Sive Morten
Special Consultant to the FPA
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- 22,091
FUNDAMENTALS
Yesterday in our weekly FX Outlook we start discussing signs that point on a big shift in the Fed's policy as market sentiment starts changing, debt yields are reaching high levels while economy components stagnating despite that aggregate indicators, such as GDP remains positive. Combined intervention of the Fed and BoJ on JPY, Warsh initiation to cut amount of public Fed meetings, yields jump after the Fed's flat decision and some others - these events are not occasional. They tell that investors patience is decreasing. They start demand higher premium for time risk, for term which clearly points on inflation risks and hidden devaluation of values as money as debt. Gold in such environment always has a special role.
MARKET OVERVIEW
Gold fell as an intervention-driven rally in the yen stalled, helping the dollar snap a five-day run of losses. Bullion declined toward $4,050 an ounce, still on track for a narrow monthly gain in July, its first since February. The US currency recovered on Friday as the Bank of Japan kept its policy settings unchanged, with Governor Kazuo Ueda offering little fresh support for the yen and authorities in Tokyo refraining from confirming any intervention. The gains have been primarily driven by softer inflation data, which led traders to scale back expectations for Federal Reserve interest rate hikes for the year and as oil prices retreated to pre-Iran war levels earlier this month.
Data on Thursday showed U.S. inflation slowed in June - PCE price Index fell 0.1% in June, but the easing was likely temporary as renewed hostilities in the Middle East lifted oil prices. Warsh this week pledged an unwavering commitment to bring inflation down without signaling a readiness to raise interest rates.Traders see a 65% chance of a rate hike in September, according to the CME FedWatch Tool.
U.S. jobless claims increased less than expected last week, suggesting labor market conditions remained stable, another government report showed.
A wave of dip-buying has helped to keep the metal above the key level of $4,000 an ounce in recent weeks. Looking ahead, bullion traders are continuing to seek clues to the Federal Reserve’s next policy steps. This week’s split decision in favor of preserving the current rate revealed conviction among some policymakers that higher borrowing costs will eventually be needed to meet the central bank’s inflation target of 2%. The Federal Open Market Committee voted 9-3 to hold the benchmark federal funds rate in a range of 3.5% to 3.75%. Three officials dissented in favor of raising rates by a quarter percentage point.
Tether bought 14 tons of gold for its reserves in the three months to June, extending a buying streak that’s made it the largest known holder of bullion in the world outside of banks and nation states. The crypto giant’s gold reserves rose to 146 tons worth $18.8 billion at the end of June, according to its quarterly attestation. The pace of buying is partly down to the issuance of USDT, which saw nearly half a billion dollars worth of new tokens added in the second quarter.
Central banks have returned to actively buying gold, supporting prices in the face of weakening demand from other major sources. According to the World Gold Council (WGC), in the second quarter of 2026, central banks were the only major buyers to increase their reserves compared to the previous period.
Central Banks purchased 289 tons (a record for the second quarter, 5 times higher than in the first quarter), despite that overall demand for gold decreased in the second quarter. Investment demand (including ETFs, bars, and coins) fell more sharply than central banks could compensate for with their purchases. The rise in long-term yields indicates that the market is preparing for a more hawkish policy. ETF speculative capital is being withdrawn faster than central banks are accumulating reserves.
Central banks bought far less gold at the start of the year than previously thought, and while demand has since rebounded, their purchases are expected to decline this year, according to the World Gold Council. Central banks only bought 57 tons in the first quarter, 187 tons less than previously thought, the industry group said in a report Thursday. That’s the weakest start to a year in well over a decade, according to WGC data, and the revision means the overall pace of purchasing this year is likely to fall below 2025.
A large share of the central-bank buying captured in the WGC’s estimates isn’t disclosed by monetary authorities themselves. Consultancy Metals Focus Ltd. calculates the estimated purchases on behalf of the council using a combination of public data, trade statistics and field research. Central-bank demand nevertheless recovered sharply between April and June, totaling a net 289 tons, a record amount for a second quarter. Poland was the top buyer with 51 tons, which took its first-half purchases to 82 tons. China bought 33 tons in the quarter.
