Sive Morten
Special Consultant to the FPA
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Fundamentals
Gold in recent 2-3 weeks has become the most mysterious asset. It shows unprecedented growth, even under impact of strong US data and raising US Dollar. Obviously this is not the market factor, this is external demand. Rally on gold market has accelerated recently, and some analysts suggest that partially it could be because of L. Summers article about 18% inflation in the US that has become public. This event is very important. Such things never happen occasionally. More negative publications appear on US debt situation. This is slow process of public mind transformation, preparing opinion for bad times. On this background, gold remains one of the flawless assets for investments (if not the only one at all).
Market overview
Gold prices hit fresh all-time peaks on Monday with stocks on Wall Street closing mixed as optimism that the Federal Reserve was near to cutting interest rates faded due to a strong U.S. economy that rebuts the need for cuts anytime soon. The dollar rose after data showed the U.S. manufacturing sector grew in March for the first time since September 2022. What had been an optimistic reading of key U.S. inflation last week soon darkened as the market weighed the strength of the U.S. economy versus the need for immediate rate cuts.
The yield on two-year Treasury notes, which reflects interest rate expectations, rose 9.2 basis points to 4.712%. The 10-year's yield rose 12.3 basis points to 4.317%, after earlier touching a two-week high of 4.337%.
Fed Chair Jerome Powell said on Friday that inflation data released that day "is what we were expecting" and that "you won't see us over-reacting," suggesting the U.S. central bank is content to remain in wait-and-see mode. Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, said the Fed does not want to relive the 1970s when it cut too soon and inflation reignited.
Growing rate cut expectations, safe-haven demand and central bank purchases amid geopolitical tensions have boosted gold by more than 8% this year.
However, the dollar rose 0.5% to a more than four-month peak against rivals, making gold more expensive for other currency holders, while yields on 10-year Treasury notes also climbed. Bullion prices have also hit record highs in other currencies, including the euro, the yuan, Japanese yen, Indian rupee and the British pound sterling.
Gold scaled yet another record peak on Tuesday as traders snapped up the safe haven asset amid growing Middle East tensions, largely ignoring a stronger dollar and tempered bets for U.S. rate cuts. Iran vowed to take revenge on Israel for an airstrike on the Iranian embassy compound in Damascus. Saxo Bank's Ole Hansen said an underlying bid from retail and central banks was being joined by momentum-following speculators who have extended their already elevated longs following gold's break above $2,200.
On Wednesday, Federal Reserve Chair Jerome Powell reiterated that recent readings on job gains and higher-than-expected inflation do not materially change the overall picture of economic policy this year. Powell said that "if the economy evolves broadly as we expect," he and his Fed colleagues largely agree that a lower policy interest rate will be appropriate "at some point this year." Investors still expect a first rate cut at the Fed's June 11-12 policy meeting, even as stronger recent economic data has sown investor doubts about that outcome.
On Thursday data showed the number of Americans filing new claims for unemployment benefits increased more than expected last week as labor market conditions gradually ease.
An upgraded gold price forecast for 2024 from Nicky Shiels, head of metals strategy at Swiss gold refinery MKS PAMP, drew an unexpected follow-up question this week from market participants. The enquiry was: "Will or can gold 'go cocoa'?" Cocoa prices have more than doubled since the start of 2024 due to poor harvests in Ivory Coast and Ghana. Meanwhile, spot gold , a much more global and liquid market, hit record highs on five previous trading sessions as investors jumped in looking for exposure to the metal used to preserve wealth.
While cocoa price growth is driven by supply shortage, the gold market is protected by significant stocks held by individuals and reserves of central banks, which own one-fifth of all the gold ever mined. However, while the market may not exactly "go cocoa", analysts retain a bullish tone even as technically the market feels ripe for hefty falls due to it being overbought.
The metal’s positive prospects have been endorsed by a slew of leading banks. Among them, JPMorgan Chase & Co. said last month that gold was its No. 1 pick in commodities markets, and the price may reach $2,500 an ounce this year. Goldman Sachs Group Inc. said it sees potential for $2,300, highlighting the benefits from a lower interest-rate environment.
