Sive Morten
Special Consultant to the FPA
- Messages
- 19,191
Fundamentals
Gold market mostly was moving together with other ones, driven by overall panic and uncertainty. Later market has calmed down a bit and overall result was mild. As we said last time - with all those mess in the US politics, it seems that global bankers temporally have taken power in their hands to control situation. Which means that collapse of the financial markets is not the primary scenario. Once drop has started on Monday, J. Yellen has added liquidity for ~ $195 Bln, including $69 Bln spent by US Treasury directly and drop of RRP account.
Bullion’s next test will come with inflation data. Investors will look for readings of producer and consumer price indexes on Tuesday and Wednesday to confirm that inflation is still ebbing, supporting the case for Fed rate cuts as soon as next month....and Japan GDP data. Now it seems it might be even more important. At the same time, currently we almost do not have gold specific news or data. Gold now is mostly driven by political issues either domestic or global.
Market overview
Gold plunged on Monday as traders assessed the implications of a major global stock rout. Spot bullion fell as much as 3.2%, the biggest single day drop since early June. Other precious metals have also fallen sharply, with silver down by as much as 7.2%. Despite Monday’s sharp drop, gold is still up by about 15% so far this year. It hit an all-time high in July, aided by central-bank buying and Asian consumers.
Wall Street tumbled, as fears of the United States tipping into recession following weak economic data last week rippled through global markets.
Expectations of rate cuts by the US central bank have also increased, a positive for the non-interest-yielding yellow metal. Rising geopolitical tensions in the Middle East — Israel is bracing for a possible attack from Iran and regional militias — should also support the safe-haven asset.
A rebounding US dollar and a pullback in expectations of rate cuts by the US Federal Reserve are also weighing on the yellow metal. Meanwhile, exchange-traded funds added 125,101 troy ounces of gold to their holdings in the last trading session.
Fed policymakers pushed back against the notion that weaker-than-expected July jobs data means the economy is in recessionary freefall, but also warned that rate cuts will be needed to avoid such an outcome.
China’s central bank, at least officially, didn’t buy any gold for a third straight month in July, as the precious metal surged to record high. World Gold Council has said state-backed demand in the second quarter slumped 39% compared with the first three months of the year. However, some analysts believe central-bank buying will remain a key driver for bullion, saying the PBOC is likely to resume the purchases as as it seeks to diversify reserves and guard against weak currency.
The rebound on Gold market on Thursday may have been aided by Labor Department data that showed applications for unemployment benefits falling by the most in nearly a year. Market see a 72% chance of 50 basis points cut in September, up from 70% on Monday, according to the CME FedWatch Tool, with an additional cut anticipated in December.
U.S. data showed there were 233,000 initial jobless claims last week, below the 240,000 expected by economists and down from 250,000 the week before, easing worries of a slowdown in the world's largest economy.
On the geopolitical front, the killing of senior members of militant groups Hamas and Hezbollah last week raised the possibility of retaliatory strikes by Iran on Israel.
Gold wavered after its biggest one-day surge in three weeks, with the latest US data easing some concerns about a hard landing for the world’s biggest economy and helping support a broader rally. Bullion for immediate delivery closed 1.9% higher Thursday after shedding almost 3% during a five-day losing streak. A large majority of economists surveyed by Bloomberg see only a quarter-point decrease coming in September — a finding that’s at odds with calls from some large Wall Street banks for a jumbo cut.
SOME THOUGHTS ON DIFFERENT SUBJECTS
Last week we've estimated that Central Banks keep buying gold (based on WGC report). The motivation here is clear. Central banks understand that there will definitely be a zero rate and inflation above this rate, so they need to buy something in advance that will preserve the purchasing power of reserves. They can't buy at highs because it becomes obvious to everyone.
So, Central banks here, suddenly, since 2022, have been frantically [and not always publicly as we shown on example of PBoC] replenishing their reserves with gold. They are not waiting, but preparing - listen to the testimony of the head of the Central Bank of the Netherlands, Klaas Knot, on camera. However, not only because of the notorious de-dollarization, but because of serious imbalances in sovereign debt markets and structural inflationary pressure in unprofitable economies.
we must not forget about the revaluation of gold as a controlled process. Moreover, European central banks have equalized their gold reserves with each other in proportion to GDP over the last decades. Obviously, this was done so that everyone could get the same relative increase in their gold revaluation accounts (i.e., the account of gold revaluation on the balance sheet) when the price of gold rises and they allow themselves to revalue gold on the balance sheet without selling.