Other highlights of the WGC’s quarterly report shows wide decrease of the gold demand in all spheres - gold-backed exchange-traded funds saw outflows of 45 tons in the second quarter, bar and coin demand fell about 3% year-on-year to 307 tons, jewelry demand slipped 17% to 278 tons, the lowest since the pandemic and recycled supply dropped 6% to 326 tons.
Analysts have cut their gold price forecasts for the first time since late 2023 after a sharp pullback from January's record highs, a Reuters poll showed, but most still expect support from central bank buying and concerns about fiscal sustainability. The survey of 29 analysts and traders conducted over the past three weeks returned a median gold forecast of $4,509 per troy ounce for 2026. The average forecast for 2027 is $4,610 compared with $5,100 in the previous poll. Commerzbank lowered its year-end gold price forecast by $300 to $4,500 per ounce, adding that without a reversal in interest-rate expectations, a lasting return of gold ETF investors and a recovery in gold price are unlikely.
Analysts say the core structural drivers for gold such as geopolitical tensions, government debt and currency debasement remain intact. A common theme in responses to the poll was that central banks are likely to remain the most reliable source of demand, even if purchases moderate from recent record levels. Meanwhile, analysts were generally less optimistic about jewellery consumption, particularly in India and China, the world's largest physical gold markets.
Analysts expect silver to average $72 per ounce in 2026, below the $78 forecast three months ago.
CME Group Inc. said the debut weekend of 24/7 trading for its one-ounce gold futures saw stronger-than-expected demand with deep liquidity despite subdued volatility. Nearly 15,000 one-ounce gold futures contracts, representing about $60 million in notional value, traded during the inaugural weekend of the new all-hours trading schedule, according to a statement Monday. The smaller-sized gold contract was launched in January 2025 to cater to retail investors.
LET'S KEEP CONVERSATION
Yesterday we talked a lot about changing in the Fed's policy and position. Also we mentioned some signs why we think that investors view is changing and they demand higher premium for time risk. Formally, monetary policy did not change. The market reacted differently. By July 31, the yield on 2-year Treasury bonds had risen to 4.28%, the yield on 10-year bonds had risen to 4.75%, and the yield on 30-year bonds had risen to 5.27%. On key market terms, the price of money was significantly higher than the Fed's rate.
The central bank provides less guidance, the market itself assesses the data, prices again carry information, and do not repeat the last phrase of the Fed Chairman. But the market has used this freedom in a rather pessimistic way. It has not only raised expectations for the future rate. It has also raised the price of long-term confidence in the dollar, the budget, and the Fed itself. If long-term yields are rising because the market expects high productivity and real growth, that is good news. If they are rising due to inflation, deficits, a large supply of Treasuries, and policy uncertainty, that is a tax on the entire economy.
The Fed may not change its rate. But the 10-year yield affects mortgages, corporate bonds, commercial real estate, private credit, and the valuation of growth stocks. And the rise in all these rates, along with the cost of credit, continues to increase unrealized losses for banks and funds, because as yields rise, bond prices fall. That is why the phrase "The Fed has lost control" is both incorrect and dangerously close to the truth. It is incorrect because the Fed can raise or lower the short rate, buy long-term bonds, change its balance sheet. It is close to the truth because every such action now has a price.
To directly bring long-term rates down, the Fed would have to either convince the market that inflation and the budget are under control, or buy Treasuries again. The first option requires results. The second creates bank reserves and, accordingly, additional liquidity in the financial system. hose very "money from thin air." But this could finally convince the market that the debt is going to be saved by devaluing the currency. It is also possible to raise the short rate in line with the market. Then the Fed would regain leadership, but it would accelerate the blow to borrowers and risk finding a weak spot in private credit, real estate, or AI debt.
It has become a beautiful trap. If the Fed does not follow the market, it looks out of touch. If it follows, it acknowledges that the market has set its rate. If it suppresses the market with purchases, the market will see this as an admission that without its balance sheet, the Fed's debt at that price is becoming too heavy. The Fed wanted investors to stop watching the referee and start playing the game. Investors have played. In mortgages, bonds, stocks, and the federal budget. The central bank still controls the price of money for one day. The price of confidence for 30 years is now being set without it.
