Sive Morten
Special Consultant to the FPA
- Messages
- 22,093
FUNDAMENTALS
Gold mostly is going in the same way as financial markets. No signs of de-escalation keep investors under pressure, suggesting the new spiral of demand for liquidity as crude oil prices stand high. As we've estimated yesterday, started negotiations between Arab Countries and the US on USD swap lines tells that M. East has a lack of liquidity to finance current operations and could start selling reserves, raising yields and dollar together. Even providing swap lines will not take the tension off totally. Thus, this will be another holding factor for gold. But there are others as well.
MARKET OVERVIEW
Gold rose on Friday, but was on track for its first weekly loss in the last five weeks, as lingering inflation concerns and the uncertain state of the U.S.-Iran war kept markets on edge. Gold advanced on optimism that the US and Iran are moving toward talks after days of deadlock, with traders also assessing the Federal Reserve’s interest rate path after the Justice Department dropped a probe of Chair Jerome Powell. Bullion rose above $4,700 an ounce as bond yields fell after US Attorney Jeanine Pirro said she’s dropping her investigation into building-renovation cost overruns by the Fed. Meanwhile, the ending of a controversial investigation into building-renovation cost overruns by the Fed potentially cleared a path to confirmation for Kevin Warsh, President Donald Trump’s pick to be the next Fed leader.
Warsh is known for his hawkish stance on inflation. Investors don’t expect him to deliver the aggressive rate cuts urged by Trump, but rather pursue a measured approach with gradual moves to lower borrowing costs.
President Donald Trump will send envoys to Pakistan with the intention of meeting with Iranian officials, while Tehran sounded a pessimistic tone on the prospects for talks to end the eight-week war roiling the global economy. Iranian Foreign Minister Abbas Araghchi is also set to be in Pakistan but hasn’t publicly agreed to sit down with Trump’s representatives. No talks are slated to take place between US and Iranian officials during the foreign minister’s trip, semi-official Tasnim news agency reported earlier.
Higher energy prices since the war began in late February have stoked concerns about inflation, which may prompt the Federal Reserve and its peers to keep interest rates elevated for longer or even raise them further. That’s negative for non-yielding bullion. Bullion has traded in a tight range in recent weeks as traders navigate a steady stream of shifting headlines from the Middle East conflict. Brent extended its advance above $106 a barrel on worries that peace talks have stalled, rhetoric is amping up and military threats are increasing. Treasury yields and the dollar also climbed.
Elsewhere, the State Oil Fund of Azerbaijan, one of the largest sovereign gold buyers, released data showing it had sold nearly 22 tons of the precious metal in the first quarter, an amount worth more than $3 billion at current prices. Rapid price gains meant gold’s share of the fund’s portfolio was straining its target upper threshold of 35%, creating a need to rebalance the holdings.
Gold premiums in India climbed to their highest in over two-and-a-half months this week, as supplies tightened, while buying interest picked up in China. Indian banks were forced to halt gold and silver imports earlier this month after the government delayed an authorisation order, leaving tons of bullion stranded at customs.
Gold has ditched its safe-haven credentials since the war began, moving unusually closely with equities and even volatile crypto. It remains 10% below pre-war levels.
Gold usually boasts a robustly negative correlation to the dollar. When volatility picks up to the point where investors ditch stocks, bonds and other markets, the dollar emerges as the main beneficiary, as has been the case during the war. Since late February, the correlation between gold and the dollar has softened to around -0.19 from an average of -0.4, while the correlation between gold and stocks has been around 0.55, up from a five-year average of 0.22.
The current positioning in gold is significantly cleaner than before, according to Darwei Kung, head of commodities and portfolio manager at DWS Group.
“Gold ETF inflows have shown a consistent recovery over the last three weeks, allowing prices to continue their steady ascent since the March sell-off,” analysts at BMO Capital Markets wrote in a note Wednesday. Still, upward price momentum has slowed over the last week with signs that Asia may be selling once prices hit around the $4,850 mark, they said.
