Sive Morten
Special Consultant to the FPA
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Fundamentals
If usually we call as a major news of the week some economical event or data release, this time it is the different thing. We are talking about the arrest of Pavel Durov, the frontman and symbol of the Telegram social network in France. Why is this news fundamentally important? It is a symbol of a fundamental change in the economic model in the world. No, we do not believe that there was freedom of speech and democracy in the world. But, all violations so far have been, in general, of a national nature. And in general, there was a feeling in the world that there was some kind of order, rules the violation of which was impossible or severely suppressed.
Durov's arrest finally dispels illusions about how the IT world works. And, accordingly, a huge layer of transnational business will now begin to die. Because the main question will be: which special service do you work for? And the main task of any business will be protection from those very special services. Of course, not immediately, but this path is almost inevitable. And it's time to get used to it. Together with other similar events of this week, such as Zuckerberg revelance, X ban in Brazil, K. Harris taxes ideas, Britains arrests for memes, the same in Belgium, just to name a few. All these events are the parts of the same chain. The degree of entropy in the world is raising...
Market overview
Gold’s record-setting rally above $2,500 an ounce looks to have further to run as the Federal Reserve prepares to chop rates, traditional drivers such as lower yields return, and Western investors pile back in. Chair Jerome Powell’s Jackson Hole speech — which promised rate cuts — was a watershed moment for bullion, according to Hatfield.
So far in 2024, spot gold has rallied by more than a fifth, with banks including Goldman Sachs Group Inc. saying as far back as April that prices had the scope to hit $2,700 an ounce. After Powell’s roadmap at the Jackson Hole symposium on Friday, US 10-year real yields have now retreated to the lowest since December. That benefits gold as it doesn’t pay interest.
Among investors, interest has become more widespread. Hedge funds and speculators have been adding bullish wagers on Comex — with net-long bullion positions hitting the highest in more than four years, according to Commodity Futures Trading Commission data. There are also signs of a revival in demand for gold-backed ETFs. Holdings in SPDR Gold Shares, one of the leading products, have expanded for the eight straight weeks, the longest run of inflows since mid-2020.
For now, Citigroup Inc. sees inflows into ETFs expanding “significantly” over six to 12 months, with demand bolstered by looser monetary policy, as well as a potential increase in volatility amid recessionary risks. Gold may reach $3,000 by mid-2025, the bank said in a note before Powell’s address. The market can expect large ETF flows, as well as ongoing speculator demand, when the Fed actually makes its first rate cut, according to UBS Group AG, which sees prices at $2,600 for the last quarter of this year. Increasing geopolitical risks should also lift demand for portfolio hedges, said Wayne Gordon, commodities strategist at UBS Global Wealth Management.
Gold demand in top consumers India and China is expected to improve in the next few months, industry officials said.
Gold ETFs saw modest net inflows of 8 metric tons ($403 million) last week, led by North American funds, according to the World Gold Council. Elsewhere, China's net gold imports via Hong Kong rose 17% in July, marking the first increase since March, data showed on Tuesday. Bullion fell for 1.2% on Wednesday as the dollar inched up amid speculation investors are buying the US currency for month-end portfolio rebalancing.
For further growth ETFs must continue to raise funds, partly to compensate for the slowdown if jewelry buyers abandon these levels. The inflow of funds into global ETFs has been observed for the third month in a row, and stock indexes of stocks have returned to their highest level since February. At the same time, gold reserves backed by ETFs remain ~878 tons below the 2020 peak seen during the pandemic.
Spot silver firmed 1.5% to $29.53. Platinum gained 1.3% to $942.06 and palladium was up 3.5% to $979.72. Both platinum and palladium are used by automakers in catalytic converters to reduce exhaust emissions.
Data earlier showed U.S. initial jobless claims slipped last week, with the Labor Department adding that the unemployment rate probably remained high in August.
Gross domestic product rose at a 3% annualized rate during the April-June period, up from the previous estimate of 2.8%. The economy’s main growth engine — personal spending — advanced 2.9%, versus the prior estimate of 2.3%.
