Sive Morten
Special Consultant to the FPA
- Messages
- 18,551
Fundamentals
This week, no doubts, CPI has become the major driving factor. We've have taken in-depth view on it yesterday, and on components. The major conclusion - inflation remains strong but extreme war premiums in commodities, mostly gas and oil start melting gradually. This makes CPI number to gravitate to an average inflation in other spheres of economy that stands around 5-6%. At the same time, as Fed doesn't intend to rise rate to 6% and re-start QE in a bit different way - the average inflation also keep going higher, despite that hydrocarbons become cheaper.
For the gold it is positive situation that should keep real interest rates in negative territory, while inflation stands stable or even slowly growing.
Market overview
Gold prices drifted higher on Friday helped by a drop in U.S. Treasury yields and setting the metal on path for a fourth straight week of gains, as investors took stock of the recent inflation data out of the United States.
U.S. Treasury yields dipped after a volatile week as investors evaluated whether an apparent slowdown in inflation increases could reduce the speed of Federal Reserve interest rate hikes. Data released earlier this week indicated that inflation in the U.S. has cooled down, following which market participants toned down expectations of an aggressive rate hike by the Fed.
However, recent Fed commentary continues to be hawkish and have stopped the metal from breaking above the $1,800 level. Gold tends to do well in a low-interest environment as it yields no interest.
Meanwhile, high domestic prices restrained physical gold demand in India this week, while uncertainty surrounding Taiwan-related developments prompted bullion importers in China to hold off on big purchases.
Gold headed for its fourth straight weekly gain as traders weighed further signs of easing inflationary pressures and hawkish remarks by Federal Reserve officials. This followed reports earlier in the week that showed US inflation was cooling, supporting the case for the Fed to be less hawkish, but swaps referencing the central bank’s September meeting signal some uncertainty over whether a half-point or another 75 basis-point rate hike is on the cards. Nonetheless, the possibility of a slowdown in the Fed’s tightening path -- potentially capping bond yields and the dollar strength -- helped stabilize bullion around $1,800 an ounce as it eyes the longest winning stretch of weekly gains in almost a year. Higher yields and a stronger dollar typically weigh on bullion as it pays no interest and is priced in the greenback.
Richmond Fed President Thomas Barkin said in an interview on CNBC on Friday that more rate hikes are needed to control inflation. His San Francisco peer Mary Daly said inflation is too high, adding that she anticipates more restrictive monetary policy in 2023. The precious metal has now rebounded more than 6% from a low in mid-July on a combination of fears of a global recession and heightened US-China tensions over Taiwan. It’s also been aided by declines in the dollar in recent weeks.
Despite the latest data out of the US, inflation remains stubbornly high around the world. That could force the Fed and other central banks to stay aggressive with rates, keeping pressure on gold.
Although it is uncertainty exist, concerning next rate move from the Fed. Now the most probable scenario is 0.5% rate change in September. Anyway - the common view is 1% change until the end of the year. Let's take a look at our favorite chart - crystal ball . Thus, despite that CPI is slowing a bit, markets stand in tension and think that Fed should not relax its policy until the year end.
Morgan Stanley tells the same - the chief investment officer of Morgan Stanley Wealth Management has a warning for investors who are chasing the latest rally in stocks: Don’t get too excited about a potential peak in inflation after the consumer price index cooled off a bit in July. Lisa Shalett explains the firm’s cautious stance toward the market, and how CPI is still elevated enough that the Federal Reserve needs to continue lifting rates aggressively. “The direction is correct, but the levels are wrong,” she says of the latest inflation data.
Concerning stock market - situation is tricky, as S&P perfectly repeats action of three crisises - Great Depression ,Dotcom and Subprime. Just take a look at it:
Here is DotCom Bubble and modern S&P (red):
And here is comparison to Great Depression period:
Bank of America warns (and this is quite logical) that market could find the bottom only when households start liquidating their positions. Currently they still hold them. That's why it is too early to speak about the bottom and indirectly confirms idea of further drop on the market. The Households' pack counts for ~38 Bln, which is 52% of market's capitalization. Hindsight shows that market hits the bottom within few quarters after households' sell-off.
Two cents on Silver
Silver’s been the worst performer among major precious metals in 2022, but prices may have fallen far enough to spark a modest recovery. The white metal has lost more than 12% since the beginning of the year, weighed down by the stronger US dollar, rising interest rates and slowing growth. But prices could turn higher from later this year as the electronics and photovoltaics sectors support industrial consumption, while retail and jewelry demand look strong, James Steel, chief precious metals analyst at HSBC Securities USA Inc., said in a note early this month.
Still, headwinds to the white metal’s rally exist as the world braces for the withdrawal of stimulus and an economic downturn. While HSBC remains positive, it has cut its forecasts as silver follows gold and copper lower. The bank now sees the average price at $22.25 an ounce for 2022 and at $23.50 for 2023. UBS Group AG expects silver to trade lower to $19 by early 2023.
