Sive Morten
Special Consultant to the FPA
- Messages
- 18,792
Fundamentals
As we've mentioned yesterday, there were no big events this week, especially gold specific events. But the progress of existed factors that are supportive for the Gold market and some political events tell that we're on the right course. It is amazing how very small event could trigger big action. I'm speaking about Initial claims report. In 99% cases it is usually ignored or triggers minor reaction. But, as market already was prepared by weaker NFP and dovish comments from the Fed and J. Yellen - minor event has triggered solid action and maybe it is already the starting point of major upside tendency continuation.
Market overview
Gold rose as traders assessed mixed signals on the US economy while awaiting a slew of Federal Reserve speakers for clues about the outlook for interest rates. A softer-than expected US jobs print last week added to evidence the economy is gradually slowing, easing fears that markets are headed for a painful rut marked by high inflation and sluggish growth. Still, inflation remains sticky, which means that there’s a limit on what the US central bank can do and that bond yields may remain in their recent ranges.
Swap traders are now cautiously upping their bets for policy easing this year, and gold investors are upping their bids on views that inflation may remain higher for longer. A record-breaking rally saw the metal hit a succession of all-time highs in April, with those gains linked to strong central-bank purchases, demand from Asian markets and haven buying amid conflicts in Ukraine and the Middle East.
Bullion became less attractive in recent weeks on signs that the Middle East is easing away from a potential full-blown war. However, Israel’s military has told civilians to move out of parts of Rafah, a possible prelude to a long-expected attack on the Gazan city. The move comes after cease-fire talks between Hamas and Israel in Cairo over the weekend stalled, the main sticking point being the Iran-backed militant group’s insistence that any truce is permanent.
Federal Reserve Bank of Boston President Susan Collins expressed confidence that the current setting of monetary policy will slow the economy in the way she believes will be necessary to get inflation back to the Fed's 2% target.
Gold prices climbed on Friday, en route to their best week in five, with zero-yield bullion building on momentum fuelled by weaker U.S. jobs data this week that reinforced expectations for interest rate cut by the Federal Reserve. Gold gained more than 1% on Thursday after data showed a bigger-than-expected rise in weekly claims for state unemployment benefits.
Investors are now looking forward to the U.S. producer price index and consumer price index data due next week, both of which could significantly impact gold and silver prices.
Meanwhile, near-record domestic prices stifled demand for physical gold in India, the world's second-biggest consumer, during a key festival.
China’s central bank topped up its gold reserves for an 18th straight month in April, although the pace of buying slowed in the face of record prices. In April, the PBOC bought 60,000 troy ounces, according to official data released Tuesday. That’s down from 160,000 ounces in March, and 390,000 ounces in February. First-quarter purchases by the world’s central banks, led by China, were the strongest on record, according to the World Gold Council. Some market watchers have suggested that gold’s 12% rally this year has been partly driven by mystery buyers among those institutions. Gold has also been supported by increased demand from Asian investors, especially in China, where appetite has been sharpened by an under-performing economy and lackluster markets.
LONG TERM FUNDAMENTAL EVENTS
The only economic news this week is the signing of a free trade agreement between Serbia and China, since this agreement effectively closes the possibility for Serbia to join the EU. It means that the pressing tool that EU was using constantly to force Serbia to do what was said is not working any more. Serbia is despaired to join EU making old proverb works - "You will join EU after the Turkey. And when will Turkey join EU? Never..." So, Serbia has tired to wait and turns to the East. This tells about two things - joining West doesn't look as attractive as before. Second - it confirms acceleration of world's fragmentation.