Gold slipped 1% on Friday as the dollar and Treasury yields firmed after U.S. inflation data matched expectations. Data from the Commerce Department showed the personal consumption expenditures (PCE) price index rose 0.2% last month, matching economists' forecasts. Traders slightly raised bets of a 25-basis-point rate reduction by the Fed next month to 69%, with a 50-bps cut possibility coming down to 31% following the inflation report, according to the CME FedWatch tool.
Investors now look ahead to the U.S. non-farm payroll report due next week.
Physical demand remained lacklustre is top Asian consumers as new import quotas failed to lift Chinese demand.
TD Securities see some near-term downside for gold as “positioning cues are flashing red on several fronts,” with macro funds positions particularly extreme, according to senior commodity strategist Daniel Ghali. A move lower toward $2,430 an ounce could trigger liquidation, according to Ghali.
It is noteworthy that the precious metal is now paying more attention to its usual drivers, after such an unusual first half — when some ordinary macroeconomic relations went awry. Now gold is rising, the US dollar is falling, and the yield on 10-year Treasury bonds is also declining both in nominal terms and adjusted for inflation. It looks like a regular toolbar.
Returning to Jackson Hole... J. Powell met expectations, giving a signal for a rate reversal, but the statements of a number of Fed representatives were moderate, i.e. no -50 bp in September is in sight, even close , although the market still hopes for a decline to 100 bp by the end of the year. The fact is that inflation has not returned to the target, neither in the US nor in Europe , but central banks are already "changing their shoes", afraid of being late due to the inertia of the process. The problem is that inflation in services remains high everywhere and any step back in commodity disinflation will immediately raise overall inflation, but central banks are so afraid of a recession that they are ready to "buy" this risk. But they are also afraid of reducing it quickly. The main narrative of the decade “the budget and the Fed will save everyone” remains relevant ... markets traditionally like it.
The Fed still did conduct QT this week, reducing its securities portfolio by $19 billion, and other assets were reduced by another $16.7 billion, but this is a quarterly transfer of interest. On the passive side, reverse repos remained virtually unchanged (-$3.7 billion). Yellen generously spent $54 billion from her accounts, effectively compensating for the reduction in the Fed's balance sheet this week. As a result, we have a small increase in bank balances at the Fed by $20 billion, i.e. there is still a lot of dollar liquidity in the system .
Until the end of the quarter, the US Treasury/Federal Reserve System will be withdrawing liquidity, and it is unlikely that anything will come from the RRP, since the plan for placing bills has already been fulfilled, and inflows are still going into money market funds. The impact should not be strong, since bank reserves are at a relatively high level ($3.36 trillion), but it will still be negative.
And the last moment. Everybody were speaking about J. Powell speech in Wyoming, but somehow, it was a very little attention to the speech of IMF chief economist Pierre-Olivier Gourinchas who said the Japanese central bank could continue to gradually raise rates depending on incoming data, Reuters reports. ️
Next rate hike is expected in December. As the Fed and BoJ are moving toe-to-toe, the clash is unavoidable. So another drop in the US big techs and US Dollar sell-off are not off the table yet. This will be definitely supportive factor for Gold market.
SEPTEMBER ISSUE
Gold investors returning from their summer holidays will be eager to see whether the precious metal can sustain its record-breaking rally, or if it will succumb to the curse of September. Bullion has dropped every September since 2017. Over that period, the average decline has been 3.2% in September – easily the worst month of the year, and far below the monthly average gain of 1%.
September is also commonly the worst month for US stocks, with average declines of more than 1.5% in the S&P 500 over the past decade. The dynamic is far from reliable — gold has actually risen in September over a three-decade horizon — but one explanation for the recent weakness is that traders are buying bullion to take a defensive position over the increasingly turbulent summer months, before selling on their return to the office in September.
The flip side is that when September arrives, there’s an inbuilt headwind for gold. September is also traditionally the dollar’s strongest month, which means traders using other currencies can buy less gold with their money.
Whether these tailwinds are enough to break the September curse is another question.
