Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
In recent few weeks or even month we do not have any gold specific news or information. Gold now is one among of all others that is driven by common factors - Fed policy, statistics and US Treasury action. Today we consider a bit specific view on debt ceil raising and what could be hidden behind recent US Treasury and Fed steps. Next week, obviously CPI/PPI numbers should become the major driver at the eve of Fed and ECB meetings.
Market overview
Gold eased on Friday on a stronger dollar and higher yields but was set for its best week since early May after weaker jobs data bolstered bets for the Federal Reserve to hold pat on interest rates next week. The dollar index bounced off two-week lows, making gold expensive for overseas buyers, while higher 10-year Treasury yields made zero-yield bullion less attractive.
Markets now priced in a 72% chance of the Fed standing pat next week, but odds of a hike in July were 67%, the CME Fedwatch tool showed. Traders braced for the U.S. inflation report for May due on Tuesday, a day before the Fed announces its policy decision.
China increased its gold reserves for a seventh straight month, signaling ongoing strong demand for the precious metal from the world’s central banks. China raised its gold holdings by about 16 tons in May, according to data from the People’s Bank of China on Wednesday. Total stockpiles now sit at about 2,092 tons, after adding a total of 144 tons from November through last month.
About a quarter of central banks intend to increase their holdings over the next 12 months amid increasing pessimism toward the future role of the US dollar, according to a survey published by the council in May. The London Bullion Market Association sees strong demand from central banks continuing into this year, Chief Executive Officer Ruth Crowell said in an interview with Bloomberg TV earlier this week.
Central banks accounted for a nearly a quarter of global gold demand last year, and continued buying would offer some support to prices, which hit a record in May. Only Singapore was a bigger buyer than China in the first quarter.
MANAGED CRISIS?
Recently the rush around banking crisis eased and headlines mostly stands around coming Fed meeting and the way how US Treasury will grab all liquidity around. We think that it is too early to relax and very soon this question will come on stage again. crisis. The size of the problem is equal to the entire capital of the banking sector and everything didn't go down in March just because the State, together with the Fed, entered the game and loaded everything with money. In a normal situation, depositors would have lost some of their money, shareholders would have gone down the drain, and large banks would have picked up everything that was left of small and medium-sized banks for free. But Has Fed's and State liquidity help solved the problem? No. It only postponed it. Because the unrealized loss will gradually become real one as deposit rates increase. In general, instead of colorful fireworks, we see a slow-burning fire.
But now the question, why they do need this? It's all about the money, guys. As everybody needs your money...
Who will stabilize the treasure market from the beginning of 2022? American households are the main buyer of the entire range of debt securities of the US Treasury.
From January 1, 2022 to March 31, 2023, accumulated net purchases amounted to $ 1.7 trillion – this is the most significant flow to the treasury from the US population in the entire history of this market.
The market position of the population on the treasuries account, taking into account mutual funds, has changed positively by 1.4 trillion since the beginning of 2022. Estimated net investments of the population, taking into account investment funds, may exceed $2 trillion. The Fed's market position decreased by 1.1 trillion, but net sales were $500 billion.
Let's take a look what other investors do on US Bond market:
But how much households' money rests? Analysts tell that excess savings are around $1.2 Trln, while sum of extra savings during CV19 pandemic are around $2.3 Trln.
Right at the eve of QT households' investments, mostly was in stocks, bank deposits and crypto were around $5 Trln. Mentioned data shows that today, $1.7 trillion are already in the US treasuries directly, and through the ETFs of the money market, too, how much was distributed, perhaps a trillion. Roughly speaking, half of what the population had put into treasuries. But half still remained in some other assets. That is about $2.5 trillion.
They are claimed by:
What should I do in this situation if I exclude the option "print a lot of money at once"?
I will assume the following:
1. Give way to the Ministry of Finance. After all, it will spend some part of money on salaries, and people will return part of it to the system.
2. To clamp down on foreigners, or force them to betray little by little and unprofitable
3. The Fed will sit in the papers, they are grown men already and should understand the problem.
SEC now tries to grab funds out of crypto-market trying to slaughter both big exchanges. But it is long way run, and BTC capitalization now is around $600 Bln, ETH - around 250 Bln, USDT is around 80 Bln, - all together less than $1 Trln and doesn't resolve the problem. Besides, now they attack transaction centers - exchanges, but not cryptocurrencies directly by far. So total effect will be even smaller. But, this also will happen later with CBDC presentation.