The US doesn't have a problem repaying its nearly $40 trillion debt. The problem is repaying it with dollars that have the same value as the original dollars. The Fed's interest rate becomes more than just a tool to fight inflation. If the average cost of the debt increases by just 1 percentage point over time, the additional costs to the budget begin to be measured in hundreds of billions of dollars per year.
Interest is financed by new debt. New debt creates new interest. New interest requires even more new debt. A house of cards doesn't have to collapse in one day. It can simply become increasingly expensive to maintain, until maintenance becomes its primary function. American financial system has become accustomed to each subsequent cycle of cheaper money over the past 45 years, and the government has accumulated a debt that is no longer compatible with a normal real cost of capital.
Strictly speaking, debt sustainability requires not that the interest rate be lower than inflation every month. It requires that the average cost of servicing the debt be lower than the rate of growth of the nominal economy. But when the real economy grows slowly and falls into recession, and the debt grows rapidly, it is easiest to achieve this through the old state method - financial repression.
Interest rates are kept below nominal growth and sometimes below inflation. During a crisis, the Fed expands its balance sheet again. Banks are given incentives to hold treasuries. The debt is repaid on time, but the currency used to repay it gradually loses its purchasing power. Legally, there is no default. Economically, the creditor receives less back. That's why the current gold cycle is different from a typical stock market bubble.
Central banks buy the metal not because the dollar will stop being accepted in stores tomorrow. The dollar will remain the main currency of world trade, credit, and settlements for a long time. Gold cannot replace the huge dollar-based banking system. It replaces something else - unconditional trust in the state's debt obligations.
In the second quarter, central banks bought a net 289 tons of gold - a record for the second quarter. This happened despite the strengthening dollar, rising expected interest rates, falling gold prices, and outflows from Western ETFs. The central bank does not necessarily have to sell all of its treasuries. It is enough to decide that the next billion in reserves is better partially held in an asset that is not someone else's promise to pay.
Therefore, gold may continue to fall when real yields and the dollar are rising. Gold mining companies may fall much more than the metal itself. No asset is immune to liquidity, interest rates, and speculative distortions. But this structural thesis does not disappear because of it. The longer the Fed keeps real interest rates high, the more difficult the budget arithmetic becomes. The faster it gives in and returns to negative real interest rates, the stronger the argument in favor of gold. It turns out to be a rather convenient fork in the road.
Either the high interest rate begins to break the debt structure. Or the low interest rate begins to devalue the currency in which this structure is denominated.
Gold does not necessarily have to replace the dollar. It will simply measure the cost of saving it. America will almost certainly repay all $40 trillion. That's what central banks, buying gold, are betting on.
Major players understand that inflation risks are rising and are selling off their holdings, including dollar itself. Naturally, such a performance caused people to distrust the regulator, especially regarding its ability to control inflation going forward. Stock and bond markets, and the DXY index, reacted with a decline. Therefore, Warsh speech in Jackson Hole will be one of the most important in the last 5 years.
It's likely that we will see a situation where real interest rates (nominal rate minus inflation) will fall even deeper into negative territory. Visually, you are shown that the nominal rate is slightly outpacing official inflation, but considering how skillfully official statistics in the US and other countries underestimate the actual growth in prices (labor market statistics, etc.), your money in long-term bonds will simply evaporate.
I am almost certain that in the next 1.5-2 years, people who have invested in long-term bonds (with maturities of 10-20-30 years) will continue to receive lower real returns on these bonds, which do not cover inflation. In other words, the debt they bought will continue to be diluted, just like the real purchasing power of the money they lent to the US government. This also applies to long-term bonds purchased from other major central banks. And since long-term rates will continue to rise, the value of these bonds will continue to fall.
That's what actually we're waiting for as a basis for the gold to get ground.
Fed now is also a political hostage. the economic effect of a rate change takes three months to manifest, while the financial effect is immediate. If they raised rates, the effect on the economy would be felt after the midterm elections, and the negative impact on the stock market would be immediate, and Trump would blame him for helping the Democrats. The bursting of the AI market bubble may have also frightened members of the Fed. A 20-30% drop in the stock prices that every American holds creates serious negative effects. Therefore, the decision not to raise rates was logical, and the dollar started to fall as a result. The ideal scenario is a moderate bursting of the bubble, so that excess capital and overvalued stocks are eliminated. The stock price crash over the past two weeks is a real fear. They can't say this publicly, but we know that the Fed targets the stock market.