PLATINUM
Last week we've explained why other precious metals (particularly Silver) could be great add-on to gold in portfolio. The same idea is announced by Commerzbank above. But any idea should have a background. In previous report we've explained why silver could show explosive rally in mid term perspective. Now it is time to consider Platinum. Besides of changing in automobile sector, mentioned above, when major producers turn back to common engines from EV, or to hybrids, there is another reason of higher demand for platinum.
We are talking about the use of metal in fuel cells. Platinum acts as a catalyst in hydrogen fuel cells: when platinum is used as an anode and cathode, hydrogen is oxidized without combustion, resulting in electricity and water. In the event of mass implementation of this technology as an alternative (addition) to classic electric traction, the demand for platinum may increase sharply. Bloomberg NEF believes that by 2035 the demand growth will be 35%, which will make this narrow market scarce.
Today, 70% of the world's platinum is produced in one country - South Africa, another 12% - in Russia, 8% - in Zimbabwe. It is impossible to significantly increase production (at current prices), which means that platinum prices and metal producers' shares are on the rise. However, the introduction of hydrogen is very difficult due to its fluidity and explosiveness, and a couple of major disasters could put an end to the development of this technology.
RAISING DEMAND FOR GOLD IS UNAVOIDABLE
The total debt in the world is about to exceed 340% of the world GDP . And if someone has such illusions that all these debts will eventually be repaid, paid off, etc., then there is no need to delude yourself with unrealistic hopes. The debt of states is less than $100 trillion, when the world GDP is $184.7 trillion. The rest is corporations and the population. If states can print money, and do it successfully, then the others... you know.
The accumulation of debt is generally the most stable trend of recent years. Without an increase in the debt burden, there is often no development. A classic example of this is China. The economy is being stimulated. Consumption is being stimulated. And at the expense of what? An increase in the debt of both households and, first and foremost, corporations. China still has room to grow in terms of debt to GDP, compared to the Japanese scenario.
The US caught up with China in terms of debt to GDP back in 2017, kept up for some time, and overtook it in early 2022. Moreover, China has also turned out to be ahead of the US in terms of monetization of the economy. In the US, the ratio of M2 money supply to GDP is currently 0.73, while in China it is a crazy 2.32.
Contradictions in world trade are growing. We know very well that trade wars are almost inevitable, especially if Trump comes to power. And all these are extremely destructive factors, in particular, for a possible new surge in inflation. Geopolitics. Well, there's nothing to add here. And any aggravation is a serious growth factor for precious metals. Coming serious reduction of interest rates in the world will also be an additional factor, positive for the growth of M2 all over the world, and first of all in the USA.
The main conclusion is that trust in classical money is rapidly falling. Contradictions are rapidly growing in almost all areas. I recommend that those who haven't read these articles read them in their free time. The growth of real assets value in this situation is practically inevitable. And first of all, the prices of precious metals. In fact real investors never left gold. Take the same Central Banks of the BRICS countries. Rate at $3000?
Hm, If the target for gold was just $3000, it would be a so-so deal. Take higher, throw further. After 2008, gold almost made x3 in 3 years. And we won't agree to less. And this is against the background of a sluggish budget deficit compared to current times. Of course, we really want to see the x5, like from 1971 to 1974, or the x6, like from 1976 to 1980, but we should moderate demands. X3 is OK
M2, by the way, has increased by x2 since 2011 and will increase even more against the backdrop of the upcoming post-crisis stimuli. So gold for the next 3 years is one of the important assets in the portfolio, which should help both central banks and investors (in aggregate, of course) cover losses from other assets.
PRESIDENT'S RUN FACTOR
Now both programmes, as from Reps and D. Trump as from Dems and K. Harris contain multiple economical points, giving answers on hot problems, such as budget deficit, record debt, China competition and many others. This is the reason why many analysts start scrutiny these issues to understand how it could impact on performance of different assets. This week I found two interesting materials. One is from Rabobank analysts Michael Every, I put his view as a screenshot below, just to not re-print it here:
In fact, he concludes on unavoidable of inflationary scenario. Keep it simple he tells that In general, there are two chairs of different color for the American and world economy. One is stagflation in the colors of the American flag, and other one is stagflation in LGBT colors. That's it.