The best method for solving problems 1 and 2 is a banking crisis. Actually, we are watching it and we will see it again. Nothing personal, but the State treasury needs to be saved.
After the completion of the epic with the debt ceiling, an intelligent person has only three really big fears left.
If we proceed from our magic numbers, then everything should already happen by February 2025, including a new debt crisis. The calculation here is very simple - the acute phase of the crisis began in July / August 2021, we add 3.5 years, it turns out January / February 2025. That is, there are about 20 months left.
A little bit about AUKUS
There are two interesting things. First one we've covered here. But the second one seems more important and it is accuratelyhidden ignored by mass media. We talk about fastest ever US industrialization - this is the core of AUKUS concept and it is started. It means that although tacitly by far but AUKUS strategy starts to embody and major decision is made. Here is the investments on industrial infrastructure. This is not social infrastructure guys, it is industrial -
There is an unprecedented construction boom of industrial infrastructure in the United States in modern history. Since February 2021, spending on the construction of industrial infrastructure has increased 2.6 times, which is the most powerful infrastructure impulse in at least 30 years. In the USA, there were two cycles of capital expenditures on industrial infrastructure – from July 2004 to February 2009 (4.5 years) – an increase of 3.3 times and from February 2011 to June 2015 (almost 3.5 years) – an increase of 2.9 times. This time the expansion cycle is more rapid and large-scale.
Spending on industrial infrastructure as a share of the volume of non—residential construction by the private sector has increased to 29% - almost twice as high as in 2020. In relative comparison to the total volume of construction, the priorities and phases of industrialization/de-industrialization are visible. Of course, this is just the beginning and it will be possible to say how effective this work will be only in a few years. But compares to to Europe, which is going to de-industrialization with gaint steps, its like a hot and cold. At the same time, of course, the situation in the US economy is not improving yet:
After being allowed to borrow money, the debt began to grow sharply. However, it is not the debt itself that is dangerous, but the scale of support for the economy, which should grow rapidly. And there are simply no resources for this. In other words, it is possible that attempts at industrialization will meet with a recession that has already begun — and, most likely, the battlefield will remain precisely behind the recession. And if we also take into account the outflow of deposits from American banks, the picture becomes even more alarming:
Because against the background of how the Treasury sweeps all available liquidity from the market, banks need to somehow maintain their own financial indicators. And if they start raising deposit rates, the cost of loans will also increase. That is, a new wave of economic recession is ahead…
Conclusion:
After debt ceil raising, US authorities have got a big degree of freedom and come on operational space spinning up government machine, that is called "financing of the Government spending". Until, they will be busy with new "budget allocation", placing new bonds issues and drying liquidity, gold will remain under pressure. But when the active process of new debt allocation will come closer to the end (somehow we suspect that it happens much earlier than in 2025), we should see first fruits that we've mentioned above. Thus, until the end of the year, hardly we will see strong Gold rally, except if something extraordinary happens. Thus, we should prepare for wobbling and choppy action and keep eyes open on new data that will arrive, especially, related to Fed/US Treasury assets, M2, Bank reserves, deposits, Reverse Repo amount etc.
In recent few weeks or even month we do not have any gold specific news or information. Gold now is one among of all others that is driven by common factors - Fed policy, statistics and US Treasury action. Today we consider a bit specific view on debt ceil raising and what could be hidden behind recent US Treasury and Fed steps. Next week, obviously CPI/PPI numbers should become the major driver at the eve of Fed and ECB meetings.
Market overview
Gold eased on Friday on a stronger dollar and higher yields but was set for its best week since early May after weaker jobs data bolstered bets for the Federal Reserve to hold pat on interest rates next week. The dollar index bounced off two-week lows, making gold expensive for overseas buyers, while higher 10-year Treasury yields made zero-yield bullion less attractive.
Markets now priced in a 72% chance of the Fed standing pat next week, but odds of a hike in July were 67%, the CME Fedwatch tool showed. Traders braced for the U.S. inflation report for May due on Tuesday, a day before the Fed announces its policy decision.
China increased its gold reserves for a seventh straight month, signaling ongoing strong demand for the precious metal from the world’s central banks. China raised its gold holdings by about 16 tons in May, according to data from the People’s Bank of China on Wednesday. Total stockpiles now sit at about 2,092 tons, after adding a total of 144 tons from November through last month.
