Sive Morten
Special Consultant to the FPA
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- 18,673
Fundamentals
Yesterday we've provided in depth view why we suggest that the Fed probably should become the last Central Bank that will cut the rate and why dollar should keep domination over its rivals. In general strong dollar is a headwind for gold market, as well as raising inflation, but here we have three nuances that could make overall situation slightly different. First is, the relative strength of USD against its rivals doesn't mean the same strength against commodities and gold in particular. It could mean that the gold price in EUR or GBP will rally even stronger, that's all. Second is, not the inflation itself is the problem but increasing of real interest rate. But now when the Fed stands somewhere near the end of rate cycle means that with any jump in inflation and stable long-term rates the real rate will go down. So, impact from inflation that we expect should spin up could be mixed. Finally, gold now has additional supportive factors of geopolitical instability, demand from central banks and rapidly changing political situation as inside the US as EU. All these factors together tell that although from time to time gold could become an object of external pressure from occasionally strong statistics data, but general tendency should remain intact.
Today, we've said, we consider very interesting turn, that has relation to inflation and job market but in very specific way. It stands on a surface and when you will read, you will be surprised. We consider it as the harbinger of big changes and and spiral of activity in the US domestic political life.
Market overview
This week market has shown minor reaction as on J. Powell speech on Friday as on PCE data releases. Gold prices climbed on Tuesday, as expectations of interest rate cuts by the U.S. Federal Reserve firmed.
Traders are now seeing a 71% chance of a June rate-cut . Lower interest rates boost the appeal of holding non-yielding bullion. Gold prices also continue to find support from elevated physical demand from Chinese households, where gold's record rally has not tarnished the buying appetite. Central bank purchases also sustain their support for gold, with China's central bank steadily building its gold reserves.
The precious metal was also bolstered on Tuesday by weaker US dollar, which snapped a two-day rally after the People’s Bank of China on Monday set a stronger-than-expected reference rate for the yuan.
Meanwhile, gold imports by India, the world's second-biggest consumer of the precious metal, are set to plunge by more than 90% in March from the previous month, as banks cut imports after record-high prices hit demand. But this had no big impact on gold prices as import mostly stands for individual demand and usually stable year over year, becoming a part of 5 000 tonnes annual gold market, that includes all physical gold spending, such as jewelry, dantist medicine, coins, bullions etc.
According to recent The World Bank research there are two main factors may explain the recent rise in central bank gold purchases:
● Firstly, gold is seen as a safe haven and an attractive asset during periods of economic, financial and geopolitical uncertainty, as well as a portfolio diversifier.
● Secondly, gold is seen as a safe haven asset when countries are subject to financial sanctions and asset freezes.
Skeptics, however, point to gold's disadvantages, which include the cost of transporting, storing and securing it, as well as the lack of interest in it. Despite these shortcomings, gold remains a popular asset for central banks due to its history and well-regulated markets for trading.
Commodities usually rally when central banks cut interest rates, bolstering the case for going long raw materials in the coming months, according to Invesco Ltd.
In months before and after the start of easing cycles, raw material prices typically have positive returns, according to Kathy Kriskey, senior commodities and alternatives strategist at the asset manager. Gains have been particularly large when a soft landing has been achieved, bolstering the case for holding the sector as part of a wider portfolio, she said.
Raw materials prices have been buoyed in recent weeks, aided by surges in the cost of copper, cocoa, crude and gold. Until now, 2024 had been dominated by reduced price volatility as most markets remained amply supplied. Goldman Sachs Group Inc. as well said this week that commodities could return more than 15% this year as borrowing costs come down, manufacturing recovers, and geopolitical risks persist. Copper, aluminum, gold and oil products may climb, according to the bank, which also stressed the need for investors to be selective as gains wouldn’t be universal. I would also add Uranium and silver.
Goldman’s cautiously bullish outlook echoes comments from other market watchers. Commodities are entering a fresh cyclical upswing aided by tighter supplies and an upturn in the global economy, Macquarie Group Ltd. said earlier this month. Jeff Currie, formerly the head of commodities research at Goldman and now at Carlyle Group LP, has also forecast gains as the Fed cuts rates. Elsewhere, JPMorgan Chase & Co. highlighted gold’s upside potential.