If anyone is not aware, as a general rule, gold on the balance sheets of the Central Bank is not revalued at the current market value and simply hangs at the purchase price. The Germans formed their reserves for an amount equivalent to 8 billion euros, and now their reserves are about 180 billion euros.
Therefore, central banks are not yet able to cover their losses, which arose as a result of the Covid-era stimuli. By the way, the US has long opposed the revaluation of gold, since the 1970s, since this would damage the dollar's status as a global reserve currency. In fact, the dollar's privilege arose precisely for this reason, since with this revaluation rule, it would be more profitable to hold and buy gold on central bank balance sheets than to hold US treasuries.
Everything is correct about the world's central banks: at least a minimum volume of liquid reserves must exist in case of trouble . The more, the better - then you can set the rules yourself in new markets.
Interesting historical analogy on gold performance in previous crisis. Gold appreciation was not straightforward. The sale in the markets in 2007 began in July-August. Fed Chairman Bernanke panicked and rushed to cut rates in September, starting an easing cycle. On the eve of the meeting of the American Central Bank, both risky assets and Gold rebounded. (Everything as we saw just recently and watching again on September...) But already in October 2007, the shares again came under attack, and the rally in precious metals continued. The sale of gold began only in March 2008. By this time, both risky assets and stocks were synchronized and went down together. However, the price of gold in dollars during this period managed to jump by +60%.
Also it is interesting to watch on perspective of some fundamental data. For example, C. Lagarde said very interesting thing in November 2022:
Why? Supply-side inflation, which was forgotten and unnoticed for a couple of decades but which surfaced in Covid due to disruption of supply chains and the beginning of market decoupling, does not cancel out demand-side inflation. The latter can be fueled by the growth of the wealth effect due to the growth of the stock market.
The market grew, in addition to the infusions from the printing press, largely due to the expectation of a quick rate cut. But now everyone is slowly beginning to understand that the Fed is starting to cut the rate not so that the market booms further, but because something is starting to break. Therefore, the market sentiment towards stocks may soon worsen. And now too many points of tension in the system are related to the high rate - banks for example. And not only American ones, but also global ones, and if negative sentiment and uncertainty are given to an already tense system, it will crumble. We saw it recently.
So if the Fed's rhetoric changes even more, this could lead to a powerful deflationary impulse, including as a result of rising unemployment and recession, but now on the demand side. As a result, initially inflation will slow down (which we have actually already seen in recent months), but then the economy will not just slide into a recession as a cyclical downturn, but will simply fly down until all the bubbles in all assets are deflated. Here is very representative chart about inflation, showing how cookies crumble:
Until a full-fledged recession and financial crisis occurs, so that the system is cleared of imbalances, any actions of the Fed will be a game of finding a balance between two scales - inflation and economic decline. And the longer this continues, the stronger the fall will be later, or the more extensive the stimulus will be applied to prevent a fall, and the higher inflation will rise on these stimuli.
The same is concerning job market. For example, analysts from Apollo are starting to lie:
First, the most widely distributed U3 report is a household survey (60,000 households) on labor force participation. Second, the Goldmans have already studied everything and said that if unemployment among immigrants were taken into account, the unemployment figures would be 1.1 million people higher. It would seem that the respected economist Torsten Slok, but so ineptly manipulates public opinion. If you read, they have had no signs of recession and America is strong for the last few months.
And this kind of falsifications across all major data is becoming more and more. Investors should not worry about their assets. So, picture has to show that everything is fine. It is quite obvious that the situation in the global and American economies is becoming more and more critical, the recession continues and is not going to stop. Accordingly, more and more often the monetary authorities of different countries appeal (officially or not officially) to various kinds of political reasons.
Politicians are also speaking out, Trump openly said that it was time to make sure that the Fed's policy would be controlled by the president of the country. In fact, he (for the first time!) fully voiced the scenario of "Either support the global dollar system at the expense of U.S. industry, or save U.S. industry, but at the cost of destroying the global dollar system."
