaliation against Houthi forces for attacks on Red Sea shipping that the Iran-backed fighters cast as a response to the war in Gaza. Iran condemned the attacks, warning that it will fuel "insecurity and instability" in the region. A rise in geopolitical risk is pushing gold prices up, and at the same time, the U.S. central bank may be getting ready to start moderating its restrictive monetary policy, said Bart Melek, head of commodity strategies at TD Securities.
U.S. producer prices unexpectedly fell in December amid declining costs for goods such as diesel fuel and food, suggesting inflation would continue to subside. Investors typically seek haven in gold in times of geopolitical and economic uncertainty. At the same time, they want to own the precious metal in a rate-cutting cycle. Bullion usually has an inverted relationship with rates — the lower rates, the higher it climbs.
While recent US economic data point to a bumpy path ahead for policymakers trying to bring down inflation to a 2% target, traders appear to be focused on the timing and size of the Federal Reserve’s shift to lowering borrowing costs.
Results of the week
As we've mentioned yesterday, the Fed has got bad surprise, because their long term plan could fail. The Fed now sees the major task as to spend 2024 Election year without big jump in inflation and simultaneously with stable households' wealth. As personal savings are melting, somewhere in April-May the Fed supposedly should come with some type of QE, no matter what it will be. In this case, they could last time to postpone aggressive inflation spike on 2025. Now, with raising CPI everything is breaking apart - they haven't started yet to cut rates but inflation is already raising. Oil is turning up again due widening Middle East conflict. And it is total disaster in Global logistics:
Every second ton of cargo passing through the Red Sea (Suez, Bab El Mandeb) travels in a container, he most marginal market of all listed is the transportation of containers, and the Red Sea is the most important artery connecting European and Asian markets.
Economical consequences are awful. First is, a military operation in the Bab el-Mandeb Strait and the Red Sea could stop all sea traffic between Europe and Asia that goes through the Suez Canal, which is almost 15% of all world trade. This route transports 12% of all marine oil and 8% of all natural gas annually. Brent oil, for example, has already responded with a sharp rise and rose 2% overnight to $78.86 .
Many shipping companies have already begun sending ships around Africa, but this adds 10 days to delivery times and at least $1 million in extra fuel per ship. The insurance premium will naturally increase.
Europe will feel the logistical blow the most. In “normal” times, maritime import logistics accounts for about 7% of the cost of goods, but now this figure can easily exceed 20% . In Covid 2021, when the Evergreen accident occurred in the Suez Canal, this figure reached 25% .
The Shanghai container shipping index very quickly grew from 1 to 2.2 thousand points, and the cost of delivering one 40-foot container from China to Europe rose from $1,148 to $4,000 . In general, if Western countries fail to quickly resolve the issue with Yemen, then inflation in an already unhappy Europe will begin to rise, and population consumption will rapidly fall.
Cargo ship traffic is down 50% since the end of November. Shipping insurance does not cover war risks. Insurance increased by 300–500% (0.2–0.7% of the value of the vessel/cargo). Cargo ships, not tankers, are hit the hardest. Egypt loses about $10 million a day on this. While Volvo and Tesla already report on interruption of parts delivery and stop production until mid February, because bulk of components are made in China. In Volvo case, this is transmission parts.
Maersk, in a desperate situation, is trying to compensate for the double blow - the blocking of transit in the Red Sea and the drying up of the Panama Canal . To solve the problem, the company is moving some of the containers to the railway running through Panama. But all these efforts are doomed.
Due to Red Sea crisis, the cargo shipping market is reshaping. 4 of the top 5 world leaders in container shipping have their headquarters in continental Europe. Only the Chinese operator Cosco was randomly included in this list:
- Mediterranean Shipping Company (MSC) Geneva, Switzerland;
- AP Moller-Maersk Group (Maersk) – Copenhagen, Denmark;
- CMA CGM Group (CMA) – Marseille, France;
- Hapag Lloyd – Hamburg, Germany.
The world's largest logistics container operators do not include companies from the United States or Great Britain, but the navies of these countries have been protecting commercial shipping through the Red Sea, chasing Houthi drones for almost a month.
As a result of this mess, Chinese operators Cosco and Evergreen have already received huge competitive advantages: there has been a multiple increase in prices for transporting containers from Asia to Europe. At the same time, Cosco and Evergreen maintained their traditional sailing routes through the Red Sea, that is, they kept costs at pre-war levels.
But this is not the end of the story yet. Petrodollar system is broken. It means that the US now can't export inflation in other countries and finance it by devaluation of other currencies. For decades, the petrodollar played on the financial system of the US and its allies - Japan, EU etc. To combat inflation, the Fed begins to raise rates, which leads to an influx of capital into the American dollar. This influx raises the dollar's value against other currencies, primarily developing countries.