Yesterday in our weekly FX Outlook we start discussing signs that point on a big shift in the Fed's policy as market sentiment starts changing, debt yields are reaching high levels while economy components stagnating despite that aggregate indicators, such as GDP remains positive. Combined intervention of the Fed and BoJ on JPY, Warsh initiation to cut amount of public Fed meetings, yields jump after the Fed's flat decision and some others - these events are not occasional. They tell that investors patience is decreasing. They start demand higher premium for time risk, for term which clearly points on inflation risks and hidden devaluation of values as money as debt. Gold in such environment always has a special role.
MARKET OVERVIEW
Gold fell as an intervention-driven rally in the yen stalled, helping the dollar snap a five-day run of losses. Bullion declined toward $4,050 an ounce, still on track for a narrow monthly gain in July, its first since February. The US currency recovered on Friday as the Bank of Japan kept its policy settings unchanged, with Governor Kazuo Ueda offering little fresh support for the yen and authorities in Tokyo refraining from confirming any intervention. The gains have been primarily driven by softer inflation data, which led traders to scale back expectations for Federal Reserve interest rate hikes for the year and as oil prices retreated to pre-Iran war levels earlier this month.
Data on Thursday showed U.S. inflation slowed in June - PCE price Index fell 0.1% in June, but the easing was likely temporary as renewed hostilities in the Middle East lifted oil prices. Warsh this week pledged an unwavering commitment to bring inflation down without signaling a readiness to raise interest rates.Traders see a 65% chance of a rate hike in September, according to the CME FedWatch Tool.
U.S. jobless claims increased less than expected last week, suggesting labor market conditions remained stable, another government report showed.
A wave of dip-buying has helped to keep the metal above the key level of $4,000 an ounce in recent weeks. Looking ahead, bullion traders are continuing to seek clues to the Federal Reserve’s next policy steps. This week’s split decision in favor of preserving the current rate revealed conviction among some policymakers that higher borrowing costs will eventually be needed to meet the central bank’s inflation target of 2%. The Federal Open Market Committee voted 9-3 to hold the benchmark federal funds rate in a range of 3.5% to 3.75%. Three officials dissented in favor of raising rates by a quarter percentage point.
Tether bought 14 tons of gold for its reserves in the three months to June, extending a buying streak that’s made it the largest known holder of bullion in the world outside of banks and nation states. The crypto giant’s gold reserves rose to 146 tons worth $18.8 billion at the end of June, according to its quarterly attestation. The pace of buying is partly down to the issuance of USDT, which saw nearly half a billion dollars worth of new tokens added in the second quarter.
Central banks have returned to actively buying gold, supporting prices in the face of weakening demand from other major sources. According to the World Gold Council (WGC), in the second quarter of 2026, central banks were the only major buyers to increase their reserves compared to the previous period.
Central Banks purchased 289 tons (a record for the second quarter, 5 times higher than in the first quarter), despite that overall demand for gold decreased in the second quarter. Investment demand (including ETFs, bars, and coins) fell more sharply than central banks could compensate for with their purchases. The rise in long-term yields indicates that the market is preparing for a more hawkish policy. ETF speculative capital is being withdrawn faster than central banks are accumulating reserves.
Central banks bought far less gold at the start of the year than previously thought, and while demand has since rebounded, their purchases are expected to decline this year, according to the World Gold Council. Central banks only bought 57 tons in the first quarter, 187 tons less than previously thought, the industry group said in a report Thursday. That’s the weakest start to a year in well over a decade, according to WGC data, and the revision means the overall pace of purchasing this year is likely to fall below 2025.
A large share of the central-bank buying captured in the WGC’s estimates isn’t disclosed by monetary authorities themselves. Consultancy Metals Focus Ltd. calculates the estimated purchases on behalf of the council using a combination of public data, trade statistics and field research. Central-bank demand nevertheless recovered sharply between April and June, totaling a net 289 tons, a record amount for a second quarter. Poland was the top buyer with 51 tons, which took its first-half purchases to 82 tons. China bought 33 tons in the quarter.