Gold is the No. 1 pick in commodities markets for JPMorgan Chase & Co. and the price has the potential to reach $2,500 an ounce this year, according to the bank’s global head of commodities research.
Why Gold is raising?
Speaking commonly about reasons, it makes sense to put here the ones from Jonathan Awde, president and CEO of Dakota Gold Corp. At a recent small-cap stock investing conference put on this week by the equity research firm Sidoti & Company, he took a moment to lay out all the reasons that he thought gold was doing so well lately:
“Over the last couple of years, you’ve seen record central bank buying. You’ve really seen a couple of key shifts happening. You’ve seen this dedollarization shift where a lot of countries are looking to settle transactions in something other than U.S. dollars.”
“You’re seeing this move from West to East, where historically speaking, a lot of Western countries have been countries were gold was stored. And this is now changing because of what happened with Russia and Ukraine. The U.S. imposing sanctions on Russia. A lot of countries are saying, all right, we’ve seen your playbook. We don’t want to have gold stored in other countries. We want to have gold stored in our own country. So in case we have or do something that goes against your foreign policy, we don’t have our gold confiscated.”
“You know, the U.S. government is running at an unsustainable pace of $2.5 trillion to $3 trillion annually in deficits, almost $1 trillion on military, and close to $1 trillion a year on interest payments to service the debt. So at some point, this is not sustainable.”
“I think the U.S. dollar will also get ahead and historically has an inverse relationship with gold. So I think the setup is there and I think it’s a really interesting time to be looking at gold if you currently have no exposure.”
These are most common things that come in mind, but there other drivers exist that are not as obvious. Things that we were talking two weeks ago have turned to public sphere. Analysts on Bloomberg points the same - it is not typical gold behavior, when it ignores as US Dollar rally as increasing of US Yields. What is more interesting that gold’s record run has yet to attract investors who favor exposure to the metal through physically backed exchange-traded funds. Worldwide holdings in such ETFs shrank by more than 100 tons year-to-date, hitting the lowest level since September 2019, according to a Bloomberg tally..
History shows that active purchases of the dollar, which is observed now, simultaneously with actively growing gold, is a very atypical situation. Usually everyone starts running into gold after everyone has first fled to dollar assets, and then all other financial assets like non-bonds and shares become unclear in terms of risks. Well, that is, usually after some kind of financial crisis, when all the speculators were thrown out of gold and had to sell it in order to close the holes in their balance sheet.
It means that demand comes from some different source. What's going on? There are few reasons for that. First is, let's start from the most obvious ones. Starting from traditional sources of gold support - Central Banks are keep buying it. The latest data compiled by the World Gold Council shows central banks continued adding to their gold holdings in February, albeit at a slower pace than before. They bought a net 19 tons, marking the ninth straight month of growth.
Gold demand in China has been pronounced in recent quarters. The nation’s central bank has added substantial volumes of bullion to its reserves, boosting holdings in each of the past 16 months. In addition, gold-buying has been gaining in popularity among younger Chinese.
Second reason among most obvious is deterioration of the US economy. Not necessary that economist believe in total crush, but raising risk forces managers to search for protection and low volatility assets to balance portfolios. Gold is setting record prices, silver is following next, reaching multi-year highs in anticipation of a new surge in inflation. The US Treasury and banks are on fire with 500Bln+ potential loss on US Bonds exposure, and the Fed now is becoming a pocket tool of the US budget department. Without waiting for inflation to stabilize, Fed Chairman Jerome Powell intends to cut the rate three times by the end of the year. This means that the department chose a pro-inflationary dollar scenario in order to stabilize the banking system and preserve the government’s exorbitant budget spending.
The transition to lowering the rate has been synonymous over the last 15 years with the issue of dollars for the purchase of bonds on the market. This practice will probably resume before the end of the year, since without new trillions out of thin air it will not be possible to reduce the yield on American bonds. The US banking system can no longer tolerate losses from the depreciation of bond portfolios, and the American budget's spending on debt servicing this year exceeded $1.1 trillion. If the rate remains the same, according to BOfA calculations, the figure will fly to $1.6 trillion. Therefore, we need to put out the fire until the building collapsed.