Few fiscal aspects
Within the few recent weeks we saw signs of Fed's policy changing and come to conclusion that Fed turns to money printing again. The most recent events that again confirm our view is as follows:
Almost two times rising debt limit by US Treasury until September - US Treasury Lifts Quarterly Borrowing Estimate to $444 Billion.
The Treasury’s debt managers now expect to borrow $444 billion in the July-through-September period, compared with the original estimate of $182 billion. The Treasury left unchanged its cash-balance estimate for the end of September, at $650 billion. That stockpile is currently around $597 billion. For the three months through December, the Treasury said Monday that it anticipates borrowing $400 billion through net new marketable debt issuance. It assumes a cash balance of $700 billion at the end of the period.
US Treasury cash balance is one of the most important indicators now that let us to understand Fed steps on money market. Most recent data shows that it has dropped for 5 Bln last week.
Now, the Treasury balance is linked with Fed balance. Our suggestion that Fed intend to use this money to pay for the new debt, because they have no other source to do it. And Bingo! - this week the Fed balance has increased for the same 5 Bln$:
And now - attention! Just a simple maths. US Treasury wants it balance to be around 650 Bln by the end of September, while now it is almost 100 Bln lower. And they want to achieve it with simultaneous increasing of debt issue up to 440 Bln. The question is - how they could do it? It is possible only if there will be external demand for US Treasuries for this sum. If foreign investors will buy it. But we already have shown that it is impossible - all countries except China (and Australia) have negative trading balance and big current account deficit, so they can't buy more US Bonds. Besides, China now even contracting its position.
But there is another way - stocks. They could try to crush or hurt stocks to make money flow out to the bond market. But how they intend to do it before elections? In fact - this drop in gasoline prices by burning national oil reserves, QE to trigger rally on the stock market - all this stuff is for elections, to make a visuality of prosperity and improvement.
Without these two ways - they can't achieve this object, i.e. to issue 440 Bln and increase US Treasury balance, additionally to cut Fed balance for ~200 Bln to September. This is very interesting object to watch for. The way how these balances will change should tell us how really bad situation is... or good.
Now, following the QE Topic here is what else we have:
Indeed:
Although the average US temperature is lower than in 2005
How would you call it, folks? Right - that's an outrage! Although J. Biden has promised many times to not increase taxes with those of below 200K annual wage. He has lied... Anyway, we're interested with the gold...
Conclusion
In two words - we think that Democrats intentionally run off the rails, to deliver D. Trump and Republicans "exceptional succession" and let's them go with it. Whatever tricks stand behind current drop in gasoline prices, we have reasons to suggest that they are controlled administratively and only inside the US, sooner or later this should have to happen, because war premium exhausting and gradual slowdown in global economy naturally should decrease demand for energy commodities. This is the reason why inflation number is tending to average level of core CPI (ex. fuel) around 6-7%. But the components of a core CPI are not decreasing. They are slowly but stubbornly growing.
At the same time with recent US government steps and Fed decisions we see that more liquidity will be added to the US financial system that support in different ways. The first Trillion dollars is already underway - semiconductor, IRS agents hiring, climate and inflation act. Some liquidity likely will come by Fed tricks. It means that core CPI level will keep going higher and not stop around 6-7%, pushing real interest rate deeper in negative area.
External and US internal political situation doesn't bring stability and certainty. Sharp twists could make investors think about the gold again. All these stuff bears a striking resemblance to expectations of downside reversal on the stock market, following to the shape of previous crisises. Not occasionally Zoltan Pozsar said that recession will take L-shape, last for 5-6 years and Fed has to rise rates to 6% and hold them for considerable period of time to cut the inflation. But the US fundamentals stand so that Fed just can't do this.
We see in all these moments the positive background for the gold market. Limited upside rate hike potential, high and rising inflation, political crisis in the US and stronger recession, supposedly with collapse on stock market - all these moments work for the gold. And we do not see any reasons to change our view on expectations of gold appreciation in mid term. As market is forming potentially bullish patterns - maybe the reversal process is already started...
To be continued...
This week, no doubts, CPI has become the major driving factor. We've have taken in-depth view on it yesterday, and on components. The major conclusion - inflation remains strong but extreme war premiums in commodities, mostly gas and oil start melting gradually. This makes CPI number to gravitate to an average inflation in other spheres of economy that stands around 5-6%. At the same time, as Fed doesn't intend to rise rate to 6% and re-start QE in a bit different way - the average inflation also keep going higher, despite that hydrocarbons become cheaper.
For the gold it is positive situation that should keep real interest rates in negative territory, while inflation stands stable or even slowly growing.
Market overview
Gold prices drifted higher on Friday helped by a drop in U.S. Treasury yields and setting the metal on path for a fourth straight week of gains, as investors took stock of the recent inflation data out of the United States.
Currently the gold market is seeing some short-covering and is supported by lower yields," said Bart Melek, head of commodity strategy at TD Securities. "Gold's rally, after cooler CPI numbers, stopped in its tracks as the market believes inflation will continue to be a problem. Fed speakers have also suggested they can't afford to relinquish the fight against inflation," Melek added.
U.S. Treasury yields dipped after a volatile week as investors evaluated whether an apparent slowdown in inflation increases could reduce the speed of Federal Reserve interest rate hikes. Data released earlier this week indicated that inflation in the U.S. has cooled down, following which market participants toned down expectations of an aggressive rate hike by the Fed.
However, recent Fed commentary continues to be hawkish and have stopped the metal from breaking above the $1,800 level. Gold tends to do well in a low-interest environment as it yields no interest.
"Rising risk appetite as seen through surging stocks and bond yields ... have so far prevented the yellow metal from making a decisive challenge at key resistance above $1,800," Saxo Bank analyst Ole Hansen said.
Meanwhile, high domestic prices restrained physical gold demand in India this week, while uncertainty surrounding Taiwan-related developments prompted bullion importers in China to hold off on big purchases.
Gold headed for its fourth straight weekly gain as traders weighed further signs of easing inflationary pressures and hawkish remarks by Federal Reserve officials. This followed reports earlier in the week that showed US inflation was cooling, supporting the case for the Fed to be less hawkish, but swaps referencing the central bank’s September meeting signal some uncertainty over whether a half-point or another 75 basis-point rate hike is on the cards. Nonetheless, the possibility of a slowdown in the Fed’s tightening path -- potentially capping bond yields and the dollar strength -- helped stabilize bullion around $1,800 an ounce as it eyes the longest winning stretch of weekly gains in almost a year. Higher yields and a stronger dollar typically weigh on bullion as it pays no interest and is priced in the greenback.
Richmond Fed President Thomas Barkin said in an interview on CNBC on Friday that more rate hikes are needed to control inflation. His San Francisco peer Mary Daly said inflation is too high, adding that she anticipates more restrictive monetary policy in 2023. The precious metal has now rebounded more than 6% from a low in mid-July on a combination of fears of a global recession and heightened US-China tensions over Taiwan. It’s also been aided by declines in the dollar in recent weeks.
Despite the latest data out of the US, inflation remains stubbornly high around the world. That could force the Fed and other central banks to stay aggressive with rates, keeping pressure on gold.
“The gold price has not managed to lastingly overcome the $1,800 mark this week,” analysts at Commerzbank AG including Thu Lan Nguyen wrote in a note. “The ongoing tightening of monetary policy is still having a braking effect on gold as a non-interest-bearing investment vehicle.”
Although it is uncertainty exist, concerning next rate move from the Fed. Now the most probable scenario is 0.5% rate change in September. Anyway - the common view is 1% change until the end of the year. Let's take a look at our favorite chart - crystal ball . Thus, despite that CPI is slowing a bit, markets stand in tension and think that Fed should not relax its policy until the year end.
Morgan Stanley tells the same - the chief investment officer of Morgan Stanley Wealth Management has a warning for investors who are chasing the latest rally in stocks: Don’t get too excited about a potential peak in inflation after the consumer price index cooled off a bit in July. Lisa Shalett explains the firm’s cautious stance toward the market, and how CPI is still elevated enough that the Federal Reserve needs to continue lifting rates aggressively. “The direction is correct, but the levels are wrong,” she says of the latest inflation data.
Concerning stock market - situation is tricky, as S&P perfectly repeats action of three crisises - Great Depression ,Dotcom and Subprime. Just take a look at it:
Here is DotCom Bubble and modern S&P (red):
And here is comparison to Great Depression period:
Bank of America warns (and this is quite logical) that market could find the bottom only when households start liquidating their positions. Currently they still hold them. That's why it is too early to speak about the bottom and indirectly confirms idea of further drop on the market. The Households' pack counts for ~38 Bln, which is 52% of market's capitalization. Hindsight shows that market hits the bottom within few quarters after households' sell-off.
Two cents on Silver
Silver’s been the worst performer among major precious metals in 2022, but prices may have fallen far enough to spark a modest recovery. The white metal has lost more than 12% since the beginning of the year, weighed down by the stronger US dollar, rising interest rates and slowing growth. But prices could turn higher from later this year as the electronics and photovoltaics sectors support industrial consumption, while retail and jewelry demand look strong, James Steel, chief precious metals analyst at HSBC Securities USA Inc., said in a note early this month.
“We believe silver is oversold,” Steel said. “Much of silver’s industrial demand will be well supported and will not reflect overall industrial sluggishness,” while price declines will stimulate demand from key consumers China and India, he said.