A Reuters poll of economists showed the U.S. Federal Reserve will likely wait at least six months before cutting interest rates this year. Meanwhile, more Americans filed claims for unemployment benefits last week than anticipated. There was no clear consensus where rates would end the year, but 71 economists still expected at least one cut. The median forecast expects a single reduction, matching the dot‑plot projections released by the Fed last month.
In his testimony on Tuesday, Warsh denied making any such promises to Trump but called for "regime change" at the Fed.
The Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index, is now expected to rise by an annual rate of 3.7%, 3.4% and 3.2% in the second, third and fourth quarters, respectively, about 30 basis points higher than the forecasts in late March. The Fed has a 2% inflation target. Those survey changes mark a second straight upward revision but are still mild compared with the nearly 5% inflation expected by consumers over the year ahead.
In recent months gold seems has failed to act as a haven or a geopolitical hedge. However, that’s not unusual — the pattern seen this month mirrors similar price corrections during the 2008 global financial crisis and when Covid struck in March 2020. One new market dynamic, though, is that central banks, the biggest gold buyers over the past four years, are starting to contemplate using some of their holdings to pay for vastly increased energy and defense expenditure. Central bankers are the custodians of national wealth, with reserves management one of their principal tasks; taking some of the profit from gold’s better than 150% gain during the past five years to meet emergency needs makes sense.
Even if liquidity-driven selling pressure diminishes, it’s unlikely gold will return to the speculative fervor of last year, with a shift into more of a balanced two-way market looking more probable. Some countries may resume their buying at modestly reduced prices; others may sell to pay bills. After all, that’s what central bank reserves are meant to be there for. Thus Gold now is more useful like a Piggy bank than safe haven.
China’s imports of silver surged to an all-time high in March as demand from retail investors and the country’s massive solar industry pushed purchases well above the seasonal average. The world’s biggest silver consumer imported around 836 tons last month, extending a strong run of inbound shipments so far this year, according to Chinese customs data on Monday. That compares with a 10-year seasonal average for March of about 306 tons.
OTHER ISSUES TO MENTION
In most recent report UBS writes - Gold is trading around 11% below its January all-time high, amid investor demand for liquidity, renewed US dollar strength, and fears US rates may stay higher than previously thought. Still, we believe the forces that helped drive gold's rally remain in place, including robust demand from investors and central banks, and expect prices to rise again in 2026. Lower US real interest rates as the Fed cuts and solid demand should help underpin gold prices, in our view. Data from the World Gold Council showed that total gold demand exceeded 5,000 metric tons for the first time in 2025, and we expect demand to pick up further. We expect structural trends, such as elevated government debt as well as central banks' and global investors’ efforts to diversify, to support gold’s long-term outlook.
Gold suffered a setback during the recent Middle East crisis, partly reflecting concerns over tighter central bank policies. But the long-term drivers of gold's rally - including low real rates and robust reserve demand from central banks - remain in place. Interest in exchange-traded funds (ETFs) tied to gold are expected to remain high: We project inflows for 2026 to reach 825 metric tons, an increase from our previous forecast of 750 metric tons.
We see gold as a strategic hedge within an investment portfolio. We believe a mid-single digit portfolio allocation is optimal for those with an affinity for gold. We expect the price of gold to end the year around USD 5,900/oz. Gold tends to perform best when growth expectations fall and central banks cut rates, leading to lower real yields, usually during the second phase of a crisis.
WHY WE THINK THAT THIS TIME IT MIGHT BE DIFFERENT
First is, let's start with the conflict results. Iran wants to secure its current position + receive reparations. What form they will take: either payment for passing through the strait from all ships, or direct payments from the US, is not so important. The root of the problem: if Iran just agrees to peace with the current results, it clearly shows that it can be defeated with a couple more similar strikes, and it will eventually collapse. After all, the US hasn't suffered significant damage yet. If Iran retains control of the strait or Trump agrees to pay large reparations for the damage caused, such attacks on Iran will have a very tangible price, especially reputational for the US.
