Sive Morten
Special Consultant to the FPA
- Messages
- 22,095
Fundamentals
This week gold market has shown reaction that differs from common reaction of safe haven assets. Overall background and news stream was supportive, but gold behaved different, if not to say opposite to such a safe haven assets as CHF and JPY. Even BTC has shown more quiet performance. We've explained this earlier and warned about this phenomenon. Indirectly gold market has a technical relation to stocks. But we suggest that it will catch up things that it has missed a bit later, when this relation will play out. What is more interesting, that crude oil stands in the similar situation and its price jump is just a question of time and, hence, the spike of inflation in the US as well.
Market overview
Gold fell more than 3% on Friday, erasing gains from earlier in the week, as investors sold off bullion to cover their losses from a wider market meltdown as an intensifying trade war sparked concerns of a global recession. Gold, however, is still up about 15.3% this year, driven by robust central bank purchases and its overall appeal as a safe hedge against economic and geopolitical uncertainties. Despite the volatility, "gold is still a safe-haven place for many investors," said Matt Simpson, a senior analyst at City Index.
Prices of silver dropped to over eight-week lows on Friday as concerns about demand for the industrial precious metal dominated sentiment due to recession fears stemming from U.S. President Donald Trump's slew of tariffs. Silver typically tends to move alongside gold, but industrial uses such as electronics and photovoltaics account for more than half of global demand, estimated at around 700.2 million troy ounces as of 2024, according to the Silver Institute industry association.
While gold , traditionally seen as a refuge from political and economic uncertainty, has touched multiple record highs this year, silver has struggled to break through the 12-year peak at $34.87 an ounce it hit on October 22, 2024. At $31.00 an ounce, silver has dropped nearly 9% since Trump's latest tariffs announcements on Wednesday. The gold-silver ratio, a measure of the amounts of silver needed to buy one ounce of gold, is currently at 100, its highest level since June 2020.
Demand for physical gold in China increased this week as trade war jitters spurred safe-haven buying, although customers in India refrained from purchases, anticipating a price drop. Meanwhile, central banks are expected to continue buying gold this year due to risks stemming from U.S. President Donald Trump's policies
Trump's tariffs have panicked investors, who now believe a U.S. recession could happen, jettisoning U.S. stocks in one of the most aggressive sell-offs in the past 30 years and hunting for safe-haven gems. The dollar has typically been the shelter of choice. But the extent of the fear over what damage the tariffs might do to the U.S. economy and the U.S. administration's increasingly isolationist tendencies has left the dollar in the dust. Gold, the Japanese yen and the Swiss franc have all soared along with Treasury prices. Not content with turning the world order on its head, Trump and Co are turning markets on their head too and investors are having to find new ways to play it.
HSBC raised its average 2025 and 2026 gold price forecast to $3,015 and $2,915 per ounce respectively, citing geopolitical risks. HSBC warns that Central Banks purchases may fall below 2022-24 peak levels, moderating if prices rise above $3,000 an ounce and increasing if they drop below $2,800 approximately. HSBC predicts a stronger dollar in late 2025 could limit gold's gains, especially since 2024's gains were based on expected rate cuts that may not materialize, the bank added in a note.
Central banks are expected to help keep gold's stunning rally going this year with buying aimed at further diversifying reserves away from the dollar due to risks stemming from U.S. President Donald Trump's policies. In the final quarter of 2024, when Trump won the U.S. election, central bank purchases accelerated 54% year-on-year to 333 tons, according to an estimate from the World Gold Council (WGC).
The dollar has lost its shine as a chief safety option primarily because of the home-grown turmoil unleashed by Trump tariffs that have heightened the risk of a U.S. recession.
Gold's role as a safe-haven asset predates any financial system. Central banks, portfolio managers and retail investors alike have scooped up gold as a hedge against the inflation spike that stemmed from the COVID crisis and then from the global energy crunch. But they kept buying even as inflation eased. And with Trump's increasingly isolationist policies playing out, many have been buying gold as a liquid alternative to the dollar.
Gold stocks in Comex warehouses are on track to hit new records over the coming days due to the risk of import tariffs curtailing shipments to the United States from other countries, analysts and traders say. Flows may have slowed recently, but sources say gold is still being flown to the U.S. as Trump has promised to unveil a massive tariff plan on Wednesday, which he has dubbed "Liberation Day." "There is still material going to the U.S. almost daily," said a source from a Swiss refinery. Switzerland is the world's biggest bullion refining and transit hub. Comex gold stocks are now equal to five years of U.S. total gold consumption, estimated by BNP Paribas at 8.8 million ounces a year.