Among Goldman’s year-end forecasts, copper was seen at $10,000 a ton, aluminum at $2,600 a ton, and gold at $2,300 an ounce, which would be a nominal record. The base metals were last near $8,886 a ton and $2,310 a ton on the London Metal Exchange, while bullion was close to $2,167 an ounce.
DON"T FORGET ABOUT SILVER
Silver is an intriguing metal. Like gold, it’s a precious metal often used in jewelery. But unlike gold, it has a vast array of industrial uses, from solar panels to computing to health. That means its price is influenced by economic growth prospects. A booming, or recovering, economy will generally be good for silver. More interestingly still, more silver is being used each year than is being dug out of the ground, according to a recent note by Michael Hsueh at Deutsche Bank. In other words, it’s running at a supply deficit. That sounds quite exciting — more demand than supply.
But there’s a catch. As Hsueh notes, there’s still a “vast stock of silver above ground” in the form of scrap silver that could easily make its way to market at the right price. As a result, physical supply and demand is not an issue in the way that it can be for, say, oil.
Big yawn at silver then? Not quite. You see, in common with gold, yet unlike any other precious metal (eg platinum and palladium), silver used to play a role — albeit a junior one — in the monetary system. As a result, it’s not just the economic cycle that matters, but also the monetary backdrop. Put more simply, silver tends to follow what gold is doing. And based on the gold/silver ratio, silver is currently on the cheap side by that measure, notes Charlie Morris over at ByteTree. Today, as the chart below shows, one ounce of gold will buy you roughly 88 ounces of silver. The 30-year average is more like 67.
Hsueh at Deutsche Bank reckons that both prices overall are likely to range trade in the coming months, rather than move strongly in either direction. But assuming you think gold’s bull market can be sustained in the longer run (as Marcus does) — and particularly if you think that there’s a chance that the global manufacturing cycle might be about to turn higher — there’s a case for arguing that silver may have further to go. So how should you think about silver from an investment point of view?
Silver is optional in portfolio. If gold is going up, silver will tend to go up too. Depending on the starting point and the economic backdrop, it may well go up faster than gold. But it’s highly volatile — it will give you a serious rollercoaster ride. Depending on the way you're would like to take the investing way be different. really think that hyperinflation and fiat collapse is on the cards, and you’re happy to wait faithfully for that moment when the silver price presumably goes to infinity and beyond as a result — it’s more of a trade.
If you are interested in owning physical silver, you can go for the romantic option and buy antique silver, or buy it in bullion or coin form. But be aware of 20% VAT in some countries, such as UK. If you’re just looking to get exposure, it’s easier and cheaper to buy via an exchange-traded product backed by physical silver, or via one of the online bullion dealers that will put your name on a lump of silver in a warehouse.
If investors decide that the gold bull market has legs, then it’s very possible that both silver and the miners could benefit from the dash for catch-up trades. Although it is an open question in what proportion to gold positions silver should be taken. This depends on your personal view and analysis. Our humble opinion stands in favor of gold as we suggest that gold is just coming to most active period and rally from 1650 was just a preparation to this. From this point of view hardly more than 15-20% of silver is necessary in precious metals portfolio. Later when rally in gold will start exhausting, situation could change. As silver usually lags behind, the balance might be changed in favor of the silver.
The dark side of the US statistics
Last week we've mentioned very interesting macro economy article by L. Summers. This article is interesting by itself, because unveils different approach to statistics interpretation, and provides alternative numbers of major US statistics data with explanations. But for us there are two points are interesting. First is, alternative inflation numbers, second - why this reports is written right now?
