Sive Morten
Special Consultant to the FPA
- Messages
- 18,771
Fundamentals
Beyond the debt ceil raising, which was able to take big burden off the shoulders of US financial authorities, there is another one event has happened, mostly political sphere, which could be important for gold market in perspective of 8-12 months. The White House was have to make a decision on geopolitical activity - either to stay in Europe and keep fighting with Russia until the last Ukrainian, Polack etc. Or, leave EU battleground for its own and turn to China. By indirect signs it seems that decision has been made...
Market overview
Gold firmed supported by lower Treasury yields but the dollar's strength, with more interest rate hikes in the offing and optimism about a U.S. debt deal kept bullion on course for its first monthly dip in three. It has lost nearly 1.1% this month and over $100 from near-record highs scaled earlier in May.
Any decision by the Fed to hold its benchmark overnight interest rate steady should not be taken to mean the U.S. central bank is done tightening monetary policy, Fed Governor Philip Jefferson said. Key support around $1,950 could fuel momentum trade to push gold back to $2,000, said Edward Moya, senior market analyst at OANDA.
According to the World Gold Council 2023 Central Bank Gold Reserve survey, 24% of central banks plan to add more gold to their reserves in the next 12 months. According to the WGC, “The planned purchases are chiefly motivated by increased buying of domestic gold production, rebalancing to a more preferred strategic level of gold holdings, and financial market concerns including higher crisis risks and rising inflation. Adding to these concerns is the banking sector crisis in the United States and Europe which began in early 2023.”
Seventy-one percent of central banks surveyed believe the overall level of global reserves will increase in the next 12 months. That was a 10-point increase over last year.
According to the survey, “Gold’s ‘historical position’ continues to be the top reason for central banks to hold gold, with 77% of respondents saying that it is highly relevant or somewhat relevant. This was followed by gold’s performance during times of crisis (74%), ‘long-term store of value/inflation hedge’ (74%), ‘effective portfolio diversifier” (70%), and ‘no default risk’ (68%).”
After a record-setting 2022, central banks continued to buy gold in the first quarter of 2023, setting a new Q1 record. Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971. It was the 13th straight year of net central bank gold purchases.
As expected, gold has turned in a fairly strong start to the month. It’s below April but is still early in the contract.
One factor that can drive total delivery volume is mid-month activity. Historically, this has been a tailwind for greater delivery volume. This month, it has started as a headwind. So far, the number of contracts that have cash settled has reached a new record. The House account activity shows more stress in the market. BofA has had to step up and deliver a huge chunk of gold (5k contracts). Starting in 2021, BofA has become much more active and seems to be serving as a backstop to the physical market. Accumulating metal in quieter periods and then delivering out when the market comes under stress.
As mentioned above, BofA was accumulating metal last month (when the price was higher) and the five months prior, only to deliver a large amount this month. Seems strange…
The physical inventory continues to demonstrate erratic behavior as well. In the last few days, metal actually moved out of Registered. This means as the delivery window approached, vaults reduced the amount of metal available for delivery. This could have been a factor driving cash settlement.
The theory is that right before the delivery period started, the available delivery supply dropped, prompting the need for cash settlement. Supposedly the actual metal available for delivery is much smaller than what is displayed on the daily stocks report.
Concerning recent NFP report, there were few interesting observations been made. First is, in May it is maximum deviation of BLS number from Households survey. The BLS reported that a whopping 339k jobs were added in May. This crushed median estimates of 190k jobs added. The Household Survey tells a very different story though, reporting a loss of 310k.
Due to the big gap this month of more than 600k jobs, the Household Survey has fallen below the Headline Report YTD 1.47m vs 1.57m. Keep in mind, the Household Survey is still averaging 294k jobs a month which is quite strong.