Now we turn to not quite obvious reasons. All things mentioned above are clear and logical from common sense point of view. Another interesting reason why gold is rising is the withdrawal of gold reserves from Western countries due to geopolitical risks. It would seem that these are just flows of physical gold that were lying in storage and waiting in the wings, why does the movement of gold affect the price? Apparently, those who stored this gold did not just store it, but borrowed it from someone, sold it or took out loans against it, and now, when this gold is taken from their storage, they have to get volumes from the market directly in order to cover their obligations. Apparently, the last 15 years were not enough to expand the entire conditional “short” that was built between central banks around gold, so the longer the trend towards such a demarcation between central banks continues, the higher gold will grow. Well, until individuals will be reach it either. And they probably do not yet, as ETF storages are decreasing.
Let's go further. Large speculators increased their bets on gold to a four-year high according to WGC. In the week leading up to April 2, large speculators like hedge funds increased their net long position in gold futures and options by 13%, bringing it to its highest level since 2020. This was announced on Friday, April 5, by the US Commodity Futures Trading Commission (CFTC).
But they are not the only ones who are interested in the precious metal: the Bank of China has been buying gold for 17 consecutive months, and the volume of the precious metal in its reserves has reached 72.74 million ounces. Interest in the precious metal is growing not only on the part of speculators: on Friday, Beijing published official statistics, from which it follows that the Bank of China has been buying gold for 17 consecutive months. In March, the volume of precious metal in its reserves reached 72.74 million ounces. February was the ninth consecutive month of net gold purchases by global central banks,according to the World Gold Council.
What we would like to say that if even speculators have begun to become interested in gold, then expect trouble. Not in the sense that growth will stop. On the contrary, growth may even accelerate if they continue to increase their positions in gold. But for the truth sake, as soon as a trigger occurs that triggers the acute phase of a financial crisis, speculators, as has historically always happened in such conditions, will begin to sell gold to cover losses or increased collateral requirements in leveraged positions. This, of course, will not discourage central banks from buying gold, they have a different motivation, they are not buying it right away because of rising prices, but it will add nervousness to slightly less conservative investors and speculators.
Silver also is trying to not lag too far behind. If the main precious metal - gold - staged a rally in early March, then silver is clearly late in this cycle. ️Now an attempt has been made to speed up, especially since there is an attack on the important level of $26, which last year acted as a clear limiter. Silver is still far from its all-time highs it reached in 1980 and then repeated in 2011, and it is very cheap compared to gold as we've explained two weeks ago. Positions in silver are growing also and we consider it as good add-on to Gold investments:
Making general bottom line of all things said - media agencies, Bloomberg in particular, knows how to be tactful when he wants: the US economy is in danger due to the budget crisis, but not right now, but in 10 years. Although everyone understands perfectly well that if nothing is changed, the system will not last even two years. Is it possible to change something? The question remains open, we will find out after the presidential elections in the United States. In this case, we see the same story as with Summers’ recent coming out on inflation - we need to take a strategically advantageous position for a very likely early change of shoes. This is what risk management looks like in media.
If we still talk about the crisis, then the ratio of oil to gold and DOW can give us a hint. We've covered this topic in details few months ago. The gold/oil ratio was:
When we reach level 30, we can say that the crisis is with us in full force. We are heading exactly there, in a year we will quite likely reach the grandmaster milestone. At the same time, the DOW/gold ratio has changed little over these two years and is still at quite comfortable levels (in a crisis it should not be 17, but something around 10-12). I believe that gold will definitely rise further, especially against the backdrop of accelerating inflation and oil prices, which clearly intend to reach $100 again, as JP Morgan said.