Here you could see that by L. Summers calculation the real inflation is significantly higher than the official one. We already talked about it many times, because the way of calculation has been revised twice in recent few years:
As we can see, the alternative estimate is much higher than the official one and the difference exceeds the pace of economic growth in the United States. In other words, even this estimate tells that the US has been experiencing an economic downturn since the fall of 2021. We have written about it many times and even gave estimates of its scale (about 6% of GDP per year), but if liberal monetarists have already started writing about it, this means a lot. Simmers writes:
But this is only the half of the story. On Friday J. Powell was spoken about interest rates policy and said nothing new. Right now we're mostly interested with his view on job market. He said:
That's when a striking discrepancy emerged between the number of US Payrolls (as measured by the BLS' Establishment Survey, a far more crude and imprecise, yet much more market-moving data series), and the number of actual Employed Workers (as measured by the BLS' far more accurate Household Survey) . As we showed then, after the two series had tracked each other tick for tick for years, a wide gap opened in March 2022 which quickly grew to 1.5 million jobs in just 3 months...
... one which has since exploded to a whopping 5 million "employed workers" that apparently do not exist.
In other words, starting in 2022 and accelerating to present days, less and less full-time jobs were added, until we got to the absurd situation that all the new jobs in the past year have been part-time jobs! Or, as we first pointed out several months ago, not only has all job creation in the past 6 years - since May 2018 - has been exclusively for foreign-born workers...
Thus the Philadelphia Fed found that the BLS had overstated jobs to the tune of 1.1 million! This is what the Philadelphia Fed wrote in its quarterly Early Benchmark Revision of State Payroll Employment report at the time:
it also means that far from the stellar 230K average monthly increase in payrolls in 2023, which the White House would spin time and again as direct evidence of the benefits of Bidenomics, the true average monthly payroll increase in 2023 was only 130K! Putting it all together, we now know - as the Philly Fed reported first - that the labor market is far weaker than conventionally believed. In fact, no less than 800,000 payrolls are "missing" when one uses the far more accurate Quarterly Census of Employment and Wages data rather than the BLS' woefully inaccurate and politically mandated payrolls "data"
Yes, this is great article from economical point of view and understanding the real deals in the US job market, but how it relates to gold?
We see the starting of the conflict of interests with this statement. Rats are running from drowning ship. This article was published around date of J. Powell's speech (if not at this date) and indirectly It accuses J. Powell in lies. Because he said in his statement that job market is strong. What is even more interesting that article has come from his subordinated office, which is the Philadelphia Reserve Bank. What was that? Attempt to frame J. Powell? But if he knew about it, it means that he intentionally speaks lies. It is safe to say that there is an outright distortion of information in Powell's speech, there is simply a hope for the best.
But in general in this sense, a conflict is inevitably brewing between the part of the liberal economic elite that is ready to figure something out (Summers & Co, authors of an article on labor statistics) and Powell's team. By the way, the heads of many large banks, judging by their recent statements, are more willing to join Summers than Powell.
For example, recent JP Morgan view on the US stock market. The S&P 500 will finish 2024 at 4,200, a roughly 8% decline from where the benchmark sat on Wednesday.
Lakos-Bujas points out that household savings are falling, borrowing costs for both consumers and corporates have reached a multi-decade high and global demand is cooling amid disinflation. JPMorgan also notes recent commentary from management teams during earnings calls depicted a deteriorating outlook for both consumers and the cost of credit. Per JPMorgan's work, the sentiment around the cost of capital hasn't been this low since the Great Financial Crisis.
While BlackRock CEO Larry Fink says gold investors hurt capital market development. Larry Fink has turned heads over the past two years by going all-in on Bitcoin. In his annual letter to shareholders published Tuesday, while singing the praises of capital markets as a mechanism for wealth creation, Fink shared his views on the original store of value.
The US faces a Liz Truss-style market shock if the government ignores the country's growing federal debt, the head of the independent Congressional Fiscal Office has warned. Phillip Swagel, director of the Congressional Budget Office, said the growing US budget burden is on an "unprecedented" trajectory, threatening a crisis similar to the one that caused the sterling flight and the collapse of the Truss government in the UK in 2022.
...