GOLD MARKET BACKGROUND
This chart quite succinctly reflects the current state of the gold market. If in 2022/23 the price reflected more the inflationary and "sanctions" premium, now the premium has expanded due to the geopolitical and growing risk for the dollar system.
New York Fed President D. Williams, although he indicated that it is too early to make precise forecasts regarding the impact of tariffs on the economy, but...
But here I also would like to tell about Crude Oil. In a recent few weeks there were a lot of talks about its price drop. First is, Crude Oil stands absolutely in the same position as Gold but not as demanded by investors. Crude oil futures are also fall under sell-off when stocks have problems. Second is, few have appreciated the connection between oil prices and extraction cost Pay attention to the collapse of oil prices in 2008, 2016 and 2020. The cost of production, of course, falls during periods of falling oil prices. Suppliers and contractors reduce prices because oil companies are bargaining them off. Oil companies, of course, have greater bargaining power. But they cannot reduce them indefinitely and there comes a time when (see the above periods) only the oil companies' margins begin to decline.
So, that's why the oil price should go up. Because despite the fact that the oil price is, with the exception of the peak in 2022, in a sideways trend, the cost price is growing. For some reason, oil companies cannot bargain with suppliers. Most likely, the same cost inflation is already pulling the cost price of suppliers up and they can't do anything about it and here oil companies are losing their margin. Therefore, the logical option for improving the profitability of new and old investments (UPD.: in the medium term) , even regardless of demand, is only an upward price.
If you take a look at the Upstream capital costs index, you can see that if you remove the periods of recession, the price of oil really follows the index value (this is the index of "inflation" of expenses, that is, the cost index). If you take the period before 2008 and the period from 2011 to 2015, then this index value corresponded to a price of about $110-120. Actually, the index value is now about the same, which means that in a certain perspective the price should return somewhere to $110-120.
The CEO of Occidental Petroleum (let me remind you, W. Buffett is actively buying their shares) recently spoke in Davos about the future prospects for supply and demand - A global oil deficit will begin in 2025, as exploration of high-yielding fields will lag behind the growth rate of demand for black gold.
Why do we talk about it? just because this is inflationary factor in the most sensitive point - the US fuel prices. Indirectly it suggests pressure on real interest rates, moving them lower and increasing the inflation. That's why this is potentially positive factor for gold market as well.
Next one is a Significant one-day rise in open interest in gold futures on COMEX. +62 thousand contracts, most of them open for April. This indicates that the most
important unknown in equation - is the budget. Which will probably be clear by July. Otherwise, if there is nothing to finance the deficit, then tariffs will have to be lowered. But it seems that if the debt market begins to actively fragment by July, there will no difference whether there will be tariffs or not. As well as GDP growth, because there will be no growth anywhere. April 2025 seems to be the very key moment.
Everyone "unexpectedly" realized that the dollar is no longer a "Risk Off" currency , but very much a "Risk On" one. In general, duties and tariffs will significantly affect the US's ability to attract capital, and with significant foreign trade deficits (which cannot be cured quickly), this ability may suffer greatly, and the US will have to give large risk premiums to foreign investors. But of course we don’t want to give risk premiums... “the rate should go down,” everyone from Finance Minister Bessent to Trade Minister Latnik says. In Q4, central banks cut dollar reserves by $155 billion per quarter , but bought 333 tons of gold. The dollar's share of fixed-rate foreign exchange reserves fell to a new low. As farer in the wood as thicker the trees...
The FT is actually writing about margin calls on the market, which is generally typical of situations when a large part of assets are lost simultaneously. The next week will be interesting precisely from the standpoint of whether this volatility will tear apart someone really big, stuck in a big leverage, provoking a transition into financial instability...
Germany is considering withdrawing 1,200 tons of gold from the U.S. Federal Reserve's vault due to concerns about Donald Trump's unpredictable policies. Senior officials from the Christian Democratic Union (CDU), which is likely to lead Germany's next government, are currently discussing the possibility of moving this gold out of New York. It is estimated that the value of the German gold reserve held in New York is 113 billion euros — about 30% of the country's total gold reserves. Experts interviewed by the publication expressed doubt that Washington would agree to give up German gold. And not only German, but in general — any other. And German politicians should keep this in mind before demanding the return of the precious metal.