Another moment is sharp increase in duties on the import of Chinese EV to the United States. Actually, the WTO has already, in fact, died, but an this is just an extra confirmation. All crisis events stand underway. The picture turns out to be, frankly, depressing across the Globe…
Switzerland and Sweden already have cut the rate, not be able to hold high rates pressure. Others, especially BoE and EU are under way to the first rate cut, which is obviously bullish sign for Gold, especially while inflation stands sticky. If this is not a crisis, then what is a crisis? Let's recall that all these data are given in a situation of frankly underestimated inflation. Let's imagine that Summers' estimates are correct - the decline in some indicators becomes generally double-digit, assuming that the main developed countries are doing about the same as in the United States. Besides, the US GDP is also artificially pumped by including there the stock market performance, which is obvious, by its nature has nothing common to "Product".
As we told many times, we're dealing not with recession that is cyclical by its nature and usually short lived, but, with the Structural crisis that is long term. In 1930-32, a similar crisis lasted for almost 3 years. Now, since the structural imbalances are higher, it will be deeper and longer. But it has the same specific feature - constant rate of decline.
If we take into account the role of the state in maintaining the economy, which is much higher today than 90 years ago, the monthly rate of decline is not 1% of GDP, but about 0.5-0.6%. That is, on an annual scale, it was about 10% in 1930s, and today it is about 6-7%. Since the cumulative scale of the recession should be about 55-60% of GDP for the United States, the crisis will last 8-10 years. Of which 2.5 years have already passed (since the autumn of 2021).
It should be noted that at some point the crisis may accelerate dramatically. Today it follows an inflationary scenario, rather than deflationary as it was in 1930. That's why in 1930s crisis started after stock market collapse(In October 1929). Now collapse is yet to happen. But as real GDP falls and monetary policy easing (which has already begun, this collapse is almost inevitable. Therefore, the overall economic picture looks disappointing.
Let's go further. I do not know whether you've signed it or not but in recent few weeks big media start pumping the topic of inflation but in a bit disguised manner, by showing performance of different assets. To name some, Transportation costs began to rise again. The Shanghai index tends to be a leading indicator for the global container index. Bad Weather and War Are Straining the World’s Wheat Supply - so, be prepared for price growth, although there are enough wheat in global storages, but they need something to raise inflation fears. The same is about Copper deficit etc. but now EV production is falling and the US imposes 100% duties on Chinese EV's. So, they warm up the inflation topic.
The inflationary expectations are raising again. Americans do not understand why Big Mac costs 18$, while grandpa in Twitter tells:
As a result, US consumer sentiment starts falling. This should to be expected, since the stock market has been doing very poorly since the beginning of April. That is, the welfare effect, began to weaken, which immediately adjusted the average expected income down and worsened consumer sentiment, which means they will soon begin to spend less if the situation does not change dramatically.
"Great 7" could climb higher, showing the picture of the strong market but analysts are breaking the veil. More than 40% of all companies in the Russell 2000 index have a net income loss. What is doubly interesting is that, obviously, the trend towards an increase in the share of unprofitable companies is a trend of the last 30 years, and not just the current cycle of rate increases. Even the period of zero rates did not help reverse this trend. How they are credited at a loss in principle remains a mystery.
Sentiment impacts on loan activity. In March the increase in card debt practically disappeared and amounted to a symbolic 152 million - the minimum increase since Covid. ️Another interesting point can be found inside the report: non-revolving credit grew by a modest 6.1 billion , which is slightly higher than February's 4.3 billion, and this is exactly half of the average monthly increase in non-revolving credit of 12.2 billion over the past decade.
Meantime, the number of Guru's forecasting soon collapse are raising. Yesterday we've considered it in relation to Forex market, but Martin Armstrong also said few thing about Gold. Previously we've explained why the West urgently needs big war, some people take this with suspicious. But Martin Armstrong tells the same - war is the most simple way to get out from the debt dead way:
Sounds not very optimistic, right? But the truth is better than false rosy picture. So, what they could do with the bond market? Hardly they will allow it to fall directly. If problems arise, the market will simply be closed. You are an investor for 30 years - so sit there for 30 years. If you want to out - fine, you can sell it on the over-the-counter market for 1-2%, approximately.
And the main thing is not to miss this moment. Because then it will be impossible to jump out of almost nowhere: repo credit pyramids are tied to treasuries, and many shares bought by banks and much more. All this will be cheap, and the “right” people who have access to liquidity will collect it all from the floor. The US budget will be financed directly by the Federal Reserve, because there will be no other options anyway. Therefore, the key point in the whole scheme is the decision to stop the market. We cannot predict it, but we simply must collect facts for further analysis.
The tightening liquidity and credit conditions is the side of the same coin. Spread between utilities sector dividend yield and 10-year US Treasury yield, at 2007 lows. Nobody should have "excess liquidity" to the "X" moment, except few "right" persons.
NEW GOLDMAN SACHS GOLD REPORT
Recently we've shared the new GS Gold report. Here we will not put it totally, but bring some extractions that seem important. Major thing is of course - new targets.
There are a lot of interesting stuff in report, you could read it, its just 5 pages length, but here is what seems to be important. Additionally to Gold, Goldman raised its price forecast for copper by the end of 2024 by 20% immediately - up to $12,000 per ton - due to the projected shortage in the market. Goldman Sachs expects very significant copper deficit in 2024. In order to fill the market's potential copper gap of 8 million tons by 2034, mining companies need prices above $10,000 - $12,000 per ton - CEO Trafigura. While Citi Announces Second Massive Copper Bull Market of This Century. Why it is important?
Based on the fact that Goldman is not only predicting growth in copper, but also predicting a rally in gold against the backdrop of sanctions and debt issues, we can conclude that they are not expecting a deflationary contraction/financial/economic crisis. Otherwise, how can a copper shortage arise and the demand for gold continue in the presence of a liquidity shortage between system participants, which always accompanies crises?
It seems that the GS apparently, are confident that any problem (by the end of the year) will be filled with money, and the economy will continue to be stimulated. It means that the US economy will go on inflationary scenario, that confirms our general look of stagflation. Excellent perspectives. The Goldmans also do not have a crystal ball, and they do not know the future, and they have no guarantees (and investment recommendations), but the direction of movement (and the logic of their mathematical model) is probably close to reality. And this might be very good news, but only for those who have, as your humble servant endlessly repeats, Gold (some could add "and BTC", but not me). I won’t ask why this isn’t shown to Westerners in the mainstream media. “Biden Strong, America Strong, Dollar Strong” and all that.
Hopefully you're not too tired from all this stuff. Ok, the last thing, it is really long term. I'll try to bring it short. The problem stands with the new debt issue by the US government. The main intrigue for the next six months is whether or not they will be able to place more than 1 trillion in government bonds for at least 2 years? This is not as trivial as it seems.
Since June 2023, the main issue was in bills, that at high degree financed by the funds of a reverse repo with the Fed, which decreased by almost 2 trillion over the year. Since March 25, the Treasury has been paying off bills (233 billion as of May 2) due to the budget surplus in April and the accumulated 0.8-0.9 trillion cash position on TGA account.
The procedure for replacing bills already was in recent history in 2021, but was picked up by excess liquidity and QE from the Fed for 4.5 trillion over two years, whereas now it is QT, so the conditions are not comparable. The current US national debt is as follows (as of April 30, 2024): bills - 5.87 trillion, notes - 13.96 trillion, bonds - 4.51 trillion, TIPS - 2 trillion, FRN - 0.55 trillion, and in total - 26.9 trillion. Bills account for about 37% in the structure of interest expenses - the maximum in modern history.
Last year, the US Treasury took the path of least resistance, issuing bills as the most accessible way, having 2.3 trillion of excess liquidity in reverse repo. Now this trick won't work. Next year, there are expected to be 5.9 trillion bill repayments, nearly 3.5 trillion note and bond repayments, and another 2 trillion in deficit financing. I do not know what they gonna do with this...
That's being said, we've provided very detailed analysis to wide amount of important driving factors, that are silenced by big media agencies. So everybody could make its own conclusions, which seem obvious to us.