Yesterday we've provided in depth view why we suggest that the Fed probably should become the last Central Bank that will cut the rate and why dollar should keep domination over its rivals. In general strong dollar is a headwind for gold market, as well as raising inflation, but here we have three nuances that could make overall situation slightly different. First is, the relative strength of USD against its rivals doesn't mean the same strength against commodities and gold in particular. It could mean that the gold price in EUR or GBP will rally even stronger, that's all. Second is, not the inflation itself is the problem but increasing of real interest rate. But now when the Fed stands somewhere near the end of rate cycle means that with any jump in inflation and stable long-term rates the real rate will go down. So, impact from inflation that we expect should spin up could be mixed. Finally, gold now has additional supportive factors of geopolitical instability, demand from central banks and rapidly changing political situation as inside the US as EU. All these factors together tell that although from time to time gold could become an object of external pressure from occasionally strong statistics data, but general tendency should remain intact.
Today, we've said, we consider very interesting turn, that has relation to inflation and job market but in very specific way. It stands on a surface and when you will read, you will be surprised. We consider it as the harbinger of big changes and and spiral of activity in the US domestic political life.
Market overview
This week market has shown minor reaction as on J. Powell speech on Friday as on PCE data releases. Gold prices climbed on Tuesday, as expectations of interest rate cuts by the U.S. Federal Reserve firmed.
Traders are now seeing a 71% chance of a June rate-cut . Lower interest rates boost the appeal of holding non-yielding bullion. Gold prices also continue to find support from elevated physical demand from Chinese households, where gold's record rally has not tarnished the buying appetite. Central bank purchases also sustain their support for gold, with China's central bank steadily building its gold reserves.
The precious metal was also bolstered on Tuesday by weaker US dollar, which snapped a two-day rally after the People’s Bank of China on Monday set a stronger-than-expected reference rate for the yuan.
Meanwhile, gold imports by India, the world's second-biggest consumer of the precious metal, are set to plunge by more than 90% in March from the previous month, as banks cut imports after record-high prices hit demand. But this had no big impact on gold prices as import mostly stands for individual demand and usually stable year over year, becoming a part of 5 000 tonnes annual gold market, that includes all physical gold spending, such as jewelry, dantist medicine, coins, bullions etc.
According to recent The World Bank research there are two main factors may explain the recent rise in central bank gold purchases:
● Firstly, gold is seen as a safe haven and an attractive asset during periods of economic, financial and geopolitical uncertainty, as well as a portfolio diversifier.
● Secondly, gold is seen as a safe haven asset when countries are subject to financial sanctions and asset freezes.
Skeptics, however, point to gold's disadvantages, which include the cost of transporting, storing and securing it, as well as the lack of interest in it. Despite these shortcomings, gold remains a popular asset for central banks due to its history and well-regulated markets for trading.
Commodities usually rally when central banks cut interest rates, bolstering the case for going long raw materials in the coming months, according to Invesco Ltd.
In months before and after the start of easing cycles, raw material prices typically have positive returns, according to Kathy Kriskey, senior commodities and alternatives strategist at the asset manager. Gains have been particularly large when a soft landing has been achieved, bolstering the case for holding the sector as part of a wider portfolio, she said.
Raw materials prices have been buoyed in recent weeks, aided by surges in the cost of copper, cocoa, crude and gold. Until now, 2024 had been dominated by reduced price volatility as most markets remained amply supplied. Goldman Sachs Group Inc. as well said this week that commodities could return more than 15% this year as borrowing costs come down, manufacturing recovers, and geopolitical risks persist. Copper, aluminum, gold and oil products may climb, according to the bank, which also stressed the need for investors to be selective as gains wouldn’t be universal. I would also add Uranium and silver.
Goldman’s cautiously bullish outlook echoes comments from other market watchers. Commodities are entering a fresh cyclical upswing aided by tighter supplies and an upturn in the global economy, Macquarie Group Ltd. said earlier this month. Jeff Currie, formerly the head of commodities research at Goldman and now at Carlyle Group LP, has also forecast gains as the Fed cuts rates. Elsewhere, JPMorgan Chase & Co. highlighted gold’s upside potential.