The rejection of the second part of this scenario was costly to him in his first term, now the situation may change. There is the hypothesis that the elite of the "Western" global project could collude with those industrial elites who are moving Trump. Because there is little hope for Harris. If this is the case, and we will soon see it by the "withering away" of the Harris campaign, then it is almost certainly possible to predict US policy. Which will consist in the gradual "write-off" of the debt overhang and its possible transfer to the "crypto" mode. With the subsequent cancellation of debts to all external creditors.
The most important thing is to prevent hyperinflation, as it destroys the real sector. In this case, the nominal indicators of financial markets will not change, the real value of assets will gradually fall, and the state will support investments in the real sector. But still, such a policy will require the emergence of new markets, so that the United States will almost inevitably begin expansion into Southeast Asia. There are no contradictions between the two US political camps on this subject.
By the way two words on Bangladesh that was totally ignored by big media. Meantime, this is very important topic for future US foreign policy. A country with a population of 170 million people is experiencing a Coup. The region is promising - uranium and gas reserves have been discovered in Bangladesh [there are joint projects with the Russian Federation]. In addition, it is a transit territory for drug trafficking.
Washington actively helped the opposition in order to achieve territorial concessions, split the region, create a new country with a non-Muslim majority, and enter South Asia through Myanmar. The US has "strongly requested" Bangladesh to join the QUAD alliance and is demanding a long-term lease on St Martin's Island to house a military base.
In case of a Pacific conflict, the US will close the Strait of Malacca, the world's main trade artery. The Coup is a threat to China's BCIM (Bangladesh, China, India and Myanmar) trade corridor project within the framework of the "One Belt, One Road" strategy. So if Taiwan for the US means approaching the enemy (China) and grabbing its throat, then Bangladesh and Myanmar mean coming from behind and hitting it over the head with a brick. Because in this case China has only one access to world ocean - via Russian water space and North Sea Way.
Besides, you can rummage through your wardrobe and suddenly discover that up to a third of your clothes were made in Bangladesh. Businesses will have to come up with something now, which means goods will become more expensive...
Gold market mostly was moving together with other ones, driven by overall panic and uncertainty. Later market has calmed down a bit and overall result was mild. As we said last time - with all those mess in the US politics, it seems that global bankers temporally have taken power in their hands to control situation. Which means that collapse of the financial markets is not the primary scenario. Once drop has started on Monday, J. Yellen has added liquidity for ~ $195 Bln, including $69 Bln spent by US Treasury directly and drop of RRP account.
Bullion’s next test will come with inflation data. Investors will look for readings of producer and consumer price indexes on Tuesday and Wednesday to confirm that inflation is still ebbing, supporting the case for Fed rate cuts as soon as next month....and Japan GDP data. Now it seems it might be even more important. At the same time, currently we almost do not have gold specific news or data. Gold now is mostly driven by political issues either domestic or global.
Market overview
Gold plunged on Monday as traders assessed the implications of a major global stock rout. Spot bullion fell as much as 3.2%, the biggest single day drop since early June. Other precious metals have also fallen sharply, with silver down by as much as 7.2%. Despite Monday’s sharp drop, gold is still up by about 15% so far this year. It hit an all-time high in July, aided by central-bank buying and Asian consumers.
Wall Street tumbled, as fears of the United States tipping into recession following weak economic data last week rippled through global markets.
Expectations of rate cuts by the US central bank have also increased, a positive for the non-interest-yielding yellow metal. Rising geopolitical tensions in the Middle East — Israel is bracing for a possible attack from Iran and regional militias — should also support the safe-haven asset.
A rebounding US dollar and a pullback in expectations of rate cuts by the US Federal Reserve are also weighing on the yellow metal. Meanwhile, exchange-traded funds added 125,101 troy ounces of gold to their holdings in the last trading session.
Fed policymakers pushed back against the notion that weaker-than-expected July jobs data means the economy is in recessionary freefall, but also warned that rate cuts will be needed to avoid such an outcome.