As we've mentioned yesterday, there were no big events this week, especially gold specific events. But the progress of existed factors that are supportive for the Gold market and some political events tell that we're on the right course. It is amazing how very small event could trigger big action. I'm speaking about Initial claims report. In 99% cases it is usually ignored or triggers minor reaction. But, as market already was prepared by weaker NFP and dovish comments from the Fed and J. Yellen - minor event has triggered solid action and maybe it is already the starting point of major upside tendency continuation.
Market overview
Gold rose as traders assessed mixed signals on the US economy while awaiting a slew of Federal Reserve speakers for clues about the outlook for interest rates. A softer-than expected US jobs print last week added to evidence the economy is gradually slowing, easing fears that markets are headed for a painful rut marked by high inflation and sluggish growth. Still, inflation remains sticky, which means that there’s a limit on what the US central bank can do and that bond yields may remain in their recent ranges.
Swap traders are now cautiously upping their bets for policy easing this year, and gold investors are upping their bids on views that inflation may remain higher for longer. A record-breaking rally saw the metal hit a succession of all-time highs in April, with those gains linked to strong central-bank purchases, demand from Asian markets and haven buying amid conflicts in Ukraine and the Middle East.
Bullion became less attractive in recent weeks on signs that the Middle East is easing away from a potential full-blown war. However, Israel’s military has told civilians to move out of parts of Rafah, a possible prelude to a long-expected attack on the Gazan city. The move comes after cease-fire talks between Hamas and Israel in Cairo over the weekend stalled, the main sticking point being the Iran-backed militant group’s insistence that any truce is permanent.
Federal Reserve Bank of Boston President Susan Collins expressed confidence that the current setting of monetary policy will slow the economy in the way she believes will be necessary to get inflation back to the Fed's 2% target.
Gold prices climbed on Friday, en route to their best week in five, with zero-yield bullion building on momentum fuelled by weaker U.S. jobs data this week that reinforced expectations for interest rate cut by the Federal Reserve. Gold gained more than 1% on Thursday after data showed a bigger-than-expected rise in weekly claims for state unemployment benefits.
Investors are now looking forward to the U.S. producer price index and consumer price index data due next week, both of which could significantly impact gold and silver prices.
Meanwhile, near-record domestic prices stifled demand for physical gold in India, the world's second-biggest consumer, during a key festival.
China’s central bank topped up its gold reserves for an 18th straight month in April, although the pace of buying slowed in the face of record prices. In April, the PBOC bought 60,000 troy ounces, according to official data released Tuesday. That’s down from 160,000 ounces in March, and 390,000 ounces in February. First-quarter purchases by the world’s central banks, led by China, were the strongest on record, according to the World Gold Council. Some market watchers have suggested that gold’s 12% rally this year has been partly driven by mystery buyers among those institutions. Gold has also been supported by increased demand from Asian investors, especially in China, where appetite has been sharpened by an under-performing economy and lackluster markets.
LONG TERM FUNDAMENTAL EVENTS
The only economic news this week is the signing of a free trade agreement between Serbia and China, since this agreement effectively closes the possibility for Serbia to join the EU. It means that the pressing tool that EU was using constantly to force Serbia to do what was said is not working any more. Serbia is despaired to join EU making old proverb works - "You will join EU after the Turkey. And when will Turkey join EU? Never..." So, Serbia has tired to wait and turns to the East. This tells about two things - joining West doesn't look as attractive as before. Second - it confirms acceleration of world's fragmentation.
Another moment is sharp increase in duties on the import of Chinese EV to the United States. Actually, the WTO has already, in fact, died, but an this is just an extra confirmation. All crisis events stand underway. The picture turns out to be, frankly, depressing across the Globe…
Switzerland and Sweden already have cut the rate, not be able to hold high rates pressure. Others, especially BoE and EU are under way to the first rate cut, which is obviously bullish sign for Gold, especially while inflation stands sticky. If this is not a crisis, then what is a crisis? Let's recall that all these data are given in a situation of frankly underestimated inflation. Let's imagine that Summers' estimates are correct - the decline in some indicators becomes generally double-digit, assuming that the main developed countries are doing about the same as in the United States. Besides, the US GDP is also artificially pumped by including there the stock market performance, which is obvious, by its nature has nothing common to "Product".
As we told many times, we're dealing not with recession that is cyclical by its nature and usually short lived, but, with the Structural crisis that is long term. In 1930-32, a similar crisis lasted for almost 3 years. Now, since the structural imbalances are higher, it will be deeper and longer. But it has the same specific feature - constant rate of decline.
If we take into account the role of the state in maintaining the economy, which is much higher today than 90 years ago, the monthly rate of decline is not 1% of GDP, but about 0.5-0.6%. That is, on an annual scale, it was about 10% in 1930s, and today it is about 6-7%. Since the cumulative scale of the recession should be about 55-60% of GDP for the United States, the crisis will last 8-10 years. Of which 2.5 years have already passed (since the autumn of 2021).
It should be noted that at some point the crisis may accelerate dramatically. Today it follows an inflationary scenario, rather than deflationary as it was in 1930. That's why in 1930s crisis started after stock market collapse(In October 1929). Now collapse is yet to happen. But as real GDP falls and monetary policy easing (which has already begun, this collapse is almost inevitable. Therefore, the overall economic picture looks disappointing.
Let's go further. I do not know whether you've signed it or not but in recent few weeks big media start pumping the topic of inflation but in a bit disguised manner, by showing performance of different assets. To name some, Transportation costs began to rise again. The Shanghai index tends to be a leading indicator for the global container index. Bad Weather and War Are Straining the World’s Wheat Supply - so, be prepared for price growth, although there are enough wheat in global storages, but they need something to raise inflation fears. The same is about Copper deficit etc. but now EV production is falling and the US imposes 100% duties on Chinese EV's. So, they warm up the inflation topic.
The inflationary expectations are raising again. Americans do not understand why Big Mac costs 18$, while grandpa in Twitter tells:
Translating this into common language it means that "first we will weaken the dollar by printing money, putting the entire real estate sector on even greater leverage, and then, when a consumer solvency crisis occurs and real estate prices begin to fall like in 2008, a series of defaults in credit institutions will sweep across the country, which again will have to be rescued"
As a result, US consumer sentiment starts falling. This should to be expected, since the stock market has been doing very poorly since the beginning of April. That is, the welfare effect, began to weaken, which immediately adjusted the average expected income down and worsened consumer sentiment, which means they will soon begin to spend less if the situation does not change dramatically.
"Great 7" could climb higher, showing the picture of the strong market but analysts are breaking the veil. More than 40% of all companies in the Russell 2000 index have a net income loss. What is doubly interesting is that, obviously, the trend towards an increase in the share of unprofitable companies is a trend of the last 30 years, and not just the current cycle of rate increases. Even the period of zero rates did not help reverse this trend. How they are credited at a loss in principle remains a mystery.
Sentiment impacts on loan activity. In March the increase in card debt practically disappeared and amounted to a symbolic 152 million - the minimum increase since Covid. ️Another interesting point can be found inside the report: non-revolving credit grew by a modest 6.1 billion , which is slightly higher than February's 4.3 billion, and this is exactly half of the average monthly increase in non-revolving credit of 12.2 billion over the past decade.
Meantime, the number of Guru's forecasting soon collapse are raising. Yesterday we've considered it in relation to Forex market, but Martin Armstrong also said few thing about Gold. Previously we've explained why the West urgently needs big war, some people take this with suspicious. But Martin Armstrong tells the same - war is the most simple way to get out from the debt dead way:
Sounds not very optimistic, right? But the truth is better than false rosy picture. So, what they could do with the bond market? Hardly they will allow it to fall directly. If problems arise, the market will simply be closed. You are an investor for 30 years - so sit there for 30 years. If you want to out - fine, you can sell it on the over-the-counter market for 1-2%, approximately.
