Sive Morten
Special Consultant to the FPA
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Fundamentals
So, in our FX Report recently we've taken in depth view on recent Fed minutes, real estate market and overall situation in the US economy. Still as we have big amount of important data, some part of it we consider here, in Gold report, which brings us more or less full picture to monitor. Gold market right now also is a kind of victim of recent Fed steps, but still, it stands in better conditions as overall background is supportive for safe haven demand.
Market overview
Gold headed for the first weekly decline in five as traders weighed reiteration from Federal Reserve officials that they’re determined to hike interest rates to fight inflation. Policy makers offered divergent views on the size of the next interest-rate increase, but they agreed on the need to keep raising interest rates. St. Louis’s James Bullard urged another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone. Richmond’s Thomas Barkin echoed that resolve on Friday, noting the risk those efforts could cause a recession.
Bullion dropped to a three-week low as the dollar and Treasury yields strengthened, bringing the precious metal’s weekly loss to 3.1%.
George also noted that the Fed was shrinking its $8.9 trillion balance sheet while raising rates, which would also help to restrain the economy. The pace of decline steps up next month to an annual pace of around $1 trillion. Although yesterday we've considered that Fed totally fails QT programme, while promising from its representatives still sound. Policy makers saw the federal funds rate reaching a range of 3.25% to 3.5% this year, according to the median estimate of their June projections. The forecasts will be updated in September when the Fed next meets.
The officials spoke a day after the release of minutes from the July Fed policy meeting, which showed officials judged it would eventually be appropriate to slow the pace of interest-rate increases, with some advocating the Fed keep them at elevated levels for some time after increases concluded.
Fed officials who have spoken since the July meeting have pushed back against any perception that they’d be pivoting away from tightening any time soon. They’ve made it clear that curbing the hottest inflation in four decades is their top priority.
Gold slipped as the dollar advanced after latest data pointed to a still-healthy US labor market, potentially leaving the door open for the Federal Reserve to continue carrying out an aggressive path of interest rate hikes.
Applications for US unemployment insurance fell for the first time in three weeks, Labor Department data showed Thursday, with initial claims decreasing by 2,000 to 250,000 in the week ended Aug. 13. The median estimate in a Bloomberg survey of economists called for 264,000 applications. A gauge of manufacturing activity in the Philadelphia area unexpectedly expanded in August for the first time in three months. A gauge of the greenback advanced after the print, while the benchmark 10-year Treasury yield inched lower.
Gold could rally above $2,000 an ounce next year as inflation remains elevated, underpinning support for the metal often viewed as a traditional hedge against price pressures, an industry veteran said.
Gold to Rebound When Fed Pivots, FS Investments’ Gayeski Says
Gold stands to rebound when the Federal Reserve pivots to easier monetary policy after about a year, although prices may drop before that as it goes on shrinking its balance sheet, according to FS Investments. The FS Chiron Capital Allocation Fund’s bullion exposure may rise from 4% once the Fed begins to ease aggressively, said Troy Gayeski, who joined the Philadelphia-based asset manager as chief market strategist in October. Before that “it’s rational to assume another mild leg down,” he said in an interview.
Initially, he expects the Fed to stop hiking and shrinking its balance sheet, then likely start easing in 12 to 18 months.
Based on our "magic" chart we see that despite a lot of argumentations around recent Fed minutes protocol, data releases and so on - the sentiment mostly stands stable, the full percent hike until the end of the year and perspective of starting policy easing on next 12 months.
It means that all noise in the media concerning coming aggressive Fed steps are just short term outbreaks that have short-term impact and makes no difference to longer term picture, which stands blur for US economy and inspiring for the gold market.
Our major conclusion right now that US government, Fed and Treasury have space only for tactical moves due existed reserves of 400+ Bln Treasury cash, 2.2 Trln, of banks' reserves on the Fed account, denying of QT programme and holding aside new debt issues by US Treasury.