About a quarter of central banks intend to increase their holdings over the next 12 months amid increasing pessimism toward the future role of the US dollar, according to a survey published by the council in May. The London Bullion Market Association sees strong demand from central banks continuing into this year, Chief Executive Officer Ruth Crowell said in an interview with Bloomberg TV earlier this week.
Central banks accounted for a nearly a quarter of global gold demand last year, and continued buying would offer some support to prices, which hit a record in May. Only Singapore was a bigger buyer than China in the first quarter.
MANAGED CRISIS?
Recently the rush around banking crisis eased and headlines mostly stands around coming Fed meeting and the way how US Treasury will grab all liquidity around. We think that it is too early to relax and very soon this question will come on stage again. crisis. The size of the problem is equal to the entire capital of the banking sector and everything didn't go down in March just because the State, together with the Fed, entered the game and loaded everything with money. In a normal situation, depositors would have lost some of their money, shareholders would have gone down the drain, and large banks would have picked up everything that was left of small and medium-sized banks for free. But Has Fed's and State liquidity help solved the problem? No. It only postponed it. Because the unrealized loss will gradually become real one as deposit rates increase. In general, instead of colorful fireworks, we see a slow-burning fire.
But now the question, why they do need this? It's all about the money, guys. As everybody needs your money...
Who will stabilize the treasure market from the beginning of 2022? American households are the main buyer of the entire range of debt securities of the US Treasury.
From January 1, 2022 to March 31, 2023, accumulated net purchases amounted to $ 1.7 trillion – this is the most significant flow to the treasury from the US population in the entire history of this market.
The market position of the population on the treasuries account, taking into account mutual funds, has changed positively by 1.4 trillion since the beginning of 2022. Estimated net investments of the population, taking into account investment funds, may exceed $2 trillion. The Fed's market position decreased by 1.1 trillion, but net sales were $500 billion.
Let's take a look what other investors do on US Bond market:
- Commercial banks reduced their position by $ 147 billion;
- Investment funds, brokers and dealers, taking into account money market funds, reduced their position in treasuries by 457 billion from the beginning of 2022 to March 31, 2023 (mainly due to depreciation after the fall of bonds), while net sales are estimated at 350 billion from the financial sector.
- Insurance, pension and state funds combined increased investments in treasuries by 75 billion according to market estimates, where net purchases could amount to about $ 250 billion.
- The position of non-residents on the treasuries account has decreased by $ 212 billion according to market estimates since the beginning of 2022, but began to grow in Q1 2023.
But how much households' money rests? Analysts tell that excess savings are around $1.2 Trln, while sum of extra savings during CV19 pandemic are around $2.3 Trln.
Right at the eve of QT households' investments, mostly was in stocks, bank deposits and crypto were around $5 Trln. Mentioned data shows that today, $1.7 trillion are already in the US treasuries directly, and through the ETFs of the money market, too, how much was distributed, perhaps a trillion. Roughly speaking, half of what the population had put into treasuries. But half still remained in some other assets. That is about $2.5 trillion.
They are claimed by:
- ️ The Ministry of Finance, which needs to attract about $ 2 trillion.
- ️ Foreigners, who also want to sell about $ 2 trillion. (There are actually only 6, but there are about 2 BRICS members in front of the greyhounds)
- ️ well, the Fed, which has $8 trillion on its balance sheet. and which he wants to get rid of.
What should I do in this situation if I exclude the option "print a lot of money at once"?
I will assume the following:
1. Give way to the Ministry of Finance. After all, it will spend some part of money on salaries, and people will return part of it to the system.
2. To clamp down on foreigners, or force them to betray little by little and unprofitable
3. The Fed will sit in the papers, they are grown men already and should understand the problem.
SEC now tries to grab funds out of crypto-market trying to slaughter both big exchanges. But it is long way run, and BTC capitalization now is around $600 Bln, ETH - around 250 Bln, USDT is around 80 Bln, - all together less than $1 Trln and doesn't resolve the problem. Besides, now they attack transaction centers - exchanges, but not cryptocurrencies directly by far. So total effect will be even smaller. But, this also will happen later with CBDC presentation.