In the end, the parties need to find a compromise. Iran will undoubtedly not gain control of the strait, but the US will have to pay something in some form. Enriched uranium will still remain in Iran. Trump can't do this (because it would be the final nail in his political coffin), so the story of Ukraine is repeating itself: an endless medium-intensity conflict.
Today, the UAE monarchy stated that it's time to kick out American bases from the region and only buy weapons from the US for self-defense. The US, however, is a dubious ally that only exposes you to danger and doesn't protect you. This whole message, apparently, is related to the fact that the UAE expects reparations from the US (WHAT DO YOU THINK?), because just like in Iran, the US has caused huge damage to the emirates and continues to do so. They propose starting with the opening of swap lines from the Fed (lending like to Ukraine). And then, as they say, we'll see.
It's obvious that the prolongation of the conflict will destroy the Petrodollar, because it's not just an idea that it's time to kick the Americans out of the region, it's also an idea that China could easily become a new arbiter ensuring predictability. At the same time, both India and Pakistan, which organized this peace, are also very important for stability in the region. In the end, BRICS is for stability and prosperity in the region, while the US and Israel are for its complete destruction.
According to all indirect indications, it's obvious that Trump is going to get stuck in Iran. He's gathering ground troops and came up with a truce to avoid going to Congress for permission to fight for more than two months. He will definitely try various types of ground special operations.
At the same time, the American economy is structured in such a way that any real war of attrition will simply wipe it out. Bubble on bubble, bubble chasing bubble. If we add a petard called "inflation three times higher than the target" to this wonderful house of cards, everything will literally collapse. An extra spice is added by the fact that if we exclude AI, the US economy under Trump is already falling. And unfortunately, the main investors in computing infrastructure have become the Gulf monarchies. Now, having been defeated, they will not only not invest, but will have to sell their dollar assets to maintain political, infrastructural and credit stability.
If Russia, thanks to China and India, can really hold out for 10 years, then the US won't last more than a couple of years in a real exhausting conflict. Literally everything will collapse, and the next Great Depression will start.
Now let's go further... to economical issues.
As things develop in Iran, there will be at least one more episode, and Europe is opening up the plot with sanctions against China. The political confrontation between Trump (or rather those he represents) and the globalists has gone too far, and the financial markets are no longer self-sufficient and "protected" in principle. That is, of course, no one wants a crash, but if it's really necessary, they'll crash everything they can.
The fact that the markets are currently "ignoring the negatives and performing well" is not due to stupidity or optimism - it's because they're being tightly held (for now). A crash in the US market would be a direct path to a banking collapse, re-capitalization by the Fed, and the loss of control of Trump's opponents over the real sector, if not the loss of control of the globalists over domestic affairs in the US and Europe (which is what Trump really needs in the big picture).
Therefore, the stock market is being held, just as Iran and the US are holding a double blockade of the Strait of Hormuz. We've seen the same thing around the world with the rate in 2023-2024, only then the globalists were in the role of troublemakers, they were tightening monetary policy, trying to bleed opponents from the real sector and, if possible, seize assets. But now the roles have changed, and the so-called "financial control" has gone on the attack and, so to speak, the "national globalists" (Trump in the US, Xi in China, etc.)
In short, the game of nerves continues. In this situation, everyone cares little about conventions and decency, so we'll see a full range of manipulations and insider tricks soon, and not just from Trump, although he will of course be in the spotlight as usual.
What will calm things down? In the best case, one of the sides will give up before the situation leads to an obvious collapse, and the losers will wear sad, all in black and without any jewelry, and speculate about how we'll definitely take revenge. In the worst case - they'll still pull the closet out and we'll get a full-blown market crash and a sharp economic crisis.
One of the key moments is, of course, the battle for the Fed. If Trump appoints his supporter there, then it's not even about lowering rates, but about who will help quickly in case of need and who won't. It's not the rates that matter, but the limits in the current situation. And the talk about the economy now is just a distraction.