Still, headwinds to the white metal’s rally exist as the world braces for the withdrawal of stimulus and an economic downturn. While HSBC remains positive, it has cut its forecasts as silver follows gold and copper lower. The bank now sees the average price at $22.25 an ounce for 2022 and at $23.50 for 2023. UBS Group AG expects silver to trade lower to $19 by early 2023.
Silver’s trajectory will closely follow gold, and investors should consider buying both metals when the Fed makes a proper dovish pivot and there’s meaningful easing of policy to support growth, said Wayne Gordon, executive director for commodities and FX at UBS Group’s global wealth management unit. Once we get to that recovery phase in gold, we believe silver can really outperform the yellow metal,” said Gordon.
Few fiscal aspects
Within the few recent weeks we saw signs of Fed's policy changing and come to conclusion that Fed turns to money printing again. The most recent events that again confirm our view is as follows:
Almost two times rising debt limit by US Treasury until September - US Treasury Lifts Quarterly Borrowing Estimate to $444 Billion.
The Treasury’s debt managers now expect to borrow $444 billion in the July-through-September period, compared with the original estimate of $182 billion. The Treasury left unchanged its cash-balance estimate for the end of September, at $650 billion. That stockpile is currently around $597 billion. For the three months through December, the Treasury said Monday that it anticipates borrowing $400 billion through net new marketable debt issuance. It assumes a cash balance of $700 billion at the end of the period.
US Treasury cash balance is one of the most important indicators now that let us to understand Fed steps on money market. Most recent data shows that it has dropped for 5 Bln last week.
Now, the Treasury balance is linked with Fed balance. Our suggestion that Fed intend to use this money to pay for the new debt, because they have no other source to do it. And Bingo! - this week the Fed balance has increased for the same 5 Bln$:
And now - attention! Just a simple maths. US Treasury wants it balance to be around 650 Bln by the end of September, while now it is almost 100 Bln lower. And they want to achieve it with simultaneous increasing of debt issue up to 440 Bln. The question is - how they could do it? It is possible only if there will be external demand for US Treasuries for this sum. If foreign investors will buy it. But we already have shown that it is impossible - all countries except China (and Australia) have negative trading balance and big current account deficit, so they can't buy more US Bonds. Besides, China now even contracting its position.
But there is another way - stocks. They could try to crush or hurt stocks to make money flow out to the bond market. But how they intend to do it before elections? In fact - this drop in gasoline prices by burning national oil reserves, QE to trigger rally on the stock market - all this stuff is for elections, to make a visuality of prosperity and improvement.
Without these two ways - they can't achieve this object, i.e. to issue 440 Bln and increase US Treasury balance, additionally to cut Fed balance for ~200 Bln to September. This is very interesting object to watch for. The way how these balances will change should tell us how really bad situation is... or good.
Now, following the QE Topic here is what else we have:
Indeed:
Although the average US temperature is lower than in 2005
How would you call it, folks? Right - that's an outrage! Although J. Biden has promised many times to not increase taxes with those of below 200K annual wage. He has lied... Anyway, we're interested with the gold...
Conclusion
In two words - we think that Democrats intentionally run off the rails, to deliver D. Trump and Republicans "exceptional succession" and let's them go with it. Whatever tricks stand behind current drop in gasoline prices, we have reasons to suggest that they are controlled administratively and only inside the US, sooner or later this should have to happen, because war premium exhausting and gradual slowdown in global economy naturally should decrease demand for energy commodities. This is the reason why inflation number is tending to average level of core CPI (ex. fuel) around 6-7%. But the components of a core CPI are not decreasing. They are slowly but stubbornly growing.
At the same time with recent US government steps and Fed decisions we see that more liquidity will be added to the US financial system that support in different ways. The first Trillion dollars is already underway - semiconductor, IRS agents hiring, climate and inflation act. Some liquidity likely will come by Fed tricks. It means that core CPI level will keep going higher and not stop around 6-7%, pushing real interest rate deeper in negative area.
External and US internal political situation doesn't bring stability and certainty. Sharp twists could make investors think about the gold again. All these stuff bears a striking resemblance to expectations of downside reversal on the stock market, following to the shape of previous crisises. Not occasionally Zoltan Pozsar said that recession will take L-shape, last for 5-6 years and Fed has to rise rates to 6% and hold them for considerable period of time to cut the inflation. But the US fundamentals stand so that Fed just can't do this.
We see in all these moments the positive background for the gold market. Limited upside rate hike potential, high and rising inflation, political crisis in the US and stronger recession, supposedly with collapse on stock market - all these moments work for the gold. And we do not see any reasons to change our view on expectations of gold appreciation in mid term. As market is forming potentially bullish patterns - maybe the reversal process is already started...
To be continued...