The rising dollar, among other things, reduced the cost of oil, the main resource of civilization. Cheaper oil had a deflationary effect on the dollar. Dollar inflation slowed sharply, but living standards fell in oil-exporting countries. The petrodollar is one way to transmit inflation from the United States to the developing world.
This instrument, as been broken. The dollar has risen in price in recent months, but oil has held back from falling and vice versa.
Taking in consideration the scale of ongoing processes and that the war in Yemen has not even started yet, we suspect that it will be nightmare effect, when real interest rates could drop under the floor and even deeper. So, the second stage of inflationary spiral unavoidable.
If the acceleration of inflation begins in 2024 and reaches its peak by the winter of 2024-2025, then a third peak can be expected in 2026, and a fourth in winter 2027-2028. At the first peak, the official CPI was 8-9%, the second - the minimum is worth waiting for 10-12%, about the third and fourth it is still difficult to say - if everything does not go into hyper, then it is possible that the CPI will go somewhere for the rest of the period range 10-15%.
Simple question is - what the Fed could do to avoid it? Could it, say, raise rate more? Nope, besides, 0.25-0.5% rate hike will not help at all. While the Fed is already at the edge. Economy is breaking apart. And here is valuable comments come.
First is, from Commerzbank, but for the truth sake, it is needed to say that this is the only meaningful comment.
Former PIMCO boss, Bill Gross aka "Bond King" tells that US Treasuries are not attractive right now and overpriced. He does not consider its purchase for now.
BlackRock, the heart of the shadow banking system, has stepped up its infrastructure/real asset purchases. The largest private manager in the world is buying the investment fund Global Infrastructure Partners for $12.5 billion.
“In terms of its potential consequences for the United States and Great Britain, this event may turn out to be more significant than demonstrative attacks on Houthi positions and Rishi Sunak’s no less demonstrative visit to Kiev.”
GIP’s portfolio includes investments in the assets of London Gatwick Airport, Edinburgh and Sydney airports, the ports of Melbourne and Brisbane, the SUEZ Group of companies, etc.” + add: Saavi Energía, the largest private electricity supplier in Mexico, LNG plants: Freeport (second largest in the USA) and Rio Grande projects in Texas, Gladstone LNG in Australia, as well as ADNOC gas pipelines (UAE network).
This is no longer a bell, but a beep that we need to escape from government bonds and other bubbles. The sovereign debt crisis is "Nigh", as they say.
This tells very simple thing - the yield of the US bond will be unattractive and insufficient to compensate inflation. Actually they have said this in May 2023.
Liquidity Problems are already here
Meantime, while traders dream about QE, it seems its already here. In recent week the outflows from the Fed REPO accounts have stopped. Despite that now all banks who have free liquidity are making arbitrage:
The rate under the Fed's term bank facility is 4.83% compared to 5.59% in September. ️Institutions with Fed accounts can borrow from BTFP at 4.83% and keep them at the central bank to earn 5.40% interest on reserve balances. This explains why REPO accounts are falling - everybody transfer money to Reserve accounts.
But this week, REPO accounts outflows stops and Fed balance has increased at highest level since March 2023, which is not surprising due massive contraction of M2 :
Frome this point of view coming government shutdown brings a fresh coat of paint. And the US coming to this point with shocking numbers. Besides, things have gotten worse in backyard of the US stock market.
if you look at the jobs created in 2023, you can see that consumer demand was greatly supported by job growth among public sector employees (in a broad sense), although before that the trend was flatter.
By and large, this is a great way to avoid a recession by increasing government spending (and the budget deficit). And this is not very good, because civil servants generally do not create value in the economy, but only redistribute it. I think everyone remembers last year’s story with the hiring of tens of thousands of people in the tax service - the best example of re-distributors.
The shutdown will potentially have a greater and greater effect on demand as time goes on, since when the work of various departments is stopped, more and more government employees will lose income, and jobs in other industries will not appear much.
In a government shutdown, broader spending cuts are more likely to have an impact, since GDP growth is currently driven by a colossal budget deficit of 8% of GDP, which is financed by rising public debt. Take away this deficit and GDP will collapse, and unemployment will fly somewhere to 10-12%.
But in order to start this fatal process, political will and correct timing are needed. Trump said here that he does not want to become the next Herbert Hoover. A seasoned conspiracy theorist will say that this could be a bold hint to the Republican majority that it is necessary to finish negotiating the budget and initiate a recession and crisis, so that Trump, along with the Republicans, will appear as saviors in the next election cycle, raking up the problems created by the Democrats. But this is what conspiracy theorists will say.
So, it seems that it is prosperous time for gold market, and first signs we should see in 2-3 months, when fruits of global collapse will find the way in the US statistics. See, today we were talking about absolutely different topics, at first glance having no relation to the gold market. But, with a deeper look, we could see how everything is related to each other in modern world.
Last edited:
