Sive Morten
Special Consultant to the FPA
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- 18,676
Fundamentals
This week we've decided to prepare a bit different kind of report. Usually we scrutiny watch for particular data and use them to form corresponding background that lets us to form forecasts and long-term expectations. Now after more than a year of this work we've accumulated enough components with detailed analysis, links to the sources etc., and now it would be interesting to collect the puzzle. When you will see the picture in a whole, you understand better why we at the edge of epic changes and tectonic shifts. This explains why by our opinion we're still in the beginning of big journey. Although gold has raised for ~600$ since we've seen this possibility, this was just a flowers and fruits seem still ahead. Market becomes more volatile, because big moves always attract a lot of speculators and more imposed to sharp moves, including downside, but this is just a by product of popularity.
Market overview
Gold prices temporary slipped from record-high levels on Wednesday as the U.S. dollar and Treasury yields firmed after a stronger-than-expected inflation print softened expectations of an early U.S. rate cut. A Labor Department report showed the Consumer Price Index(CPI) rose 0.4% on a monthly basis in March, compared with the 0.3% increase expected by economists polled by Reuters. Federal Reserve officials worried that progress on inflation might have stalled, making a longer period of tight monetary policy necessary, according to the minutes of the U.S. central bank's March 19-20 meeting.
Gold prices rose above $2,400 per ounce to an all-time high on Friday, heading for their fourth week of gains, as growing tensions in the Middle East prompted investors to seek refuge in the safe-haven assets. Also softer-than-expected U.S. producer prices data boosted hopes for U.S. rate cuts this year, while persistent geopolitical concerns added to the metal's shine. A Labor Department report showed the Producer Price Index (PPI) rose 0.2% month-on-month in March, compared with a 0.3% increase expected by economists polled by Reuters.
Everybody starts uplifting targets
Goldman Sachs hiked its year-end gold price forecast to $2,700 per ounce from $2,300, citing the metal's bull market's indifference to the usual macro factors.
UBS Group AG boosted its year-end gold outlook by 11% to $2,500 an ounce, with a revival in demand for bullion-backed exchange-traded funds set to support another leg up when the Fed cuts rates around mid-year, according to a note from analysts including Giovanni Staunovo.
Bank of America also expects 3000$ level on gold and 30$ in silver:
The Yardeni Research president predicted that gold prices could rise as high as $3,500 by the end of next year, implying as much as a 49% upside for the precious metal from Monday's price around $2,347. That's because inflation could follow the path it did in the 1970s, when prices began to spiral and gold went from $35 an ounce to a peak of $665 an ounce.
If conflict in the Middle East escalates (and it is), oil prices could rise over $100 a barrel, Yardeni predicted. He estimated there was a 20% chance inflation could rise to a second peak, which would result in the bullish run-up for gold. Yardeni isn't the only forecaster who sees more upside for gold in the years ahead. Top economist David Rosenberg said he saw 30% upside for gold prices, thanks to the risk stemming from the Fed's expected rate cuts and rising geopolitical conflict. The momentum could carry the yellow metal to $3,000 before the next business cycle shift — a 30% increase from current levels. He said in a recent note that the latest gold run is "especially impressive," because it not only surpassed bitcoin and every major currency, but also overcame typical macro headwinds that often depress its value.
The economist laid out two scenarios, both at which arrive at the conclusion that gold has further to rise: a "soft landing" and a typical bear market. In a "soft landing" scenario, assuming global real interest rates return to their pre-2000 averages—higher than the post-GFC stagnation era—this would lead the US dollar to drop by approximately 12% and push up gold prices by about 10%.
But if a recession hits the economy—with global real interest rates reverting to their 2014-2024 average, stock markets stabilizing, and the dollar depreciating by around 8%—the upside for gold is more like 15%, putting it in the $2,500 range.
The current momentum is a signal to increase holdings in gold, according to Rajeev De Mello, global macro portfolio manager at GAMA Asset Management SA. Prices may now be vulnerable to a slight correction, he said, but any pullback is likely to bring in more buyers.
One key factor has been enthusiasm among central banks, encouraging buyers like Matthew Schwab, head of investor solutions at Quantix Commodities with $933 million under management. The firm’s long-only fund has been overweight gold since 2022, with bullion’s weighting around 30% — compared with about 15% in the Bloomberg Commodity Index.
There’s one further reason to expect another boost. Unusually in this environment, investor demand for gold-backed exchange traded funds — typically a key driver for bullion — has yet to materialize. In fact, total holdings are close to the lowest level since 2019, according to data compiled by Bloomberg. According to Ben Ross, who manages about $410 million in commodities strategies at Cohen & Steers, that’s largely explained by investors chasing returns in the money market. But once the Fed actually deploys its planned rate cuts, that will eventually trigger fresh inflows into ETFs and give gold prices a further boost.
The iShares Gold Producers ETF is up 17% since a double-digit decline in 2022. But it’s still way off the highs of 2011, something that makes little sense given the rise in the metal itself. There could be fireworks ahead for those miners. It is already happening in China:
For the second time in a week, trading in an ETF that owns gold mining companies was stopped overnight in China. The ETF's price rose more than 40% over the past four sessions before falling 10% when trading resumed on Monday. This ETF rally correlated with the spot price of gold around $2,700.The premium of the ChinaAMC CSI SH-SZ-HK Gold Industry Equity ETF to its underlying assets has now risen to more than 30%...
Might it be, asks Ruffer, that we are entering a new era for gold of “price insensitive strategic buyers taking ounces out of the market that will never return?” One in which increasingly limited supply meets rising demand? If so, and if the rising price starts to pull the retail investors in the west who have little or no exposure to gold right now back in, there seems little to stop the gold price continuing to soar. As for the rise in gold prices allegedly due to the Chinese entering it, then, let’s be honest, there is not enough gold in free circulation to satisfy such a demand. Its capitalization is only ~$15 trillion. Therefore, if they seriously started going into gold, we would already see five-digit prices. In general, the real inflows to gold, if it happens, is yet to come.
The big picture
Information that we've provided above looks great and inspiring, but all comments as from private investors as from big bankers or Fund managers are single-sided. All speak about the same stuff, considering situation only from one side - Fed rates, geopolitics etc. "If Fed cuts - gold go up etc." So, they keep this market inside the existed system and move it with historical drivers. But it is not working in this way any more. Nobody tells about major thing - changing of global financial system. Let's create the big picture:
"natural" accommodation of financial system to new reality. This explains why common methods of analysis are working with limitations, because drivers are of different nature and have significantly higher level of the time perspective. We suggest it is better to not go against them and follow only bullish view on long term time frames, keeping our call to accumulate physical metal and use it for wealth preservation.
This week we've decided to prepare a bit different kind of report. Usually we scrutiny watch for particular data and use them to form corresponding background that lets us to form forecasts and long-term expectations. Now after more than a year of this work we've accumulated enough components with detailed analysis, links to the sources etc., and now it would be interesting to collect the puzzle. When you will see the picture in a whole, you understand better why we at the edge of epic changes and tectonic shifts. This explains why by our opinion we're still in the beginning of big journey. Although gold has raised for ~600$ since we've seen this possibility, this was just a flowers and fruits seem still ahead. Market becomes more volatile, because big moves always attract a lot of speculators and more imposed to sharp moves, including downside, but this is just a by product of popularity.
Market overview
Gold prices temporary slipped from record-high levels on Wednesday as the U.S. dollar and Treasury yields firmed after a stronger-than-expected inflation print softened expectations of an early U.S. rate cut. A Labor Department report showed the Consumer Price Index(CPI) rose 0.4% on a monthly basis in March, compared with the 0.3% increase expected by economists polled by Reuters. Federal Reserve officials worried that progress on inflation might have stalled, making a longer period of tight monetary policy necessary, according to the minutes of the U.S. central bank's March 19-20 meeting.
Gold prices rose above $2,400 per ounce to an all-time high on Friday, heading for their fourth week of gains, as growing tensions in the Middle East prompted investors to seek refuge in the safe-haven assets. Also softer-than-expected U.S. producer prices data boosted hopes for U.S. rate cuts this year, while persistent geopolitical concerns added to the metal's shine. A Labor Department report showed the Producer Price Index (PPI) rose 0.2% month-on-month in March, compared with a 0.3% increase expected by economists polled by Reuters.
Everybody starts uplifting targets
Goldman Sachs hiked its year-end gold price forecast to $2,700 per ounce from $2,300, citing the metal's bull market's indifference to the usual macro factors.
UBS Group AG boosted its year-end gold outlook by 11% to $2,500 an ounce, with a revival in demand for bullion-backed exchange-traded funds set to support another leg up when the Fed cuts rates around mid-year, according to a note from analysts including Giovanni Staunovo.
Bank of America also expects 3000$ level on gold and 30$ in silver:
The Yardeni Research president predicted that gold prices could rise as high as $3,500 by the end of next year, implying as much as a 49% upside for the precious metal from Monday's price around $2,347. That's because inflation could follow the path it did in the 1970s, when prices began to spiral and gold went from $35 an ounce to a peak of $665 an ounce.
If conflict in the Middle East escalates (and it is), oil prices could rise over $100 a barrel, Yardeni predicted. He estimated there was a 20% chance inflation could rise to a second peak, which would result in the bullish run-up for gold. Yardeni isn't the only forecaster who sees more upside for gold in the years ahead. Top economist David Rosenberg said he saw 30% upside for gold prices, thanks to the risk stemming from the Fed's expected rate cuts and rising geopolitical conflict. The momentum could carry the yellow metal to $3,000 before the next business cycle shift — a 30% increase from current levels. He said in a recent note that the latest gold run is "especially impressive," because it not only surpassed bitcoin and every major currency, but also overcame typical macro headwinds that often depress its value.
Rosenberg also attributed gold's recent rally to global geopolitical risks and unpredictable macroeconomic outlook. On the monetary side, he said — with the US debt-to-GDP ratio hitting 120%, and servicing costs escalating — investors are boosting gold holdings amid uncertainty over election outcomes and the looming possibility of a fiscal crisis.
The economist laid out two scenarios, both at which arrive at the conclusion that gold has further to rise: a "soft landing" and a typical bear market. In a "soft landing" scenario, assuming global real interest rates return to their pre-2000 averages—higher than the post-GFC stagnation era—this would lead the US dollar to drop by approximately 12% and push up gold prices by about 10%.
But if a recession hits the economy—with global real interest rates reverting to their 2014-2024 average, stock markets stabilizing, and the dollar depreciating by around 8%—the upside for gold is more like 15%, putting it in the $2,500 range.
The current momentum is a signal to increase holdings in gold, according to Rajeev De Mello, global macro portfolio manager at GAMA Asset Management SA. Prices may now be vulnerable to a slight correction, he said, but any pullback is likely to bring in more buyers.
In New York’s Comex gold futures market, money managers are placing more bullish bets on gold, with net long positions rising to near four-year high in the week ended April 2.
One key factor has been enthusiasm among central banks, encouraging buyers like Matthew Schwab, head of investor solutions at Quantix Commodities with $933 million under management. The firm’s long-only fund has been overweight gold since 2022, with bullion’s weighting around 30% — compared with about 15% in the Bloomberg Commodity Index.
He last month increased his exposure to gold and silver to roughly 8% across his two portfolios, which combined have about $3 billion under management.
There’s one further reason to expect another boost. Unusually in this environment, investor demand for gold-backed exchange traded funds — typically a key driver for bullion — has yet to materialize. In fact, total holdings are close to the lowest level since 2019, according to data compiled by Bloomberg. According to Ben Ross, who manages about $410 million in commodities strategies at Cohen & Steers, that’s largely explained by investors chasing returns in the money market. But once the Fed actually deploys its planned rate cuts, that will eventually trigger fresh inflows into ETFs and give gold prices a further boost.
The iShares Gold Producers ETF is up 17% since a double-digit decline in 2022. But it’s still way off the highs of 2011, something that makes little sense given the rise in the metal itself. There could be fireworks ahead for those miners. It is already happening in China:
For the second time in a week, trading in an ETF that owns gold mining companies was stopped overnight in China. The ETF's price rose more than 40% over the past four sessions before falling 10% when trading resumed on Monday. This ETF rally correlated with the spot price of gold around $2,700.The premium of the ChinaAMC CSI SH-SZ-HK Gold Industry Equity ETF to its underlying assets has now risen to more than 30%...
Might it be, asks Ruffer, that we are entering a new era for gold of “price insensitive strategic buyers taking ounces out of the market that will never return?” One in which increasingly limited supply meets rising demand? If so, and if the rising price starts to pull the retail investors in the west who have little or no exposure to gold right now back in, there seems little to stop the gold price continuing to soar. As for the rise in gold prices allegedly due to the Chinese entering it, then, let’s be honest, there is not enough gold in free circulation to satisfy such a demand. Its capitalization is only ~$15 trillion. Therefore, if they seriously started going into gold, we would already see five-digit prices. In general, the real inflows to gold, if it happens, is yet to come.
The big picture
Information that we've provided above looks great and inspiring, but all comments as from private investors as from big bankers or Fund managers are single-sided. All speak about the same stuff, considering situation only from one side - Fed rates, geopolitics etc. "If Fed cuts - gold go up etc." So, they keep this market inside the existed system and move it with historical drivers. But it is not working in this way any more. Nobody tells about major thing - changing of global financial system. Let's create the big picture:
- Nobody defeated inflation. From the simply HORRIBLE indicators of early 2022, we managed to slightly slow down their growth rate, partially by evident cheating the data and methodic of calculations. Prices, continued to rise, but not so quickly. Although, again, mostly this “not so fast” was mainly on paper as we've shown yesterday.