Next great analysis is from Schiff Sovereign and James Hickman. Here is a few extractions from it, which seem to me most important... (Read below)
If usually we call as a major news of the week some economical event or data release, this time it is the different thing. We are talking about the arrest of Pavel Durov, the frontman and symbol of the Telegram social network in France. Why is this news fundamentally important? It is a symbol of a fundamental change in the economic model in the world. No, we do not believe that there was freedom of speech and democracy in the world. But, all violations so far have been, in general, of a national nature. And in general, there was a feeling in the world that there was some kind of order, rules the violation of which was impossible or severely suppressed.
Durov's arrest finally dispels illusions about how the IT world works. And, accordingly, a huge layer of transnational business will now begin to die. Because the main question will be: which special service do you work for? And the main task of any business will be protection from those very special services. Of course, not immediately, but this path is almost inevitable. And it's time to get used to it. Together with other similar events of this week, such as Zuckerberg revelance, X ban in Brazil, K. Harris taxes ideas, Britains arrests for memes, the same in Belgium, just to name a few. All these events are the parts of the same chain. The degree of entropy in the world is raising...
Market overview
Gold’s record-setting rally above $2,500 an ounce looks to have further to run as the Federal Reserve prepares to chop rates, traditional drivers such as lower yields return, and Western investors pile back in. Chair Jerome Powell’s Jackson Hole speech — which promised rate cuts — was a watershed moment for bullion, according to Hatfield.
So far in 2024, spot gold has rallied by more than a fifth, with banks including Goldman Sachs Group Inc. saying as far back as April that prices had the scope to hit $2,700 an ounce. After Powell’s roadmap at the Jackson Hole symposium on Friday, US 10-year real yields have now retreated to the lowest since December. That benefits gold as it doesn’t pay interest.
Among investors, interest has become more widespread. Hedge funds and speculators have been adding bullish wagers on Comex — with net-long bullion positions hitting the highest in more than four years, according to Commodity Futures Trading Commission data. There are also signs of a revival in demand for gold-backed ETFs. Holdings in SPDR Gold Shares, one of the leading products, have expanded for the eight straight weeks, the longest run of inflows since mid-2020.
For now, Citigroup Inc. sees inflows into ETFs expanding “significantly” over six to 12 months, with demand bolstered by looser monetary policy, as well as a potential increase in volatility amid recessionary risks. Gold may reach $3,000 by mid-2025, the bank said in a note before Powell’s address. The market can expect large ETF flows, as well as ongoing speculator demand, when the Fed actually makes its first rate cut, according to UBS Group AG, which sees prices at $2,600 for the last quarter of this year. Increasing geopolitical risks should also lift demand for portfolio hedges, said Wayne Gordon, commodities strategist at UBS Global Wealth Management.
Gold demand in top consumers India and China is expected to improve in the next few months, industry officials said.
Gold ETFs saw modest net inflows of 8 metric tons ($403 million) last week, led by North American funds, according to the World Gold Council. Elsewhere, China's net gold imports via Hong Kong rose 17% in July, marking the first increase since March, data showed on Tuesday. Bullion fell for 1.2% on Wednesday as the dollar inched up amid speculation investors are buying the US currency for month-end portfolio rebalancing.
For further growth ETFs must continue to raise funds, partly to compensate for the slowdown if jewelry buyers abandon these levels. The inflow of funds into global ETFs has been observed for the third month in a row, and stock indexes of stocks have returned to their highest level since February. At the same time, gold reserves backed by ETFs remain ~878 tons below the 2020 peak seen during the pandemic.
Spot silver firmed 1.5% to $29.53. Platinum gained 1.3% to $942.06 and palladium was up 3.5% to $979.72. Both platinum and palladium are used by automakers in catalytic converters to reduce exhaust emissions.
Data earlier showed U.S. initial jobless claims slipped last week, with the Labor Department adding that the unemployment rate probably remained high in August.
Gross domestic product rose at a 3% annualized rate during the April-June period, up from the previous estimate of 2.8%. The economy’s main growth engine — personal spending — advanced 2.9%, versus the prior estimate of 2.3%.