China’s central bank, at least officially, didn’t buy any gold for a third straight month in July, as the precious metal surged to record high. World Gold Council has said state-backed demand in the second quarter slumped 39% compared with the first three months of the year. However, some analysts believe central-bank buying will remain a key driver for bullion, saying the PBOC is likely to resume the purchases as as it seeks to diversify reserves and guard against weak currency.
The rebound on Gold market on Thursday may have been aided by Labor Department data that showed applications for unemployment benefits falling by the most in nearly a year. Market see a 72% chance of 50 basis points cut in September, up from 70% on Monday, according to the CME FedWatch Tool, with an additional cut anticipated in December.
U.S. data showed there were 233,000 initial jobless claims last week, below the 240,000 expected by economists and down from 250,000 the week before, easing worries of a slowdown in the world's largest economy.
On the geopolitical front, the killing of senior members of militant groups Hamas and Hezbollah last week raised the possibility of retaliatory strikes by Iran on Israel.
Gold wavered after its biggest one-day surge in three weeks, with the latest US data easing some concerns about a hard landing for the world’s biggest economy and helping support a broader rally. Bullion for immediate delivery closed 1.9% higher Thursday after shedding almost 3% during a five-day losing streak. A large majority of economists surveyed by Bloomberg see only a quarter-point decrease coming in September — a finding that’s at odds with calls from some large Wall Street banks for a jumbo cut.
SOME THOUGHTS ON DIFFERENT SUBJECTS
Last week we've estimated that Central Banks keep buying gold (based on WGC report). The motivation here is clear. Central banks understand that there will definitely be a zero rate and inflation above this rate, so they need to buy something in advance that will preserve the purchasing power of reserves. They can't buy at highs because it becomes obvious to everyone.
So, Central banks here, suddenly, since 2022, have been frantically [and not always publicly as we shown on example of PBoC] replenishing their reserves with gold. They are not waiting, but preparing - listen to the testimony of the head of the Central Bank of the Netherlands, Klaas Knot, on camera. However, not only because of the notorious de-dollarization, but because of serious imbalances in sovereign debt markets and structural inflationary pressure in unprofitable economies.
we must not forget about the revaluation of gold as a controlled process. Moreover, European central banks have equalized their gold reserves with each other in proportion to GDP over the last decades. Obviously, this was done so that everyone could get the same relative increase in their gold revaluation accounts (i.e., the account of gold revaluation on the balance sheet) when the price of gold rises and they allow themselves to revalue gold on the balance sheet without selling.
If anyone is not aware, as a general rule, gold on the balance sheets of the Central Bank is not revalued at the current market value and simply hangs at the purchase price. The Germans formed their reserves for an amount equivalent to 8 billion euros, and now their reserves are about 180 billion euros.
Therefore, central banks are not yet able to cover their losses, which arose as a result of the Covid-era stimuli. By the way, the US has long opposed the revaluation of gold, since the 1970s, since this would damage the dollar's status as a global reserve currency. In fact, the dollar's privilege arose precisely for this reason, since with this revaluation rule, it would be more profitable to hold and buy gold on central bank balance sheets than to hold US treasuries.
Everything is correct about the world's central banks: at least a minimum volume of liquid reserves must exist in case of trouble . The more, the better - then you can set the rules yourself in new markets.
Interesting historical analogy on gold performance in previous crisis. Gold appreciation was not straightforward. The sale in the markets in 2007 began in July-August. Fed Chairman Bernanke panicked and rushed to cut rates in September, starting an easing cycle. On the eve of the meeting of the American Central Bank, both risky assets and Gold rebounded. (Everything as we saw just recently and watching again on September...) But already in October 2007, the shares again came under attack, and the rally in precious metals continued. The sale of gold began only in March 2008. By this time, both risky assets and stocks were synchronized and went down together. However, the price of gold in dollars during this period managed to jump by +60%.
Also it is interesting to watch on perspective of some fundamental data. For example, C. Lagarde said very interesting thing in November 2022:
Why? Supply-side inflation, which was forgotten and unnoticed for a couple of decades but which surfaced in Covid due to disruption of supply chains and the beginning of market decoupling, does not cancel out demand-side inflation. The latter can be fueled by the growth of the wealth effect due to the growth of the stock market.