Well, we've heard about the "overheating" and "growth above potential" repeatedly over the past three years. And all sorts of other nonsense. Which had little to do with reality, but the absurd nature of the "justifications" was even emphasized. This is a kind of "monetary show-off" - to say something obscure and actually irrelevant, let all these pygmies guess what it means.
It's obvious that the global economy is entering a dangerous zone, because a prolonged structural (not like in 2022) energy shock can provoke a chain reaction of crises, comparable in its consequences to the major shocks of recent decades. Damage to LNG and oil infrastructure in Qatar and the blockade of the strait are a global problem, as one of the major energy and basic petrochemical centers has been hit.
In a situation where gas supplies will be in deficit for several years, and the consequences of even a short-term deficit in fertilizers, for example, will lead to a long-term rise in food prices and a reduction in production, the market does not have time to adapt. There are simply not enough alternatives. This means only one thing - prices will rise and will remain high for a long time.
For countries that import LNG, oil, fertilizers, etc., a slow economic suffocation begins. In Europe, this will lead to a new wave of de-industrialization - factories, already operating on the verge of profitability, will begin to close. The chemical industry, fertilizer production, metallurgy, everything that depends on energy prices will be hit. Economic growth will stop, but prices will continue to rise - stagflation (real, not what our Central Bank talks about). This is the worst possible scenario, especially for countries with a high debt-to-GDP ratio.
In Asia, the consequences could be even more devastating. Japan and South Korea, completely dependent on fuel imports, will face a sharp increase in the cost of production. Their export competitiveness will begin to rapidly deteriorate. But the real vulnerability is in developing economies.
Thailand, as we discussed,is one of the vivid examples of the impending stagflation. The country is an energy importer, and its trade balance is very sensitive to commodity prices. When imports become more expensive, the deficit widens, and the currency weakens. A weaker currency makes imports even more expensive and triggers a spiral from which it's hard to escape.
Gold mostly is going in the same way as financial markets. No signs of de-escalation keep investors under pressure, suggesting the new spiral of demand for liquidity as crude oil prices stand high. As we've estimated yesterday, started negotiations between Arab Countries and the US on USD swap lines tells that M. East has a lack of liquidity to finance current operations and could start selling reserves, raising yields and dollar together. Even providing swap lines will not take the tension off totally. Thus, this will be another holding factor for gold. But there are others as well.
MARKET OVERVIEW
Gold rose on Friday, but was on track for its first weekly loss in the last five weeks, as lingering inflation concerns and the uncertain state of the U.S.-Iran war kept markets on edge. Gold advanced on optimism that the US and Iran are moving toward talks after days of deadlock, with traders also assessing the Federal Reserve’s interest rate path after the Justice Department dropped a probe of Chair Jerome Powell. Bullion rose above $4,700 an ounce as bond yields fell after US Attorney Jeanine Pirro said she’s dropping her investigation into building-renovation cost overruns by the Fed. Meanwhile, the ending of a controversial investigation into building-renovation cost overruns by the Fed potentially cleared a path to confirmation for Kevin Warsh, President Donald Trump’s pick to be the next Fed leader.
Warsh is known for his hawkish stance on inflation. Investors don’t expect him to deliver the aggressive rate cuts urged by Trump, but rather pursue a measured approach with gradual moves to lower borrowing costs.
President Donald Trump will send envoys to Pakistan with the intention of meeting with Iranian officials, while Tehran sounded a pessimistic tone on the prospects for talks to end the eight-week war roiling the global economy. Iranian Foreign Minister Abbas Araghchi is also set to be in Pakistan but hasn’t publicly agreed to sit down with Trump’s representatives. No talks are slated to take place between US and Iranian officials during the foreign minister’s trip, semi-official Tasnim news agency reported earlier.
Higher energy prices since the war began in late February have stoked concerns about inflation, which may prompt the Federal Reserve and its peers to keep interest rates elevated for longer or even raise them further. That’s negative for non-yielding bullion. Bullion has traded in a tight range in recent weeks as traders navigate a steady stream of shifting headlines from the Middle East conflict. Brent extended its advance above $106 a barrel on worries that peace talks have stalled, rhetoric is amping up and military threats are increasing. Treasury yields and the dollar also climbed.