And the main thing is not to miss this moment. Because then it will be impossible to jump out of almost nowhere: repo credit pyramids are tied to treasuries, and many shares bought by banks and much more. All this will be cheap, and the “right” people who have access to liquidity will collect it all from the floor. The US budget will be financed directly by the Federal Reserve, because there will be no other options anyway. Therefore, the key point in the whole scheme is the decision to stop the market. We cannot predict it, but we simply must collect facts for further analysis.
The tightening liquidity and credit conditions is the side of the same coin. Spread between utilities sector dividend yield and 10-year US Treasury yield, at 2007 lows. Nobody should have "excess liquidity" to the "X" moment, except few "right" persons.
NEW GOLDMAN SACHS GOLD REPORT
Recently we've shared the new GS Gold report. Here we will not put it totally, but bring some extractions that seem important. Major thing is of course - new targets.
There are a lot of interesting stuff in report, you could read it, its just 5 pages length, but here is what seems to be important. Additionally to Gold, Goldman raised its price forecast for copper by the end of 2024 by 20% immediately - up to $12,000 per ton - due to the projected shortage in the market. Goldman Sachs expects very significant copper deficit in 2024. In order to fill the market's potential copper gap of 8 million tons by 2034, mining companies need prices above $10,000 - $12,000 per ton - CEO Trafigura. While Citi Announces Second Massive Copper Bull Market of This Century. Why it is important?
Based on the fact that Goldman is not only predicting growth in copper, but also predicting a rally in gold against the backdrop of sanctions and debt issues, we can conclude that they are not expecting a deflationary contraction/financial/economic crisis. Otherwise, how can a copper shortage arise and the demand for gold continue in the presence of a liquidity shortage between system participants, which always accompanies crises?
It seems that the GS apparently, are confident that any problem (by the end of the year) will be filled with money, and the economy will continue to be stimulated. It means that the US economy will go on inflationary scenario, that confirms our general look of stagflation. Excellent perspectives. The Goldmans also do not have a crystal ball, and they do not know the future, and they have no guarantees (and investment recommendations), but the direction of movement (and the logic of their mathematical model) is probably close to reality. And this might be very good news, but only for those who have, as your humble servant endlessly repeats, Gold (some could add "and BTC", but not me). I won’t ask why this isn’t shown to Westerners in the mainstream media. “Biden Strong, America Strong, Dollar Strong” and all that.
Hopefully you're not too tired from all this stuff. Ok, the last thing, it is really long term. I'll try to bring it short. The problem stands with the new debt issue by the US government. The main intrigue for the next six months is whether or not they will be able to place more than 1 trillion in government bonds for at least 2 years? This is not as trivial as it seems.
Since June 2023, the main issue was in bills, that at high degree financed by the funds of a reverse repo with the Fed, which decreased by almost 2 trillion over the year. Since March 25, the Treasury has been paying off bills (233 billion as of May 2) due to the budget surplus in April and the accumulated 0.8-0.9 trillion cash position on TGA account.
The procedure for replacing bills already was in recent history in 2021, but was picked up by excess liquidity and QE from the Fed for 4.5 trillion over two years, whereas now it is QT, so the conditions are not comparable. The current US national debt is as follows (as of April 30, 2024): bills - 5.87 trillion, notes - 13.96 trillion, bonds - 4.51 trillion, TIPS - 2 trillion, FRN - 0.55 trillion, and in total - 26.9 trillion. Bills account for about 37% in the structure of interest expenses - the maximum in modern history.
Last year, the US Treasury took the path of least resistance, issuing bills as the most accessible way, having 2.3 trillion of excess liquidity in reverse repo. Now this trick won't work. Next year, there are expected to be 5.9 trillion bill repayments, nearly 3.5 trillion note and bond repayments, and another 2 trillion in deficit financing. I do not know what they gonna do with this...
That's being said, we've provided very detailed analysis to wide amount of important driving factors, that are silenced by big media agencies. So everybody could make its own conclusions, which seem obvious to us.