One of Britain's richest people could leave UK under a new law. Steel magnate Lakshmi Mittal, whose fortune is estimated at $17.7 billion, will make a final decision within a year. Mittal Steel is the world's largest steel group. The plan is for the government to scrap the "non-resident" tax regime that allowed some UK residents to avoid paying taxes on overseas income, and instead have to pay taxes on income earned anywhere in the world. And this is not only UK problem.
The migration crisis is raging. They are proposing to cut social services. The people are gradually becoming poorer. The energy sector has been almost destroyed, industry is also on its last legs and is closing down. The financial system has been in crisis for four years. Only chaos can help to stay in power. And global chaos at that. In general, this is always the case - as soon as serious systemic economic problems begin, you need to start creating chaos so that no one suddenly starts having bad thoughts. The problem here is precisely systemic - since 2007, the economy has not grown, only in the last couple of years has it recovered to the levels of 17 years ago (according to the World Bank), in terms of GDP PPP per capita approaching the countries of Eastern Europe.
There is a feeling that the goal of such events is to ensure that there are simply no economic elites left who are interested in some kind of development and, accordingly, capable of redirecting policy, and that it will be possible to calmly steal budgets in an atmosphere of chaos, where nobody could control anything and anybody is responsible for nothing. It is easy to escape in muddy water.
This week gold market has shown reaction that differs from common reaction of safe haven assets. Overall background and news stream was supportive, but gold behaved different, if not to say opposite to such a safe haven assets as CHF and JPY. Even BTC has shown more quiet performance. We've explained this earlier and warned about this phenomenon. Indirectly gold market has a technical relation to stocks. But we suggest that it will catch up things that it has missed a bit later, when this relation will play out. What is more interesting, that crude oil stands in the similar situation and its price jump is just a question of time and, hence, the spike of inflation in the US as well.
Market overview
Gold fell more than 3% on Friday, erasing gains from earlier in the week, as investors sold off bullion to cover their losses from a wider market meltdown as an intensifying trade war sparked concerns of a global recession. Gold, however, is still up about 15.3% this year, driven by robust central bank purchases and its overall appeal as a safe hedge against economic and geopolitical uncertainties. Despite the volatility, "gold is still a safe-haven place for many investors," said Matt Simpson, a senior analyst at City Index.
Meanwhile, Federal Reserve Chair Jerome Powell said Trump's new tariffs are "larger than expected" and the economic fallout, including higher inflation and slower growth, likely will be as well. Traders also took stock of better-than-expected U.S. jobs data.
Prices of silver dropped to over eight-week lows on Friday as concerns about demand for the industrial precious metal dominated sentiment due to recession fears stemming from U.S. President Donald Trump's slew of tariffs. Silver typically tends to move alongside gold, but industrial uses such as electronics and photovoltaics account for more than half of global demand, estimated at around 700.2 million troy ounces as of 2024, according to the Silver Institute industry association.
While gold , traditionally seen as a refuge from political and economic uncertainty, has touched multiple record highs this year, silver has struggled to break through the 12-year peak at $34.87 an ounce it hit on October 22, 2024. At $31.00 an ounce, silver has dropped nearly 9% since Trump's latest tariffs announcements on Wednesday. The gold-silver ratio, a measure of the amounts of silver needed to buy one ounce of gold, is currently at 100, its highest level since June 2020.
Demand for physical gold in China increased this week as trade war jitters spurred safe-haven buying, although customers in India refrained from purchases, anticipating a price drop. Meanwhile, central banks are expected to continue buying gold this year due to risks stemming from U.S. President Donald Trump's policies
Trump's tariffs have panicked investors, who now believe a U.S. recession could happen, jettisoning U.S. stocks in one of the most aggressive sell-offs in the past 30 years and hunting for safe-haven gems. The dollar has typically been the shelter of choice. But the extent of the fear over what damage the tariffs might do to the U.S. economy and the U.S. administration's increasingly isolationist tendencies has left the dollar in the dust. Gold, the Japanese yen and the Swiss franc have all soared along with Treasury prices. Not content with turning the world order on its head, Trump and Co are turning markets on their head too and investors are having to find new ways to play it.