Gold slipped 1% on Friday as the dollar and Treasury yields firmed after U.S. inflation data matched expectations. Data from the Commerce Department showed the personal consumption expenditures (PCE) price index rose 0.2% last month, matching economists' forecasts. Traders slightly raised bets of a 25-basis-point rate reduction by the Fed next month to 69%, with a 50-bps cut possibility coming down to 31% following the inflation report, according to the CME FedWatch tool.
Investors now look ahead to the U.S. non-farm payroll report due next week.
Physical demand remained lacklustre is top Asian consumers as new import quotas failed to lift Chinese demand.
TD Securities see some near-term downside for gold as “positioning cues are flashing red on several fronts,” with macro funds positions particularly extreme, according to senior commodity strategist Daniel Ghali. A move lower toward $2,430 an ounce could trigger liquidation, according to Ghali.
It is noteworthy that the precious metal is now paying more attention to its usual drivers, after such an unusual first half — when some ordinary macroeconomic relations went awry. Now gold is rising, the US dollar is falling, and the yield on 10-year Treasury bonds is also declining both in nominal terms and adjusted for inflation. It looks like a regular toolbar.
Returning to Jackson Hole... J. Powell met expectations, giving a signal for a rate reversal, but the statements of a number of Fed representatives were moderate, i.e. no -50 bp in September is in sight, even close , although the market still hopes for a decline to 100 bp by the end of the year. The fact is that inflation has not returned to the target, neither in the US nor in Europe , but central banks are already "changing their shoes", afraid of being late due to the inertia of the process. The problem is that inflation in services remains high everywhere and any step back in commodity disinflation will immediately raise overall inflation, but central banks are so afraid of a recession that they are ready to "buy" this risk. But they are also afraid of reducing it quickly. The main narrative of the decade “the budget and the Fed will save everyone” remains relevant ... markets traditionally like it.
The Fed still did conduct QT this week, reducing its securities portfolio by $19 billion, and other assets were reduced by another $16.7 billion, but this is a quarterly transfer of interest. On the passive side, reverse repos remained virtually unchanged (-$3.7 billion). Yellen generously spent $54 billion from her accounts, effectively compensating for the reduction in the Fed's balance sheet this week. As a result, we have a small increase in bank balances at the Fed by $20 billion, i.e. there is still a lot of dollar liquidity in the system .
Until the end of the quarter, the US Treasury/Federal Reserve System will be withdrawing liquidity, and it is unlikely that anything will come from the RRP, since the plan for placing bills has already been fulfilled, and inflows are still going into money market funds. The impact should not be strong, since bank reserves are at a relatively high level ($3.36 trillion), but it will still be negative.
And the last moment. Everybody were speaking about J. Powell speech in Wyoming, but somehow, it was a very little attention to the speech of IMF chief economist Pierre-Olivier Gourinchas who said the Japanese central bank could continue to gradually raise rates depending on incoming data, Reuters reports. ️
Next rate hike is expected in December. As the Fed and BoJ are moving toe-to-toe, the clash is unavoidable. So another drop in the US big techs and US Dollar sell-off are not off the table yet. This will be definitely supportive factor for Gold market.
SEPTEMBER ISSUE
Gold investors returning from their summer holidays will be eager to see whether the precious metal can sustain its record-breaking rally, or if it will succumb to the curse of September. Bullion has dropped every September since 2017. Over that period, the average decline has been 3.2% in September – easily the worst month of the year, and far below the monthly average gain of 1%.
September is also commonly the worst month for US stocks, with average declines of more than 1.5% in the S&P 500 over the past decade. The dynamic is far from reliable — gold has actually risen in September over a three-decade horizon — but one explanation for the recent weakness is that traders are buying bullion to take a defensive position over the increasingly turbulent summer months, before selling on their return to the office in September.
The flip side is that when September arrives, there’s an inbuilt headwind for gold. September is also traditionally the dollar’s strongest month, which means traders using other currencies can buy less gold with their money.
Whether these tailwinds are enough to break the September curse is another question.
PLATINUM
Last week we've explained why other precious metals (particularly Silver) could be great add-on to gold in portfolio. The same idea is announced by Commerzbank above. But any idea should have a background. In previous report we've explained why silver could show explosive rally in mid term perspective. Now it is time to consider Platinum. Besides of changing in automobile sector, mentioned above, when major producers turn back to common engines from EV, or to hybrids, there is another reason of higher demand for platinum.