Among Goldman’s year-end forecasts, copper was seen at $10,000 a ton, aluminum at $2,600 a ton, and gold at $2,300 an ounce, which would be a nominal record. The base metals were last near $8,886 a ton and $2,310 a ton on the London Metal Exchange, while bullion was close to $2,167 an ounce.
DON"T FORGET ABOUT SILVER
Silver is an intriguing metal. Like gold, it’s a precious metal often used in jewelery. But unlike gold, it has a vast array of industrial uses, from solar panels to computing to health. That means its price is influenced by economic growth prospects. A booming, or recovering, economy will generally be good for silver. More interestingly still, more silver is being used each year than is being dug out of the ground, according to a recent note by Michael Hsueh at Deutsche Bank. In other words, it’s running at a supply deficit. That sounds quite exciting — more demand than supply.
But there’s a catch. As Hsueh notes, there’s still a “vast stock of silver above ground” in the form of scrap silver that could easily make its way to market at the right price. As a result, physical supply and demand is not an issue in the way that it can be for, say, oil.
Big yawn at silver then? Not quite. You see, in common with gold, yet unlike any other precious metal (eg platinum and palladium), silver used to play a role — albeit a junior one — in the monetary system. As a result, it’s not just the economic cycle that matters, but also the monetary backdrop. Put more simply, silver tends to follow what gold is doing. And based on the gold/silver ratio, silver is currently on the cheap side by that measure, notes Charlie Morris over at ByteTree. Today, as the chart below shows, one ounce of gold will buy you roughly 88 ounces of silver. The 30-year average is more like 67.
Hsueh at Deutsche Bank reckons that both prices overall are likely to range trade in the coming months, rather than move strongly in either direction. But assuming you think gold’s bull market can be sustained in the longer run (as Marcus does) — and particularly if you think that there’s a chance that the global manufacturing cycle might be about to turn higher — there’s a case for arguing that silver may have further to go. So how should you think about silver from an investment point of view?
Silver is optional in portfolio. If gold is going up, silver will tend to go up too. Depending on the starting point and the economic backdrop, it may well go up faster than gold. But it’s highly volatile — it will give you a serious rollercoaster ride. Depending on the way you're would like to take the investing way be different. really think that hyperinflation and fiat collapse is on the cards, and you’re happy to wait faithfully for that moment when the silver price presumably goes to infinity and beyond as a result — it’s more of a trade.
If you are interested in owning physical silver, you can go for the romantic option and buy antique silver, or buy it in bullion or coin form. But be aware of 20% VAT in some countries, such as UK. If you’re just looking to get exposure, it’s easier and cheaper to buy via an exchange-traded product backed by physical silver, or via one of the online bullion dealers that will put your name on a lump of silver in a warehouse.
If investors decide that the gold bull market has legs, then it’s very possible that both silver and the miners could benefit from the dash for catch-up trades. Although it is an open question in what proportion to gold positions silver should be taken. This depends on your personal view and analysis. Our humble opinion stands in favor of gold as we suggest that gold is just coming to most active period and rally from 1650 was just a preparation to this. From this point of view hardly more than 15-20% of silver is necessary in precious metals portfolio. Later when rally in gold will start exhausting, situation could change. As silver usually lags behind, the balance might be changed in favor of the silver.
The dark side of the US statistics
Last week we've mentioned very interesting macro economy article by L. Summers. This article is interesting by itself, because unveils different approach to statistics interpretation, and provides alternative numbers of major US statistics data with explanations. But for us there are two points are interesting. First is, alternative inflation numbers, second - why this reports is written right now?
Here you could see that by L. Summers calculation the real inflation is significantly higher than the official one. We already talked about it many times, because the way of calculation has been revised twice in recent few years:
As we can see, the alternative estimate is much higher than the official one and the difference exceeds the pace of economic growth in the United States. In other words, even this estimate tells that the US has been experiencing an economic downturn since the fall of 2021. We have written about it many times and even gave estimates of its scale (about 6% of GDP per year), but if liberal monetarists have already started writing about it, this means a lot. Simmers writes:
But this is only the half of the story. On Friday J. Powell was spoken about interest rates policy and said nothing new. Right now we're mostly interested with his view on job market. He said:
- There is no reason to believe that the U.S. economy is in recession or on the verge of it.