The market grew, in addition to the infusions from the printing press, largely due to the expectation of a quick rate cut. But now everyone is slowly beginning to understand that the Fed is starting to cut the rate not so that the market booms further, but because something is starting to break. Therefore, the market sentiment towards stocks may soon worsen. And now too many points of tension in the system are related to the high rate - banks for example. And not only American ones, but also global ones, and if negative sentiment and uncertainty are given to an already tense system, it will crumble. We saw it recently.
So if the Fed's rhetoric changes even more, this could lead to a powerful deflationary impulse, including as a result of rising unemployment and recession, but now on the demand side. As a result, initially inflation will slow down (which we have actually already seen in recent months), but then the economy will not just slide into a recession as a cyclical downturn, but will simply fly down until all the bubbles in all assets are deflated. Here is very representative chart about inflation, showing how cookies crumble:
Until a full-fledged recession and financial crisis occurs, so that the system is cleared of imbalances, any actions of the Fed will be a game of finding a balance between two scales - inflation and economic decline. And the longer this continues, the stronger the fall will be later, or the more extensive the stimulus will be applied to prevent a fall, and the higher inflation will rise on these stimuli.
The same is concerning job market. For example, analysts from Apollo are starting to lie:
First, the most widely distributed U3 report is a household survey (60,000 households) on labor force participation. Second, the Goldmans have already studied everything and said that if unemployment among immigrants were taken into account, the unemployment figures would be 1.1 million people higher. It would seem that the respected economist Torsten Slok, but so ineptly manipulates public opinion. If you read, they have had no signs of recession and America is strong for the last few months.
And this kind of falsifications across all major data is becoming more and more. Investors should not worry about their assets. So, picture has to show that everything is fine. It is quite obvious that the situation in the global and American economies is becoming more and more critical, the recession continues and is not going to stop. Accordingly, more and more often the monetary authorities of different countries appeal (officially or not officially) to various kinds of political reasons.
Politicians are also speaking out, Trump openly said that it was time to make sure that the Fed's policy would be controlled by the president of the country. In fact, he (for the first time!) fully voiced the scenario of "Either support the global dollar system at the expense of U.S. industry, or save U.S. industry, but at the cost of destroying the global dollar system."
The rejection of the second part of this scenario was costly to him in his first term, now the situation may change. There is the hypothesis that the elite of the "Western" global project could collude with those industrial elites who are moving Trump. Because there is little hope for Harris. If this is the case, and we will soon see it by the "withering away" of the Harris campaign, then it is almost certainly possible to predict US policy. Which will consist in the gradual "write-off" of the debt overhang and its possible transfer to the "crypto" mode. With the subsequent cancellation of debts to all external creditors.
The most important thing is to prevent hyperinflation, as it destroys the real sector. In this case, the nominal indicators of financial markets will not change, the real value of assets will gradually fall, and the state will support investments in the real sector. But still, such a policy will require the emergence of new markets, so that the United States will almost inevitably begin expansion into Southeast Asia. There are no contradictions between the two US political camps on this subject.
By the way two words on Bangladesh that was totally ignored by big media. Meantime, this is very important topic for future US foreign policy. A country with a population of 170 million people is experiencing a Coup. The region is promising - uranium and gas reserves have been discovered in Bangladesh [there are joint projects with the Russian Federation]. In addition, it is a transit territory for drug trafficking.
Washington actively helped the opposition in order to achieve territorial concessions, split the region, create a new country with a non-Muslim majority, and enter South Asia through Myanmar. The US has "strongly requested" Bangladesh to join the QUAD alliance and is demanding a long-term lease on St Martin's Island to house a military base.
In case of a Pacific conflict, the US will close the Strait of Malacca, the world's main trade artery. The Coup is a threat to China's BCIM (Bangladesh, China, India and Myanmar) trade corridor project within the framework of the "One Belt, One Road" strategy. So if Taiwan for the US means approaching the enemy (China) and grabbing its throat, then Bangladesh and Myanmar mean coming from behind and hitting it over the head with a brick. Because in this case China has only one access to world ocean - via Russian water space and North Sea Way.
Besides, you can rummage through your wardrobe and suddenly discover that up to a third of your clothes were made in Bangladesh. Businesses will have to come up with something now, which means goods will become more expensive...