Other highlights of the WGC’s quarterly report shows wide decrease of the gold demand in all spheres - gold-backed exchange-traded funds saw outflows of 45 tons in the second quarter, bar and coin demand fell about 3% year-on-year to 307 tons, jewelry demand slipped 17% to 278 tons, the lowest since the pandemic and recycled supply dropped 6% to 326 tons.
Analysts have cut their gold price forecasts for the first time since late 2023 after a sharp pullback from January's record highs, a Reuters poll showed, but most still expect support from central bank buying and concerns about fiscal sustainability. The survey of 29 analysts and traders conducted over the past three weeks returned a median gold forecast of $4,509 per troy ounce for 2026. The average forecast for 2027 is $4,610 compared with $5,100 in the previous poll. Commerzbank lowered its year-end gold price forecast by $300 to $4,500 per ounce, adding that without a reversal in interest-rate expectations, a lasting return of gold ETF investors and a recovery in gold price are unlikely.
Analysts say the core structural drivers for gold such as geopolitical tensions, government debt and currency debasement remain intact. A common theme in responses to the poll was that central banks are likely to remain the most reliable source of demand, even if purchases moderate from recent record levels. Meanwhile, analysts were generally less optimistic about jewellery consumption, particularly in India and China, the world's largest physical gold markets.
Analysts expect silver to average $72 per ounce in 2026, below the $78 forecast three months ago.
CME Group Inc. said the debut weekend of 24/7 trading for its one-ounce gold futures saw stronger-than-expected demand with deep liquidity despite subdued volatility. Nearly 15,000 one-ounce gold futures contracts, representing about $60 million in notional value, traded during the inaugural weekend of the new all-hours trading schedule, according to a statement Monday. The smaller-sized gold contract was launched in January 2025 to cater to retail investors.
LET'S KEEP CONVERSATION
Yesterday we talked a lot about changing in the Fed's policy and position. Also we mentioned some signs why we think that investors view is changing and they demand higher premium for time risk. Formally, monetary policy did not change. The market reacted differently. By July 31, the yield on 2-year Treasury bonds had risen to 4.28%, the yield on 10-year bonds had risen to 4.75%, and the yield on 30-year bonds had risen to 5.27%. On key market terms, the price of money was significantly higher than the Fed's rate.
The central bank provides less guidance, the market itself assesses the data, prices again carry information, and do not repeat the last phrase of the Fed Chairman. But the market has used this freedom in a rather pessimistic way. It has not only raised expectations for the future rate. It has also raised the price of long-term confidence in the dollar, the budget, and the Fed itself. If long-term yields are rising because the market expects high productivity and real growth, that is good news. If they are rising due to inflation, deficits, a large supply of Treasuries, and policy uncertainty, that is a tax on the entire economy.
The Fed may not change its rate. But the 10-year yield affects mortgages, corporate bonds, commercial real estate, private credit, and the valuation of growth stocks. And the rise in all these rates, along with the cost of credit, continues to increase unrealized losses for banks and funds, because as yields rise, bond prices fall. That is why the phrase "The Fed has lost control" is both incorrect and dangerously close to the truth. It is incorrect because the Fed can raise or lower the short rate, buy long-term bonds, change its balance sheet. It is close to the truth because every such action now has a price.
To directly bring long-term rates down, the Fed would have to either convince the market that inflation and the budget are under control, or buy Treasuries again. The first option requires results. The second creates bank reserves and, accordingly, additional liquidity in the financial system. hose very "money from thin air." But this could finally convince the market that the debt is going to be saved by devaluing the currency. It is also possible to raise the short rate in line with the market. Then the Fed would regain leadership, but it would accelerate the blow to borrowers and risk finding a weak spot in private credit, real estate, or AI debt.
It has become a beautiful trap. If the Fed does not follow the market, it looks out of touch. If it follows, it acknowledges that the market has set its rate. If it suppresses the market with purchases, the market will see this as an admission that without its balance sheet, the Fed's debt at that price is becoming too heavy. The Fed wanted investors to stop watching the referee and start playing the game. Investors have played. In mortgages, bonds, stocks, and the federal budget. The central bank still controls the price of money for one day. The price of confidence for 30 years is now being set without it.
The US doesn't have a problem repaying its nearly $40 trillion debt. The problem is repaying it with dollars that have the same value as the original dollars. The Fed's interest rate becomes more than just a tool to fight inflation. If the average cost of the debt increases by just 1 percentage point over time, the additional costs to the budget begin to be measured in hundreds of billions of dollars per year.