- There is complete chaos and confusion in the Middle East. All Israel's efforts are ended in absolutely nothing. They didn’t defeat any Hamas, but they successfully bombed a couple of thousand babies in order to ruin as much as possible the relations of the United States, where the administration is entirely Jews, with the entire Arab world. Netanyahu generally seems to have gotten out of control. The price of oil is steadily rising. And this certainly does not help in any way to “victory over inflation.”
- It is a fake growth of the US GDP that was achieved by bubbling of the stock market and increasing the national debt on such a scale like some world war had been going on for 4 years. On the one hand you could make the vision that you're strong but in reality you have to safe on everything. The printing press has not been working for 2 years. There is simply no money in the treasury for geopolitical adventures. In real terms, the Pentagon budget is shrinking rapidly. And here every year new “challenges” appear
- In addition to juggling time intervals, American statisticians completely removed interest costs on mortgages, car loans and credit cards. All expenses are essentially calculated without taking them into account. When your credit rates rise, then such a system is completely divorced from reality. Now it turned out that in 2022, at its peak, inflation was not 9%, but 18%.
Such data correlates much better with such a parameter as consumer sentiment. American statisticians have stopped taking inflation into account, the cost of money, but in reality it exists and is destroying the real standard of living of the population, which is reflected in the growth of negative sentiment and a reduction in consumption.
When your government may or may not receive a trillion dollars from a change in official inflation by 20-30%, then you will not be so successful in the task of convincing the maximum number of economic agents that “inflation was defeated in January 2023. - The MOSCOW-BEIJING-TEHRAN alliance seems to have taken shape. This is a nightmare for any American strategist. Biden even spoke directly about this. France keep buying Russian LNG with outstanding volumes and nobody remember already about price ceil for Russian oil. Russian budget revenues are record high for both oil and gas and non-oil and gas revenues. Could you expect this in 2022, given the almost complete isolation from the European and Japanese markets?
- The Americans simply pumped up the bubble of the stock and crypto markets in order to grab the money from the world economy. Of course, when some inflatable assets give 10-100 x each, it’s hard to resist looking into this casino. The problem is that the foundation for this growth is as disgusting as possible. If you ask any valuation expert why this or that “asset” has grown several times, he simply will not be able to answer anything intelligibly. This is the most banal bubble.
- Every month, the US national debt figures are becoming more disgusting. The cost of service is growing faster than any attempts to increase budget revenues.
- You can forget about “victory over inflation”. Inflation will remain consistently high. At the same time, in trying to maintain the growth of your GDP in this way, you are driving yourself further into a corner: the cost of debt servicing is growing rapidly (it is already equal to the income for the quarter of the federal budget, this is 1/4 of all income). That is, at some point you will still have to release the rate. This will mean an even greater acceleration of inflation.
- At some point, the market will “see the light” and Nvidia and Bitcoin will fall by 70 percent in a week. Let me remind you that at the peak of Bitcoin’s acceleration, the market expected SEVEN rate cuts this year, then three, and now two. Jimi Dimon (JP Morgan Bank) actually said that it looks like there won’t be any reduction with such inflation and the rate will most likely continue to be raised. I fully believe that there will be no reductions this year. And if there is no cheap money, there is no life for bubbles.
- Russia&Co feels great in this situation. Sooner or later, the Americans will finally lose control over the price of commodities. The dollar will devaluate and there will be a more equitable distribution of value and GDP around the world. In fact, this has been happening smoothly for a whole year now. Everything is so positive that Putin seems to be able to even keep the ruble at these levels and not devalue it at all. Unless, of course, some force majeure happens.
- The idea of diplomatic isolation of the Russian Federation has completely failed, and without it the victory for Ukraine that the states and Zelensky fantasized about is impossible. In this case, the Ukraine project becomes too expensive and useless. The failed attempt at this same isolation led to the formation of a “Eurasian bloc” in which everyone hates the states. In order to do something about this, we will have to offer Putin such “gifts” against the background of which “the return of NATO to the borders of 1997” will not seem such an insane demand. Time plays exclusively on Putin.
- The political conflict inside the US is raising. Publications on fake inflation and job market statistics have turned public. They come not from "just independent experts" but from former Financial Minister and the Phil Fed Bank. Yellen speaks about households savings deterioration. As we've mentioned yesterday, it could happen that June rate cut might be a political decision that is already made. Some indirect signs point on this - Goldman Sachs reduce saving rates and increase Gold market forecast. It means that existing reserves are coming to an end and not enough to keep the image of "Strong" economy.
"natural" accommodation of financial system to new reality. This explains why common methods of analysis are working with limitations, because drivers are of different nature and have significantly higher level of the time perspective. We suggest it is better to not go against them and follow only bullish view on long term time frames, keeping our call to accumulate physical metal and use it for wealth preservation.