Gold in recent 2-3 weeks has become the most mysterious asset. It shows unprecedented growth, even under impact of strong US data and raising US Dollar. Obviously this is not the market factor, this is external demand. Rally on gold market has accelerated recently, and some analysts suggest that partially it could be because of L. Summers article about 18% inflation in the US that has become public. This event is very important. Such things never happen occasionally. More negative publications appear on US debt situation. This is slow process of public mind transformation, preparing opinion for bad times. On this background, gold remains one of the flawless assets for investments (if not the only one at all).
Market overview
Gold prices hit fresh all-time peaks on Monday with stocks on Wall Street closing mixed as optimism that the Federal Reserve was near to cutting interest rates faded due to a strong U.S. economy that rebuts the need for cuts anytime soon. The dollar rose after data showed the U.S. manufacturing sector grew in March for the first time since September 2022. What had been an optimistic reading of key U.S. inflation last week soon darkened as the market weighed the strength of the U.S. economy versus the need for immediate rate cuts.
The yield on two-year Treasury notes, which reflects interest rate expectations, rose 9.2 basis points to 4.712%. The 10-year's yield rose 12.3 basis points to 4.317%, after earlier touching a two-week high of 4.337%.
Fed Chair Jerome Powell said on Friday that inflation data released that day "is what we were expecting" and that "you won't see us over-reacting," suggesting the U.S. central bank is content to remain in wait-and-see mode. Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, said the Fed does not want to relive the 1970s when it cut too soon and inflation reignited.
Growing rate cut expectations, safe-haven demand and central bank purchases amid geopolitical tensions have boosted gold by more than 8% this year.
However, the dollar rose 0.5% to a more than four-month peak against rivals, making gold more expensive for other currency holders, while yields on 10-year Treasury notes also climbed. Bullion prices have also hit record highs in other currencies, including the euro, the yuan, Japanese yen, Indian rupee and the British pound sterling.
Gold scaled yet another record peak on Tuesday as traders snapped up the safe haven asset amid growing Middle East tensions, largely ignoring a stronger dollar and tempered bets for U.S. rate cuts. Iran vowed to take revenge on Israel for an airstrike on the Iranian embassy compound in Damascus. Saxo Bank's Ole Hansen said an underlying bid from retail and central banks was being joined by momentum-following speculators who have extended their already elevated longs following gold's break above $2,200.
On Wednesday, Federal Reserve Chair Jerome Powell reiterated that recent readings on job gains and higher-than-expected inflation do not materially change the overall picture of economic policy this year. Powell said that "if the economy evolves broadly as we expect," he and his Fed colleagues largely agree that a lower policy interest rate will be appropriate "at some point this year." Investors still expect a first rate cut at the Fed's June 11-12 policy meeting, even as stronger recent economic data has sown investor doubts about that outcome.
On Thursday data showed the number of Americans filing new claims for unemployment benefits increased more than expected last week as labor market conditions gradually ease.
An upgraded gold price forecast for 2024 from Nicky Shiels, head of metals strategy at Swiss gold refinery MKS PAMP, drew an unexpected follow-up question this week from market participants. The enquiry was: "Will or can gold 'go cocoa'?" Cocoa prices have more than doubled since the start of 2024 due to poor harvests in Ivory Coast and Ghana. Meanwhile, spot gold , a much more global and liquid market, hit record highs on five previous trading sessions as investors jumped in looking for exposure to the metal used to preserve wealth.
While cocoa price growth is driven by supply shortage, the gold market is protected by significant stocks held by individuals and reserves of central banks, which own one-fifth of all the gold ever mined. However, while the market may not exactly "go cocoa", analysts retain a bullish tone even as technically the market feels ripe for hefty falls due to it being overbought.
Over-the-counter and futures gold markets have been buoyant, with an estimated 40% rise in trading volumes, said Johan Palmberg, senior quantitative analyst at the World Gold Council.
Further out, many analysts expect gold to test new highs once the U.S. Federal Reserve starts cutting key rates triggering demand from investors sitting on the sidelines such as holders of physically-backed gold exchange traded funds (ETFs).