Second is - the BLS continues to issue jobs reports that defy reality and expectations. Last month, the jobs report broke a record as having been the 13th consecutive job report where the market underestimated the numbers. This means that for the 14th month in a row, the jobs report has surprised to the upside. How is that possible? How much stock can we put in these numbers? If the Fed is living by the job’s numbers, they could die by the job’s numbers. More likely though, something will break before the jobs data reflects a collapsing economy. That’s when the Fed will rush to step in with liquidity. They already did it on a small scale with SVB. Expect the next one to be much bigger!
Despite all of the mainstream talk about a strong, resilient economy, corporate bankruptcies through the first four months of 2023 came in at the highest level since 2010. Meanwhile, monthly bankruptcy filings have hit numbers last seen during the peak of the pandemic. According to data from S&P Global Market Intelligence, there were 235 corporate bankruptcy filings through April. That’s a 116.5% increase over the same period in 2022.
There were 70 bankruptcy filings in March alone. The last time we saw numbers that high was at the peak of the pandemic in the summer of 2020. The number of bankruptcy filings dropped to 54 in April, but that was still at levels similar to the pandemic period.
Meantime, Pimco Says Gold Is Overvalued Now, But Has Long-Term Appeal. Gold still looks too expensive after recent declines, according to a Pimco managing director who says sticky inflation will make it difficult for the Federal Reserve to meaningfully cut rates.
The precious metal fell in May, with prices retreating from just shy of a record early in the month. More losses could be in store, even if it’s well-supported over the longer term, according to Greg Sharenow, who manages a portfolio focused on energy and commodities at Pacific Investment Management Co. Bullion is “modestly over-valued” compared with inflation-linked government bonds, or TIPs, and those are probably better value in multi-asset portfolios for now, he said in an interview. Real bond yields are likely to stay higher for longer, he said, pressuring non-interest bearing gold.
Mild recessions in developed markets are “more than likely”, but while the Fed may be nearing the end of its tightening cycle, that doesn’t preclude another hike, the Pimco executive said. Central banks could struggle to bring down rates in the face of de-globalization and so-called “greenflation” as the world shifts from fossil fuels to renewable energy.
Still, the long-term outlook for gold — which Sharenow calls a 25-year duration asset — looks brighter as central banks look to diversify holdings away from dollar assets. There’s already been a “tremendous amount of interest” from central banks that have helped support bullion at recent levels, he said.
GEOPOLITICAL DECISION
Thus, as we've said, first important solution was to decide - either to tight or release monetary policy. Second one is geopolitical strategy, that no doubts will have economical impact as well. As we've said above - the United States must decide whether to leave Europe as a key region of its control (as a whole, as part of the world) or switch to Southeast Asia. The first option practically guarantees that China will capture Southeast Asia fairly quickly, after which it will become almost impossible to stop it by US forces.
This scenario practically guarantees the withdrawal of the United States not only from the position of a world leader, but also, in the interval of 15-20 years, even from the position of one of 4-5 equal world leaders. In addition, it closes the possibilities of industrialization of AUKUS, which is actually the only scenario for the strategic development of the United States today (after the collapse of the liberal model of globalization). But on the other hand, it allows us to preserve NATO and, perhaps, even close any opportunities for Russia to interact with Western Europe.
In addition, this option is much clearer and more pleasant to the old liberal elites who grew up hating the USSR/Russia and the new liberal elites who are used to interacting (often corrupt) with China.
The second option involves closing costly scenarios in Europe (such as building a "barrier" between Russia and Western Europe, from Finland to Turkey; NATO support; euro support through loans to ECB, etc.) and starting work to limit China's ability to enter world markets. To do this, it is necessary to destroy the statehood of Burma and Laos as much as possible and create a "security arc" from the Philippines to Japan, which will limit the output of Chinese goods to the Pacific Ocean. At the same time, it is also desirable to limit the exit of Chinese ships to the Pacific Ocean through the Sea of Okhotsk, which is controlled by Russia.