Elsewhere, the State Oil Fund of Azerbaijan, one of the largest sovereign gold buyers, released data showing it had sold nearly 22 tons of the precious metal in the first quarter, an amount worth more than $3 billion at current prices. Rapid price gains meant gold’s share of the fund’s portfolio was straining its target upper threshold of 35%, creating a need to rebalance the holdings.
Gold premiums in India climbed to their highest in over two-and-a-half months this week, as supplies tightened, while buying interest picked up in China. Indian banks were forced to halt gold and silver imports earlier this month after the government delayed an authorisation order, leaving tons of bullion stranded at customs.
Gold has ditched its safe-haven credentials since the war began, moving unusually closely with equities and even volatile crypto. It remains 10% below pre-war levels.
Gold usually boasts a robustly negative correlation to the dollar. When volatility picks up to the point where investors ditch stocks, bonds and other markets, the dollar emerges as the main beneficiary, as has been the case during the war. Since late February, the correlation between gold and the dollar has softened to around -0.19 from an average of -0.4, while the correlation between gold and stocks has been around 0.55, up from a five-year average of 0.22.
The current positioning in gold is significantly cleaner than before, according to Darwei Kung, head of commodities and portfolio manager at DWS Group.
The market now appears to be driven more by fundamentals, which is why “we like gold at this point,” said Kung, adding that he increased his gold positioning after the initial sell-off in the early days of the war and is now overweight gold in his portfolio. Still, “we’re very tactical, which means we trade in and out. We’re overweight right now, but we could easily not overweight as well,” said Kung.
“Gold ETF inflows have shown a consistent recovery over the last three weeks, allowing prices to continue their steady ascent since the March sell-off,” analysts at BMO Capital Markets wrote in a note Wednesday. Still, upward price momentum has slowed over the last week with signs that Asia may be selling once prices hit around the $4,850 mark, they said.
A Reuters poll of economists showed the U.S. Federal Reserve will likely wait at least six months before cutting interest rates this year. Meanwhile, more Americans filed claims for unemployment benefits last week than anticipated. There was no clear consensus where rates would end the year, but 71 economists still expected at least one cut. The median forecast expects a single reduction, matching the dot‑plot projections released by the Fed last month.
In his testimony on Tuesday, Warsh denied making any such promises to Trump but called for "regime change" at the Fed.
Adam Schickling, an economist at Vanguard, agreed.
The Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index, is now expected to rise by an annual rate of 3.7%, 3.4% and 3.2% in the second, third and fourth quarters, respectively, about 30 basis points higher than the forecasts in late March. The Fed has a 2% inflation target. Those survey changes mark a second straight upward revision but are still mild compared with the nearly 5% inflation expected by consumers over the year ahead.
In recent months gold seems has failed to act as a haven or a geopolitical hedge. However, that’s not unusual — the pattern seen this month mirrors similar price corrections during the 2008 global financial crisis and when Covid struck in March 2020. One new market dynamic, though, is that central banks, the biggest gold buyers over the past four years, are starting to contemplate using some of their holdings to pay for vastly increased energy and defense expenditure. Central bankers are the custodians of national wealth, with reserves management one of their principal tasks; taking some of the profit from gold’s better than 150% gain during the past five years to meet emergency needs makes sense.
Even if liquidity-driven selling pressure diminishes, it’s unlikely gold will return to the speculative fervor of last year, with a shift into more of a balanced two-way market looking more probable. Some countries may resume their buying at modestly reduced prices; others may sell to pay bills. After all, that’s what central bank reserves are meant to be there for. Thus Gold now is more useful like a Piggy bank than safe haven.
China’s imports of silver surged to an all-time high in March as demand from retail investors and the country’s massive solar industry pushed purchases well above the seasonal average. The world’s biggest silver consumer imported around 836 tons last month, extending a strong run of inbound shipments so far this year, according to Chinese customs data on Monday. That compares with a 10-year seasonal average for March of about 306 tons.