David Meger, director of metals trading at High Ridge Futures, termed gold's moves "a pullback or retracement within the sideways to higher trend". It is being pressured by demand concerns given the global selloff, said Phillip Streible, chief market strategist at Blue Line Futures. But while the rally's momentum may push prices higher in the first half, a mix of physical and financial market factors could pressure gold by end-2025, HSBC said in a note, forecasting prices to average $3,015.
HSBC raised its average 2025 and 2026 gold price forecast to $3,015 and $2,915 per ounce respectively, citing geopolitical risks. HSBC warns that Central Banks purchases may fall below 2022-24 peak levels, moderating if prices rise above $3,000 an ounce and increasing if they drop below $2,800 approximately. HSBC predicts a stronger dollar in late 2025 could limit gold's gains, especially since 2024's gains were based on expected rate cuts that may not materialize, the bank added in a note.
Central banks are expected to help keep gold's stunning rally going this year with buying aimed at further diversifying reserves away from the dollar due to risks stemming from U.S. President Donald Trump's policies. In the final quarter of 2024, when Trump won the U.S. election, central bank purchases accelerated 54% year-on-year to 333 tons, according to an estimate from the World Gold Council (WGC).
Fears of spiralling inflationary pressures due to companies passing on tariffs to consumers in order to protect their profit margins as well as workers seeking higher wages have also boosted gold's role as a store of value and wealth.
Analysts say expectations of steadily higher gold prices mean they are unlikely to postpone buying. However, central banks may choose not to disclose their purchases, as Trump has threatened tariffs on countries seen to be actively de-dollarising. Official numbers reported to the International Monetary Fund reflect only 34% of the WGC's 2024 total central bank gold demand estimate.
The dollar has lost its shine as a chief safety option primarily because of the home-grown turmoil unleashed by Trump tariffs that have heightened the risk of a U.S. recession.
Gold's role as a safe-haven asset predates any financial system. Central banks, portfolio managers and retail investors alike have scooped up gold as a hedge against the inflation spike that stemmed from the COVID crisis and then from the global energy crunch. But they kept buying even as inflation eased. And with Trump's increasingly isolationist policies playing out, many have been buying gold as a liquid alternative to the dollar.
Gold stocks in Comex warehouses are on track to hit new records over the coming days due to the risk of import tariffs curtailing shipments to the United States from other countries, analysts and traders say. Flows may have slowed recently, but sources say gold is still being flown to the U.S. as Trump has promised to unveil a massive tariff plan on Wednesday, which he has dubbed "Liberation Day." "There is still material going to the U.S. almost daily," said a source from a Swiss refinery. Switzerland is the world's biggest bullion refining and transit hub. Comex gold stocks are now equal to five years of U.S. total gold consumption, estimated by BNP Paribas at 8.8 million ounces a year.
Investor appetite for gold is surging, as reflected in the increased inflows to ETFs, which saw their biggest weekly inflow since March 2022, signalling a renewed rush toward the precious metal.
GOLD MARKET BACKGROUND
This chart quite succinctly reflects the current state of the gold market. If in 2022/23 the price reflected more the inflationary and "sanctions" premium, now the premium has expanded due to the geopolitical and growing risk for the dollar system.
New York Fed President D. Williams, although he indicated that it is too early to make precise forecasts regarding the impact of tariffs on the economy, but...
But here I also would like to tell about Crude Oil. In a recent few weeks there were a lot of talks about its price drop. First is, Crude Oil stands absolutely in the same position as Gold but not as demanded by investors. Crude oil futures are also fall under sell-off when stocks have problems. Second is, few have appreciated the connection between oil prices and extraction cost Pay attention to the collapse of oil prices in 2008, 2016 and 2020. The cost of production, of course, falls during periods of falling oil prices. Suppliers and contractors reduce prices because oil companies are bargaining them off. Oil companies, of course, have greater bargaining power. But they cannot reduce them indefinitely and there comes a time when (see the above periods) only the oil companies' margins begin to decline.
So, that's why the oil price should go up. Because despite the fact that the oil price is, with the exception of the peak in 2022, in a sideways trend, the cost price is growing. For some reason, oil companies cannot bargain with suppliers. Most likely, the same cost inflation is already pulling the cost price of suppliers up and they can't do anything about it and here oil companies are losing their margin. Therefore, the logical option for improving the profitability of new and old investments (UPD.: in the medium term) , even regardless of demand, is only an upward price.