We are talking about the use of metal in fuel cells. Platinum acts as a catalyst in hydrogen fuel cells: when platinum is used as an anode and cathode, hydrogen is oxidized without combustion, resulting in electricity and water. In the event of mass implementation of this technology as an alternative (addition) to classic electric traction, the demand for platinum may increase sharply. Bloomberg NEF believes that by 2035 the demand growth will be 35%, which will make this narrow market scarce.
Today, 70% of the world's platinum is produced in one country - South Africa, another 12% - in Russia, 8% - in Zimbabwe. It is impossible to significantly increase production (at current prices), which means that platinum prices and metal producers' shares are on the rise. However, the introduction of hydrogen is very difficult due to its fluidity and explosiveness, and a couple of major disasters could put an end to the development of this technology.
RAISING DEMAND FOR GOLD IS UNAVOIDABLE
The total debt in the world is about to exceed 340% of the world GDP . And if someone has such illusions that all these debts will eventually be repaid, paid off, etc., then there is no need to delude yourself with unrealistic hopes. The debt of states is less than $100 trillion, when the world GDP is $184.7 trillion. The rest is corporations and the population. If states can print money, and do it successfully, then the others... you know.
The accumulation of debt is generally the most stable trend of recent years. Without an increase in the debt burden, there is often no development. A classic example of this is China. The economy is being stimulated. Consumption is being stimulated. And at the expense of what? An increase in the debt of both households and, first and foremost, corporations. China still has room to grow in terms of debt to GDP, compared to the Japanese scenario.
The US caught up with China in terms of debt to GDP back in 2017, kept up for some time, and overtook it in early 2022. Moreover, China has also turned out to be ahead of the US in terms of monetization of the economy. In the US, the ratio of M2 money supply to GDP is currently 0.73, while in China it is a crazy 2.32.
Contradictions in world trade are growing. We know very well that trade wars are almost inevitable, especially if Trump comes to power. And all these are extremely destructive factors, in particular, for a possible new surge in inflation. Geopolitics. Well, there's nothing to add here. And any aggravation is a serious growth factor for precious metals. Coming serious reduction of interest rates in the world will also be an additional factor, positive for the growth of M2 all over the world, and first of all in the USA.
The main conclusion is that trust in classical money is rapidly falling. Contradictions are rapidly growing in almost all areas. I recommend that those who haven't read these articles read them in their free time. The growth of real assets value in this situation is practically inevitable. And first of all, the prices of precious metals. In fact real investors never left gold. Take the same Central Banks of the BRICS countries. Rate at $3000?
Hm, If the target for gold was just $3000, it would be a so-so deal. Take higher, throw further. After 2008, gold almost made x3 in 3 years. And we won't agree to less. And this is against the background of a sluggish budget deficit compared to current times. Of course, we really want to see the x5, like from 1971 to 1974, or the x6, like from 1976 to 1980, but we should moderate demands. X3 is OK
M2, by the way, has increased by x2 since 2011 and will increase even more against the backdrop of the upcoming post-crisis stimuli. So gold for the next 3 years is one of the important assets in the portfolio, which should help both central banks and investors (in aggregate, of course) cover losses from other assets.
PRESIDENT'S RUN FACTOR
Now both programmes, as from Reps and D. Trump as from Dems and K. Harris contain multiple economical points, giving answers on hot problems, such as budget deficit, record debt, China competition and many others. This is the reason why many analysts start scrutiny these issues to understand how it could impact on performance of different assets. This week I found two interesting materials. One is from Rabobank analysts Michael Every, I put his view as a screenshot below, just to not re-print it here:
In fact, he concludes on unavoidable of inflationary scenario. Keep it simple he tells that In general, there are two chairs of different color for the American and world economy. One is stagflation in the colors of the American flag, and other one is stagflation in LGBT colors. That's it.
Next great analysis is from Schiff Sovereign and James Hickman. Here is a few extractions from it, which seem to me most important... (Read below)