OTHER ISSUES TO MENTION
In most recent report UBS writes - Gold is trading around 11% below its January all-time high, amid investor demand for liquidity, renewed US dollar strength, and fears US rates may stay higher than previously thought. Still, we believe the forces that helped drive gold's rally remain in place, including robust demand from investors and central banks, and expect prices to rise again in 2026. Lower US real interest rates as the Fed cuts and solid demand should help underpin gold prices, in our view. Data from the World Gold Council showed that total gold demand exceeded 5,000 metric tons for the first time in 2025, and we expect demand to pick up further. We expect structural trends, such as elevated government debt as well as central banks' and global investors’ efforts to diversify, to support gold’s long-term outlook.
Gold suffered a setback during the recent Middle East crisis, partly reflecting concerns over tighter central bank policies. But the long-term drivers of gold's rally - including low real rates and robust reserve demand from central banks - remain in place. Interest in exchange-traded funds (ETFs) tied to gold are expected to remain high: We project inflows for 2026 to reach 825 metric tons, an increase from our previous forecast of 750 metric tons.
We see gold as a strategic hedge within an investment portfolio. We believe a mid-single digit portfolio allocation is optimal for those with an affinity for gold. We expect the price of gold to end the year around USD 5,900/oz. Gold tends to perform best when growth expectations fall and central banks cut rates, leading to lower real yields, usually during the second phase of a crisis.
WHY WE THINK THAT THIS TIME IT MIGHT BE DIFFERENT
First is, let's start with the conflict results. Iran wants to secure its current position + receive reparations. What form they will take: either payment for passing through the strait from all ships, or direct payments from the US, is not so important. The root of the problem: if Iran just agrees to peace with the current results, it clearly shows that it can be defeated with a couple more similar strikes, and it will eventually collapse. After all, the US hasn't suffered significant damage yet. If Iran retains control of the strait or Trump agrees to pay large reparations for the damage caused, such attacks on Iran will have a very tangible price, especially reputational for the US.
In the end, the parties need to find a compromise. Iran will undoubtedly not gain control of the strait, but the US will have to pay something in some form. Enriched uranium will still remain in Iran. Trump can't do this (because it would be the final nail in his political coffin), so the story of Ukraine is repeating itself: an endless medium-intensity conflict.
Today, the UAE monarchy stated that it's time to kick out American bases from the region and only buy weapons from the US for self-defense. The US, however, is a dubious ally that only exposes you to danger and doesn't protect you. This whole message, apparently, is related to the fact that the UAE expects reparations from the US (WHAT DO YOU THINK?), because just like in Iran, the US has caused huge damage to the emirates and continues to do so. They propose starting with the opening of swap lines from the Fed (lending like to Ukraine). And then, as they say, we'll see.
It's obvious that the prolongation of the conflict will destroy the Petrodollar, because it's not just an idea that it's time to kick the Americans out of the region, it's also an idea that China could easily become a new arbiter ensuring predictability. At the same time, both India and Pakistan, which organized this peace, are also very important for stability in the region. In the end, BRICS is for stability and prosperity in the region, while the US and Israel are for its complete destruction.
According to all indirect indications, it's obvious that Trump is going to get stuck in Iran. He's gathering ground troops and came up with a truce to avoid going to Congress for permission to fight for more than two months. He will definitely try various types of ground special operations.
At the same time, the American economy is structured in such a way that any real war of attrition will simply wipe it out. Bubble on bubble, bubble chasing bubble. If we add a petard called "inflation three times higher than the target" to this wonderful house of cards, everything will literally collapse. An extra spice is added by the fact that if we exclude AI, the US economy under Trump is already falling. And unfortunately, the main investors in computing infrastructure have become the Gulf monarchies. Now, having been defeated, they will not only not invest, but will have to sell their dollar assets to maintain political, infrastructural and credit stability.