At the same time, there is no need to fear a critical strengthening of Russia. Yes, Ukraine in this case will definitely come under the control of Russia, as well as, very likely, the Baltic States and Moldova. But, taking into account the need to industrialize Russia and "digest" these territories, where Russophobic ideology has been actively developing for several decades, even the countries of Eastern Europe will reach Russia's hands only in 20 years. If the US manages to industrialize AUKUS during this time, they will return to Europe, if not, this issue will lose relevance.
From the point of view of indirect signs, there are two signals that the decision has been made, at least at an informal, elite level. This is the refusal of the United States to support the opposition to Erdogan in the second round of elections in Turkey (Erdogan will not close any "barrier" against Russia) and the statement of the hero of the day Henry Kissinger that the confrontation between China and the United States in Southeast Asia will sharply intensify in the near future. If this is the case, then by the end of summer this decision will be legalized in the public sphere, with corresponding consequences.
Indeed, if we take a look at recent headlines, the China direction is becoming evident, here are just few of them:
Beyond the debt ceil raising, which was able to take big burden off the shoulders of US financial authorities, there is another one event has happened, mostly political sphere, which could be important for gold market in perspective of 8-12 months. The White House was have to make a decision on geopolitical activity - either to stay in Europe and keep fighting with Russia until the last Ukrainian, Polack etc. Or, leave EU battleground for its own and turn to China. By indirect signs it seems that decision has been made...
Market overview
Gold firmed supported by lower Treasury yields but the dollar's strength, with more interest rate hikes in the offing and optimism about a U.S. debt deal kept bullion on course for its first monthly dip in three. It has lost nearly 1.1% this month and over $100 from near-record highs scaled earlier in May.
"We've had kind of a push-pull effect," amid support from lower yields and pressure from the dollar, said David Meger, director of metals trading, High Ridge Futures. With the job's data relatively strong, concerns about the possibility of further rate hikes would obviously have a tendency to pressure gold... and yet on the other side, we have the PMI data pulling in the opposite direction."
Any decision by the Fed to hold its benchmark overnight interest rate steady should not be taken to mean the U.S. central bank is done tightening monetary policy, Fed Governor Philip Jefferson said. Key support around $1,950 could fuel momentum trade to push gold back to $2,000, said Edward Moya, senior market analyst at OANDA.
According to the World Gold Council 2023 Central Bank Gold Reserve survey, 24% of central banks plan to add more gold to their reserves in the next 12 months. According to the WGC, “The planned purchases are chiefly motivated by increased buying of domestic gold production, rebalancing to a more preferred strategic level of gold holdings, and financial market concerns including higher crisis risks and rising inflation. Adding to these concerns is the banking sector crisis in the United States and Europe which began in early 2023.”
Seventy-one percent of central banks surveyed believe the overall level of global reserves will increase in the next 12 months. That was a 10-point increase over last year.
According to the survey, “Gold’s ‘historical position’ continues to be the top reason for central banks to hold gold, with 77% of respondents saying that it is highly relevant or somewhat relevant. This was followed by gold’s performance during times of crisis (74%), ‘long-term store of value/inflation hedge’ (74%), ‘effective portfolio diversifier” (70%), and ‘no default risk’ (68%).”
Ongoing geopolitical concerns and the resulting impact on inflation, interest rates, and market outlook are certainly front of mind for many central bankers. EMDE central banks in particular have expressed continuing concerns about the impact of geopolitics on their reserve management decisions, with many valuing gold as a way to manage these risks. The future of the international monetary system continues to be in flux, with EMDE central banks also expressing less confidence in the US dollar’s supremacy than their advanced economy counterparts. In the face of these trends and an ever-changing investment environment, central bank gold demand is likely to remain robust.”
After a record-setting 2022, central banks continued to buy gold in the first quarter of 2023, setting a new Q1 record. Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971. It was the 13th straight year of net central bank gold purchases.
As expected, gold has turned in a fairly strong start to the month. It’s below April but is still early in the contract.