The best method for solving problems 1 and 2 is a banking crisis. Actually, we are watching it and we will see it again. Nothing personal, but the State treasury needs to be saved.
After the completion of the epic with the debt ceiling, an intelligent person has only three really big fears left.
- Fear of recession. In general it goes to the fact that in a couple of months most media will express it in the way that "it was obvious to everyone" (although of course it was absolutely not obvious to most, including media themselves. EU already shows negative GDP)
- Fear of the collapse of the markets - Jim Rogers soloing.
- Fear of an inflationary collapse of the dollar - now is everywhere day by day
If we proceed from our magic numbers, then everything should already happen by February 2025, including a new debt crisis. The calculation here is very simple - the acute phase of the crisis began in July / August 2021, we add 3.5 years, it turns out January / February 2025. That is, there are about 20 months left.
- In 3 months: from August 22 to 24, the BRICS summit will be held in South Africa, where it will be necessary to accept almost a dozen new members, announce the creation of the BRICS currency and, by the way, arrest Putin on the ICC lawsuit. Or not to do some of the above (for some reason it seems to me that there will be no arrest, but the currency is also an interesting question). If the summit nevertheless transfers de-dollarization from timid and creeping to official and active, then actually in September-October 2023 we can get all the crises at once - both stock and currency and debt. Or initially, say, currency only.
- In October-November 2023, the presidential election campaign in the United States will start. By analogy with the debt ceiling, the domestic political struggle will be conducted at the expense of foreign policy and world hegemony. Plus, no one will save money. Therefore, at the end of 2023 - beginning of 2024, it is likely that budget expenditures will increase with simultaneous problems in financing (the purchase of treasuries will remain sluggish). There is only one way out - to print, but first the debt crisis, because it is no easier to agree on who will use the fruits of super-QE than on the debt ceiling.
- Finally, the US presidential elections themselves are November 2024, when a political crisis and a clinch may happen again, and a new debt ceiling may inadvertently have already been reached by that time (it seems they should not, but I would not rule out such a probability).
A little bit about AUKUS
There are two interesting things. First one we've covered here. But the second one seems more important and it is accurately
There is an unprecedented construction boom of industrial infrastructure in the United States in modern history. Since February 2021, spending on the construction of industrial infrastructure has increased 2.6 times, which is the most powerful infrastructure impulse in at least 30 years. In the USA, there were two cycles of capital expenditures on industrial infrastructure – from July 2004 to February 2009 (4.5 years) – an increase of 3.3 times and from February 2011 to June 2015 (almost 3.5 years) – an increase of 2.9 times. This time the expansion cycle is more rapid and large-scale.
Spending on industrial infrastructure as a share of the volume of non—residential construction by the private sector has increased to 29% - almost twice as high as in 2020. In relative comparison to the total volume of construction, the priorities and phases of industrialization/de-industrialization are visible. Of course, this is just the beginning and it will be possible to say how effective this work will be only in a few years. But compares to to Europe, which is going to de-industrialization with gaint steps, its like a hot and cold. At the same time, of course, the situation in the US economy is not improving yet:
After being allowed to borrow money, the debt began to grow sharply. However, it is not the debt itself that is dangerous, but the scale of support for the economy, which should grow rapidly. And there are simply no resources for this. In other words, it is possible that attempts at industrialization will meet with a recession that has already begun — and, most likely, the battlefield will remain precisely behind the recession. And if we also take into account the outflow of deposits from American banks, the picture becomes even more alarming:
Because against the background of how the Treasury sweeps all available liquidity from the market, banks need to somehow maintain their own financial indicators. And if they start raising deposit rates, the cost of loans will also increase. That is, a new wave of economic recession is ahead…
Conclusion:
After debt ceil raising, US authorities have got a big degree of freedom and come on operational space spinning up government machine, that is called "financing of the Government spending". Until, they will be busy with new "budget allocation", placing new bonds issues and drying liquidity, gold will remain under pressure. But when the active process of new debt allocation will come closer to the end (somehow we suspect that it happens much earlier than in 2025), we should see first fruits that we've mentioned above. Thus, until the end of the year, hardly we will see strong Gold rally, except if something extraordinary happens. Thus, we should prepare for wobbling and choppy action and keep eyes open on new data that will arrive, especially, related to Fed/US Treasury assets, M2, Bank reserves, deposits, Reverse Repo amount etc.