If Russia, thanks to China and India, can really hold out for 10 years, then the US won't last more than a couple of years in a real exhausting conflict. Literally everything will collapse, and the next Great Depression will start.
Now let's go further... to economical issues.
As things develop in Iran, there will be at least one more episode, and Europe is opening up the plot with sanctions against China. The political confrontation between Trump (or rather those he represents) and the globalists has gone too far, and the financial markets are no longer self-sufficient and "protected" in principle. That is, of course, no one wants a crash, but if it's really necessary, they'll crash everything they can.
The fact that the markets are currently "ignoring the negatives and performing well" is not due to stupidity or optimism - it's because they're being tightly held (for now). A crash in the US market would be a direct path to a banking collapse, re-capitalization by the Fed, and the loss of control of Trump's opponents over the real sector, if not the loss of control of the globalists over domestic affairs in the US and Europe (which is what Trump really needs in the big picture).
Therefore, the stock market is being held, just as Iran and the US are holding a double blockade of the Strait of Hormuz. We've seen the same thing around the world with the rate in 2023-2024, only then the globalists were in the role of troublemakers, they were tightening monetary policy, trying to bleed opponents from the real sector and, if possible, seize assets. But now the roles have changed, and the so-called "financial control" has gone on the attack and, so to speak, the "national globalists" (Trump in the US, Xi in China, etc.)
In short, the game of nerves continues. In this situation, everyone cares little about conventions and decency, so we'll see a full range of manipulations and insider tricks soon, and not just from Trump, although he will of course be in the spotlight as usual.
What will calm things down? In the best case, one of the sides will give up before the situation leads to an obvious collapse, and the losers will wear sad, all in black and without any jewelry, and speculate about how we'll definitely take revenge. In the worst case - they'll still pull the closet out and we'll get a full-blown market crash and a sharp economic crisis.
One of the key moments is, of course, the battle for the Fed. If Trump appoints his supporter there, then it's not even about lowering rates, but about who will help quickly in case of need and who won't. It's not the rates that matter, but the limits in the current situation. And the talk about the economy now is just a distraction.
Well, we've heard about the "overheating" and "growth above potential" repeatedly over the past three years. And all sorts of other nonsense. Which had little to do with reality, but the absurd nature of the "justifications" was even emphasized. This is a kind of "monetary show-off" - to say something obscure and actually irrelevant, let all these pygmies guess what it means.
It's obvious that the global economy is entering a dangerous zone, because a prolonged structural (not like in 2022) energy shock can provoke a chain reaction of crises, comparable in its consequences to the major shocks of recent decades. Damage to LNG and oil infrastructure in Qatar and the blockade of the strait are a global problem, as one of the major energy and basic petrochemical centers has been hit.
In a situation where gas supplies will be in deficit for several years, and the consequences of even a short-term deficit in fertilizers, for example, will lead to a long-term rise in food prices and a reduction in production, the market does not have time to adapt. There are simply not enough alternatives. This means only one thing - prices will rise and will remain high for a long time.
For countries that import LNG, oil, fertilizers, etc., a slow economic suffocation begins. In Europe, this will lead to a new wave of de-industrialization - factories, already operating on the verge of profitability, will begin to close. The chemical industry, fertilizer production, metallurgy, everything that depends on energy prices will be hit. Economic growth will stop, but prices will continue to rise - stagflation (real, not what our Central Bank talks about). This is the worst possible scenario, especially for countries with a high debt-to-GDP ratio.
In Asia, the consequences could be even more devastating. Japan and South Korea, completely dependent on fuel imports, will face a sharp increase in the cost of production. Their export competitiveness will begin to rapidly deteriorate. But the real vulnerability is in developing economies.
Thailand, as we discussed,is one of the vivid examples of the impending stagflation. The country is an energy importer, and its trade balance is very sensitive to commodity prices. When imports become more expensive, the deficit widens, and the currency weakens. A weaker currency makes imports even more expensive and triggers a spiral from which it's hard to escape.
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