The metal’s positive prospects have been endorsed by a slew of leading banks. Among them, JPMorgan Chase & Co. said last month that gold was its No. 1 pick in commodities markets, and the price may reach $2,500 an ounce this year. Goldman Sachs Group Inc. said it sees potential for $2,300, highlighting the benefits from a lower interest-rate environment.
Gold is the No. 1 pick in commodities markets for JPMorgan Chase & Co. and the price has the potential to reach $2,500 an ounce this year, according to the bank’s global head of commodities research.
Why Gold is raising?
Speaking commonly about reasons, it makes sense to put here the ones from Jonathan Awde, president and CEO of Dakota Gold Corp. At a recent small-cap stock investing conference put on this week by the equity research firm Sidoti & Company, he took a moment to lay out all the reasons that he thought gold was doing so well lately:
“Over the last couple of years, you’ve seen record central bank buying. You’ve really seen a couple of key shifts happening. You’ve seen this dedollarization shift where a lot of countries are looking to settle transactions in something other than U.S. dollars.”
“You’re seeing this move from West to East, where historically speaking, a lot of Western countries have been countries were gold was stored. And this is now changing because of what happened with Russia and Ukraine. The U.S. imposing sanctions on Russia. A lot of countries are saying, all right, we’ve seen your playbook. We don’t want to have gold stored in other countries. We want to have gold stored in our own country. So in case we have or do something that goes against your foreign policy, we don’t have our gold confiscated.”
“You know, the U.S. government is running at an unsustainable pace of $2.5 trillion to $3 trillion annually in deficits, almost $1 trillion on military, and close to $1 trillion a year on interest payments to service the debt. So at some point, this is not sustainable.”
“I think the U.S. dollar will also get ahead and historically has an inverse relationship with gold. So I think the setup is there and I think it’s a really interesting time to be looking at gold if you currently have no exposure.”
These are most common things that come in mind, but there other drivers exist that are not as obvious. Things that we were talking two weeks ago have turned to public sphere. Analysts on Bloomberg points the same - it is not typical gold behavior, when it ignores as US Dollar rally as increasing of US Yields. What is more interesting that gold’s record run has yet to attract investors who favor exposure to the metal through physically backed exchange-traded funds. Worldwide holdings in such ETFs shrank by more than 100 tons year-to-date, hitting the lowest level since September 2019, according to a Bloomberg tally..
History shows that active purchases of the dollar, which is observed now, simultaneously with actively growing gold, is a very atypical situation. Usually everyone starts running into gold after everyone has first fled to dollar assets, and then all other financial assets like non-bonds and shares become unclear in terms of risks. Well, that is, usually after some kind of financial crisis, when all the speculators were thrown out of gold and had to sell it in order to close the holes in their balance sheet.
It means that demand comes from some different source. What's going on? There are few reasons for that. First is, let's start from the most obvious ones. Starting from traditional sources of gold support - Central Banks are keep buying it. The latest data compiled by the World Gold Council shows central banks continued adding to their gold holdings in February, albeit at a slower pace than before. They bought a net 19 tons, marking the ninth straight month of growth.
Gold demand in China has been pronounced in recent quarters. The nation’s central bank has added substantial volumes of bullion to its reserves, boosting holdings in each of the past 16 months. In addition, gold-buying has been gaining in popularity among younger Chinese.
Second reason among most obvious is deterioration of the US economy. Not necessary that economist believe in total crush, but raising risk forces managers to search for protection and low volatility assets to balance portfolios. Gold is setting record prices, silver is following next, reaching multi-year highs in anticipation of a new surge in inflation. The US Treasury and banks are on fire with 500Bln+ potential loss on US Bonds exposure, and the Fed now is becoming a pocket tool of the US budget department. Without waiting for inflation to stabilize, Fed Chairman Jerome Powell intends to cut the rate three times by the end of the year. This means that the department chose a pro-inflationary dollar scenario in order to stabilize the banking system and preserve the government’s exorbitant budget spending.