If you take a look at the Upstream capital costs index, you can see that if you remove the periods of recession, the price of oil really follows the index value (this is the index of "inflation" of expenses, that is, the cost index). If you take the period before 2008 and the period from 2011 to 2015, then this index value corresponded to a price of about $110-120. Actually, the index value is now about the same, which means that in a certain perspective the price should return somewhere to $110-120.
The CEO of Occidental Petroleum (let me remind you, W. Buffett is actively buying their shares) recently spoke in Davos about the future prospects for supply and demand - A global oil deficit will begin in 2025, as exploration of high-yielding fields will lag behind the growth rate of demand for black gold.
Why do we talk about it? just because this is inflationary factor in the most sensitive point - the US fuel prices. Indirectly it suggests pressure on real interest rates, moving them lower and increasing the inflation. That's why this is potentially positive factor for gold market as well.
Next one is a Significant one-day rise in open interest in gold futures on COMEX. +62 thousand contracts, most of them open for April. This indicates that the most
important unknown in equation - is the budget. Which will probably be clear by July. Otherwise, if there is nothing to finance the deficit, then tariffs will have to be lowered. But it seems that if the debt market begins to actively fragment by July, there will no difference whether there will be tariffs or not. As well as GDP growth, because there will be no growth anywhere. April 2025 seems to be the very key moment.
Everyone "unexpectedly" realized that the dollar is no longer a "Risk Off" currency , but very much a "Risk On" one. In general, duties and tariffs will significantly affect the US's ability to attract capital, and with significant foreign trade deficits (which cannot be cured quickly), this ability may suffer greatly, and the US will have to give large risk premiums to foreign investors. But of course we don’t want to give risk premiums... “the rate should go down,” everyone from Finance Minister Bessent to Trade Minister Latnik says. In Q4, central banks cut dollar reserves by $155 billion per quarter , but bought 333 tons of gold. The dollar's share of fixed-rate foreign exchange reserves fell to a new low. As farer in the wood as thicker the trees...
The FT is actually writing about margin calls on the market, which is generally typical of situations when a large part of assets are lost simultaneously. The next week will be interesting precisely from the standpoint of whether this volatility will tear apart someone really big, stuck in a big leverage, provoking a transition into financial instability...
Germany is considering withdrawing 1,200 tons of gold from the U.S. Federal Reserve's vault due to concerns about Donald Trump's unpredictable policies. Senior officials from the Christian Democratic Union (CDU), which is likely to lead Germany's next government, are currently discussing the possibility of moving this gold out of New York. It is estimated that the value of the German gold reserve held in New York is 113 billion euros — about 30% of the country's total gold reserves. Experts interviewed by the publication expressed doubt that Washington would agree to give up German gold. And not only German, but in general — any other. And German politicians should keep this in mind before demanding the return of the precious metal.
One of Britain's richest people could leave UK under a new law. Steel magnate Lakshmi Mittal, whose fortune is estimated at $17.7 billion, will make a final decision within a year. Mittal Steel is the world's largest steel group. The plan is for the government to scrap the "non-resident" tax regime that allowed some UK residents to avoid paying taxes on overseas income, and instead have to pay taxes on income earned anywhere in the world. And this is not only UK problem.
The migration crisis is raging. They are proposing to cut social services. The people are gradually becoming poorer. The energy sector has been almost destroyed, industry is also on its last legs and is closing down. The financial system has been in crisis for four years. Only chaos can help to stay in power. And global chaos at that. In general, this is always the case - as soon as serious systemic economic problems begin, you need to start creating chaos so that no one suddenly starts having bad thoughts. The problem here is precisely systemic - since 2007, the economy has not grown, only in the last couple of years has it recovered to the levels of 17 years ago (according to the World Bank), in terms of GDP PPP per capita approaching the countries of Eastern Europe.
There is a feeling that the goal of such events is to ensure that there are simply no economic elites left who are interested in some kind of development and, accordingly, capable of redirecting policy, and that it will be possible to calmly steal budgets in an atmosphere of chaos, where nobody could control anything and anybody is responsible for nothing. It is easy to escape in muddy water.