Interest is financed by new debt. New debt creates new interest. New interest requires even more new debt. A house of cards doesn't have to collapse in one day. It can simply become increasingly expensive to maintain, until maintenance becomes its primary function. American financial system has become accustomed to each subsequent cycle of cheaper money over the past 45 years, and the government has accumulated a debt that is no longer compatible with a normal real cost of capital.
Strictly speaking, debt sustainability requires not that the interest rate be lower than inflation every month. It requires that the average cost of servicing the debt be lower than the rate of growth of the nominal economy. But when the real economy grows slowly and falls into recession, and the debt grows rapidly, it is easiest to achieve this through the old state method - financial repression.
Interest rates are kept below nominal growth and sometimes below inflation. During a crisis, the Fed expands its balance sheet again. Banks are given incentives to hold treasuries. The debt is repaid on time, but the currency used to repay it gradually loses its purchasing power. Legally, there is no default. Economically, the creditor receives less back. That's why the current gold cycle is different from a typical stock market bubble.
Central banks buy the metal not because the dollar will stop being accepted in stores tomorrow. The dollar will remain the main currency of world trade, credit, and settlements for a long time. Gold cannot replace the huge dollar-based banking system. It replaces something else - unconditional trust in the state's debt obligations.
In the second quarter, central banks bought a net 289 tons of gold - a record for the second quarter. This happened despite the strengthening dollar, rising expected interest rates, falling gold prices, and outflows from Western ETFs. The central bank does not necessarily have to sell all of its treasuries. It is enough to decide that the next billion in reserves is better partially held in an asset that is not someone else's promise to pay.
Therefore, gold may continue to fall when real yields and the dollar are rising. Gold mining companies may fall much more than the metal itself. No asset is immune to liquidity, interest rates, and speculative distortions. But this structural thesis does not disappear because of it. The longer the Fed keeps real interest rates high, the more difficult the budget arithmetic becomes. The faster it gives in and returns to negative real interest rates, the stronger the argument in favor of gold. It turns out to be a rather convenient fork in the road.
Either the high interest rate begins to break the debt structure. Or the low interest rate begins to devalue the currency in which this structure is denominated.
Gold does not necessarily have to replace the dollar. It will simply measure the cost of saving it. America will almost certainly repay all $40 trillion. That's what central banks, buying gold, are betting on.
Major players understand that inflation risks are rising and are selling off their holdings, including dollar itself. Naturally, such a performance caused people to distrust the regulator, especially regarding its ability to control inflation going forward. Stock and bond markets, and the DXY index, reacted with a decline. Therefore, Warsh speech in Jackson Hole will be one of the most important in the last 5 years.
It's likely that we will see a situation where real interest rates (nominal rate minus inflation) will fall even deeper into negative territory. Visually, you are shown that the nominal rate is slightly outpacing official inflation, but considering how skillfully official statistics in the US and other countries underestimate the actual growth in prices (labor market statistics, etc.), your money in long-term bonds will simply evaporate.
I am almost certain that in the next 1.5-2 years, people who have invested in long-term bonds (with maturities of 10-20-30 years) will continue to receive lower real returns on these bonds, which do not cover inflation. In other words, the debt they bought will continue to be diluted, just like the real purchasing power of the money they lent to the US government. This also applies to long-term bonds purchased from other major central banks. And since long-term rates will continue to rise, the value of these bonds will continue to fall.
That's what actually we're waiting for as a basis for the gold to get ground.
Fed now is also a political hostage. the economic effect of a rate change takes three months to manifest, while the financial effect is immediate. If they raised rates, the effect on the economy would be felt after the midterm elections, and the negative impact on the stock market would be immediate, and Trump would blame him for helping the Democrats. The bursting of the AI market bubble may have also frightened members of the Fed. A 20-30% drop in the stock prices that every American holds creates serious negative effects. Therefore, the decision not to raise rates was logical, and the dollar started to fall as a result. The ideal scenario is a moderate bursting of the bubble, so that excess capital and overvalued stocks are eliminated. The stock price crash over the past two weeks is a real fear. They can't say this publicly, but we know that the Fed targets the stock market.