- Unexpected weakness in the labor market will lead to an immediate reaction from the Fed.
- There is stable economic growth in the United States + a strong labor market — these factors give confidence that we will reach the inflation target before the rate cut."
That's when a striking discrepancy emerged between the number of US Payrolls (as measured by the BLS' Establishment Survey, a far more crude and imprecise, yet much more market-moving data series), and the number of actual Employed Workers (as measured by the BLS' far more accurate Household Survey) . As we showed then, after the two series had tracked each other tick for tick for years, a wide gap opened in March 2022 which quickly grew to 1.5 million jobs in just 3 months...
... one which has since exploded to a whopping 5 million "employed workers" that apparently do not exist.
In other words, starting in 2022 and accelerating to present days, less and less full-time jobs were added, until we got to the absurd situation that all the new jobs in the past year have been part-time jobs! Or, as we first pointed out several months ago, not only has all job creation in the past 6 years - since May 2018 - has been exclusively for foreign-born workers...
Thus the Philadelphia Fed found that the BLS had overstated jobs to the tune of 1.1 million! This is what the Philadelphia Fed wrote in its quarterly Early Benchmark Revision of State Payroll Employment report at the time:
So what did this "more accurate", "more comprehensive" report find? It found that... In the aggregate, 10,500 net new jobs were added during the period rather than the 1,121,500 jobs estimated by the sum of the states; the U.S. CES estimated net growth of 1,047,000 jobs for the period.
it also means that far from the stellar 230K average monthly increase in payrolls in 2023, which the White House would spin time and again as direct evidence of the benefits of Bidenomics, the true average monthly payroll increase in 2023 was only 130K! Putting it all together, we now know - as the Philly Fed reported first - that the labor market is far weaker than conventionally believed. In fact, no less than 800,000 payrolls are "missing" when one uses the far more accurate Quarterly Census of Employment and Wages data rather than the BLS' woefully inaccurate and politically mandated payrolls "data"
Yes, this is great article from economical point of view and understanding the real deals in the US job market, but how it relates to gold?
We see the starting of the conflict of interests with this statement. Rats are running from drowning ship. This article was published around date of J. Powell's speech (if not at this date) and indirectly It accuses J. Powell in lies. Because he said in his statement that job market is strong. What is even more interesting that article has come from his subordinated office, which is the Philadelphia Reserve Bank. What was that? Attempt to frame J. Powell? But if he knew about it, it means that he intentionally speaks lies. It is safe to say that there is an outright distortion of information in Powell's speech, there is simply a hope for the best.
But in general in this sense, a conflict is inevitably brewing between the part of the liberal economic elite that is ready to figure something out (Summers & Co, authors of an article on labor statistics) and Powell's team. By the way, the heads of many large banks, judging by their recent statements, are more willing to join Summers than Powell.
For example, recent JP Morgan view on the US stock market. The S&P 500 will finish 2024 at 4,200, a roughly 8% decline from where the benchmark sat on Wednesday.
Lakos-Bujas points out that household savings are falling, borrowing costs for both consumers and corporates have reached a multi-decade high and global demand is cooling amid disinflation. JPMorgan also notes recent commentary from management teams during earnings calls depicted a deteriorating outlook for both consumers and the cost of credit. Per JPMorgan's work, the sentiment around the cost of capital hasn't been this low since the Great Financial Crisis.
While BlackRock CEO Larry Fink says gold investors hurt capital market development. Larry Fink has turned heads over the past two years by going all-in on Bitcoin. In his annual letter to shareholders published Tuesday, while singing the praises of capital markets as a mechanism for wealth creation, Fink shared his views on the original store of value.
The US faces a Liz Truss-style market shock if the government ignores the country's growing federal debt, the head of the independent Congressional Fiscal Office has warned. Phillip Swagel, director of the Congressional Budget Office, said the growing US budget burden is on an "unprecedented" trajectory, threatening a crisis similar to the one that caused the sterling flight and the collapse of the Truss government in the UK in 2022.
...