The transition to lowering the rate has been synonymous over the last 15 years with the issue of dollars for the purchase of bonds on the market. This practice will probably resume before the end of the year, since without new trillions out of thin air it will not be possible to reduce the yield on American bonds. The US banking system can no longer tolerate losses from the depreciation of bond portfolios, and the American budget's spending on debt servicing this year exceeded $1.1 trillion. If the rate remains the same, according to BOfA calculations, the figure will fly to $1.6 trillion. Therefore, we need to put out the fire until the building collapsed.
Now we turn to not quite obvious reasons. All things mentioned above are clear and logical from common sense point of view. Another interesting reason why gold is rising is the withdrawal of gold reserves from Western countries due to geopolitical risks. It would seem that these are just flows of physical gold that were lying in storage and waiting in the wings, why does the movement of gold affect the price? Apparently, those who stored this gold did not just store it, but borrowed it from someone, sold it or took out loans against it, and now, when this gold is taken from their storage, they have to get volumes from the market directly in order to cover their obligations. Apparently, the last 15 years were not enough to expand the entire conditional “short” that was built between central banks around gold, so the longer the trend towards such a demarcation between central banks continues, the higher gold will grow. Well, until individuals will be reach it either. And they probably do not yet, as ETF storages are decreasing.
Let's go further. Large speculators increased their bets on gold to a four-year high according to WGC. In the week leading up to April 2, large speculators like hedge funds increased their net long position in gold futures and options by 13%, bringing it to its highest level since 2020. This was announced on Friday, April 5, by the US Commodity Futures Trading Commission (CFTC).
But they are not the only ones who are interested in the precious metal: the Bank of China has been buying gold for 17 consecutive months, and the volume of the precious metal in its reserves has reached 72.74 million ounces. Interest in the precious metal is growing not only on the part of speculators: on Friday, Beijing published official statistics, from which it follows that the Bank of China has been buying gold for 17 consecutive months. In March, the volume of precious metal in its reserves reached 72.74 million ounces. February was the ninth consecutive month of net gold purchases by global central banks,according to the World Gold Council.
What we would like to say that if even speculators have begun to become interested in gold, then expect trouble. Not in the sense that growth will stop. On the contrary, growth may even accelerate if they continue to increase their positions in gold. But for the truth sake, as soon as a trigger occurs that triggers the acute phase of a financial crisis, speculators, as has historically always happened in such conditions, will begin to sell gold to cover losses or increased collateral requirements in leveraged positions. This, of course, will not discourage central banks from buying gold, they have a different motivation, they are not buying it right away because of rising prices, but it will add nervousness to slightly less conservative investors and speculators.
Silver also is trying to not lag too far behind. If the main precious metal - gold - staged a rally in early March, then silver is clearly late in this cycle. ️Now an attempt has been made to speed up, especially since there is an attack on the important level of $26, which last year acted as a clear limiter. Silver is still far from its all-time highs it reached in 1980 and then repeated in 2011, and it is very cheap compared to gold as we've explained two weeks ago. Positions in silver are growing also and we consider it as good add-on to Gold investments:
Making general bottom line of all things said - media agencies, Bloomberg in particular, knows how to be tactful when he wants: the US economy is in danger due to the budget crisis, but not right now, but in 10 years. Although everyone understands perfectly well that if nothing is changed, the system will not last even two years. Is it possible to change something? The question remains open, we will find out after the presidential elections in the United States. In this case, we see the same story as with Summers’ recent coming out on inflation - we need to take a strategically advantageous position for a very likely early change of shoes. This is what risk management looks like in media.
If we still talk about the crisis, then the ratio of oil to gold and DOW can give us a hint. We've covered this topic in details few months ago. The gold/oil ratio was:
- Two years ago - 16.4,
- a year ago - 22.5,
- now it’s already 25.5.
When we reach level 30, we can say that the crisis is with us in full force. We are heading exactly there, in a year we will quite likely reach the grandmaster milestone. At the same time, the DOW/gold ratio has changed little over these two years and is still at quite comfortable levels (in a crisis it should not be 17, but something around 10-12). I believe that gold will definitely rise further, especially against the backdrop of accelerating inflation and oil prices, which clearly intend to reach $100 again, as JP Morgan said.