One factor that can drive total delivery volume is mid-month activity. Historically, this has been a tailwind for greater delivery volume. This month, it has started as a headwind. So far, the number of contracts that have cash settled has reached a new record. The House account activity shows more stress in the market. BofA has had to step up and deliver a huge chunk of gold (5k contracts). Starting in 2021, BofA has become much more active and seems to be serving as a backstop to the physical market. Accumulating metal in quieter periods and then delivering out when the market comes under stress.
As mentioned above, BofA was accumulating metal last month (when the price was higher) and the five months prior, only to deliver a large amount this month. Seems strange…
The physical inventory continues to demonstrate erratic behavior as well. In the last few days, metal actually moved out of Registered. This means as the delivery window approached, vaults reduced the amount of metal available for delivery. This could have been a factor driving cash settlement.
The theory is that right before the delivery period started, the available delivery supply dropped, prompting the need for cash settlement. Supposedly the actual metal available for delivery is much smaller than what is displayed on the daily stocks report.
Concerning recent NFP report, there were few interesting observations been made. First is, in May it is maximum deviation of BLS number from Households survey. The BLS reported that a whopping 339k jobs were added in May. This crushed median estimates of 190k jobs added. The Household Survey tells a very different story though, reporting a loss of 310k.
Due to the big gap this month of more than 600k jobs, the Household Survey has fallen below the Headline Report YTD 1.47m vs 1.57m. Keep in mind, the Household Survey is still averaging 294k jobs a month which is quite strong.
Second is - the BLS continues to issue jobs reports that defy reality and expectations. Last month, the jobs report broke a record as having been the 13th consecutive job report where the market underestimated the numbers. This means that for the 14th month in a row, the jobs report has surprised to the upside. How is that possible? How much stock can we put in these numbers? If the Fed is living by the job’s numbers, they could die by the job’s numbers. More likely though, something will break before the jobs data reflects a collapsing economy. That’s when the Fed will rush to step in with liquidity. They already did it on a small scale with SVB. Expect the next one to be much bigger!
Despite all of the mainstream talk about a strong, resilient economy, corporate bankruptcies through the first four months of 2023 came in at the highest level since 2010. Meanwhile, monthly bankruptcy filings have hit numbers last seen during the peak of the pandemic. According to data from S&P Global Market Intelligence, there were 235 corporate bankruptcy filings through April. That’s a 116.5% increase over the same period in 2022.
There were 70 bankruptcy filings in March alone. The last time we saw numbers that high was at the peak of the pandemic in the summer of 2020. The number of bankruptcy filings dropped to 54 in April, but that was still at levels similar to the pandemic period.
Meantime, Pimco Says Gold Is Overvalued Now, But Has Long-Term Appeal. Gold still looks too expensive after recent declines, according to a Pimco managing director who says sticky inflation will make it difficult for the Federal Reserve to meaningfully cut rates.
The precious metal fell in May, with prices retreating from just shy of a record early in the month. More losses could be in store, even if it’s well-supported over the longer term, according to Greg Sharenow, who manages a portfolio focused on energy and commodities at Pacific Investment Management Co. Bullion is “modestly over-valued” compared with inflation-linked government bonds, or TIPs, and those are probably better value in multi-asset portfolios for now, he said in an interview. Real bond yields are likely to stay higher for longer, he said, pressuring non-interest bearing gold.
“The biggest challenge one has right now is to figure out the lagged effects of any credit tightening that is coming from some of the central banks,” said Sharenow. “The uncertainty band still remains fairly wide.”
Mild recessions in developed markets are “more than likely”, but while the Fed may be nearing the end of its tightening cycle, that doesn’t preclude another hike, the Pimco executive said. Central banks could struggle to bring down rates in the face of de-globalization and so-called “greenflation” as the world shifts from fossil fuels to renewable energy.
Still, the long-term outlook for gold — which Sharenow calls a 25-year duration asset — looks brighter as central banks look to diversify holdings away from dollar assets. There’s already been a “tremendous amount of interest” from central banks that have helped support bullion at recent levels, he said.
“The safety and security of gold right now has a high currency to them,” he said, “There’s a lot of countries that are questioning their dollar reserves.”
GEOPOLITICAL DECISION
Thus, as we've said, first important solution was to decide - either to tight or release monetary policy. Second one is geopolitical strategy, that no doubts will have economical impact as well. As we've said above - the United States must decide whether to leave Europe as a key region of its control (as a whole, as part of the world) or switch to Southeast Asia. The first option practically guarantees that China will capture Southeast Asia fairly quickly, after which it will become almost impossible to stop it by US forces.
This scenario practically guarantees the withdrawal of the United States not only from the position of a world leader, but also, in the interval of 15-20 years, even from the position of one of 4-5 equal world leaders. In addition, it closes the possibilities of industrialization of AUKUS, which is actually the only scenario for the strategic development of the United States today (after the collapse of the liberal model of globalization). But on the other hand, it allows us to preserve NATO and, perhaps, even close any opportunities for Russia to interact with Western Europe.
In addition, this option is much clearer and more pleasant to the old liberal elites who grew up hating the USSR/Russia and the new liberal elites who are used to interacting (often corrupt) with China.
The second option involves closing costly scenarios in Europe (such as building a "barrier" between Russia and Western Europe, from Finland to Turkey; NATO support; euro support through loans to ECB, etc.) and starting work to limit China's ability to enter world markets. To do this, it is necessary to destroy the statehood of Burma and Laos as much as possible and create a "security arc" from the Philippines to Japan, which will limit the output of Chinese goods to the Pacific Ocean. At the same time, it is also desirable to limit the exit of Chinese ships to the Pacific Ocean through the Sea of Okhotsk, which is controlled by Russia.
At the same time, there is no need to fear a critical strengthening of Russia. Yes, Ukraine in this case will definitely come under the control of Russia, as well as, very likely, the Baltic States and Moldova. But, taking into account the need to industrialize Russia and "digest" these territories, where Russophobic ideology has been actively developing for several decades, even the countries of Eastern Europe will reach Russia's hands only in 20 years. If the US manages to industrialize AUKUS during this time, they will return to Europe, if not, this issue will lose relevance.
From the point of view of indirect signs, there are two signals that the decision has been made, at least at an informal, elite level. This is the refusal of the United States to support the opposition to Erdogan in the second round of elections in Turkey (Erdogan will not close any "barrier" against Russia) and the statement of the hero of the day Henry Kissinger that the confrontation between China and the United States in Southeast Asia will sharply intensify in the near future. If this is the case, then by the end of summer this decision will be legalized in the public sphere, with corresponding consequences.
Indeed, if we take a look at recent headlines, the China direction is becoming evident, here are just few of them:
- China Defense Minister Slams US, Vows to Defend Interests
- U.S., China trade blame as hopes for military dialogue fade
- Does America Still Need Europe?
- The United States is ready for a dialogue with the Russian Federation and China on arms control without preconditions;
- The US is ready to continue to adhere to the quantitative restrictions of the START, if the Russian Federation is ready;
- The United States is ready to develop agreements with the Russian Federation to replace START for the period after 2026, despite the current contradictions;
- The United States will continue to notify the Russian Federation about the launches of its ballistic missiles and exercises of strategic forces;
- China seeks to obtain 1.5 thousand nuclear warheads by 2035 and refuses to have a dialogue on stratability with the United States;
- The United States believes that it does not need to increase the number of its nuclear warheads in order to successfully deter a potential adversary;
- The United States is ready for multilateral arms control negotiations, including in the format of the "five" of the UN Security Council;
- Washington hopes that Moscow, as in the Cold War, will not abandon the dialogue on arms control, despite the differences;
- The US administration calls on the US Congress to support disarmament agreements on a bipartisan basis.