Also the US has contracted strongly the budget deficit in recent two years but there is no additional source to contract it more. Meantime, rising consumption leading to huge disbalance in Trade and current accounts rising debt expenses and drop for US Treasuries everywhere force the US search ways of additional financing. The global sources become thin and no really free money exist to support the US. They try to stay until November elections with visuality of success but to survive they have to collapse consumption or start pump out money from domestic markets, such a stocks, where sell-off has not started yet.
We see big financial bomb here, mostly because of investments size from EU and other countries to the US stock market. This construction still holds just because EU is still could hold the tension its own economy and hasn't started yet to sell foreign assets to finance record trade deficit. But this patience is limited - amount of cashflows to the US stocks are start dropping slowly. The deadpoint is not passed yet, as the US households also have not started massive sell-off, thanks to the Fed that supports market with liquidity, but reserves are gradually exhausting, people loose wealth and sell-off stands not too far over horizon.
EU holds solid bulk of these investments as well:
The pressure on the market in the first half of the year was largely provided by non–residents who sold $ 211 billion worth of American shares - this is the most significant capitulation of non-residents in the entire history of the market. It is noteworthy here that for 10 years the accumulated financial flows into American stocks from non-residents are equal to zero!
Before fleeing the market in 2022, non-residents actively entered in 2020. The main impulse came in April 2020-March 2021, when $ 400 billion was placed – then it became the most intensive purchases in history, and now it is the most intensive sales. Everything is classic, nothing changes in this world.
The main sales have come from offshore companies from the Cayman Islands for $ 73 billion, which can be assumed that these non–residents are directly or indirectly affiliated with residents of the United States, Canada is in second place with 67 billion sales, followed by the United Kingdom - 45 billion, and Singapore – 33 billion sales, i.e. all the others worked almost zero.
For example, the Eurozone countries are symbolic plus 2 billion, but the dynamics inside are multidirectional. The Netherlands sold for 14 billion, and Germany bought for 10 billion. Why we focus on the Eurozone? Because EU countries have generated almost half of the net inflow into stocks 2020-2021, but have not started the sell-off... So, everything is still ahead against the background of record trade deficits in the region.
Among of the four major buyers of the market, the only one remained – it is corporate buybacks. The Fed has left the scene, foreigners have become net sellers, and households are devastated after closing the valves of helicopter money, trying to support current consumption through savings.
Therefore, speaking about prospects, it is necessary to understand, and who is the buyer? Now these are only corporations, but the money will be reduced from the third quarter on the trajectory of margin compression and falling demand. Bitcoin already shows the leading warning on coming trend change, like a storm crower - this week traders have liquidated $605 mln in positions just on Friday.
Many times we've warned that market makers together with Fed will create the "bullish traps", making the visuality of reversals, to catch into trap trusted people and sell them their stock positions - big banks also need to exist somehow! That's what we see now. Recent rally stands due big 400 Bln money pump from the Fed (right after first collapse when foreign investors have started selling) which has helped to stabilize market for some time. Now pressure is growing again and Fed will have to use next bulk of reserves to not let them crush!
Current market action accurately repeats performance of 2008 subprime S&P crush...
Conclusion:
Despite that few last pictures looks interesting - let's keep lyrics aside. What do we have in dry residual that could let the US to keep control over the markets and even to follow with some tightening policy? It is reserves of ~ $2.5 Trln. They will have to spend them on holding markets on the surface and buying new debt issues that should come from the US Treasury in Sep- Dec. By our calculation, Fed could stay relatively comfortable within 6-12 months, using this reserves, and another rate hike, up to 3.5% will not make the big hurt.
It means that in nearest 6-9 months we can't expect final reversal on the gold market. At the same time we do not expect the collapse either, despite it remains under pressure of the Fed policy. Because statistics keep going from bad to worse, while providing Fed liquidity should keep inflation on high levels. Thus, it is more prominent to expect rising volatility on the gold market in some range, without big drops. This is a kind of preparation stage for final reversal up.
Once all sources will exhaust Fed meets with financial drought because no other sources of capital exist now and they start to pump money out of the US stocks market. Foreign investors will do the same. The US debt market will be destabilized turning situation out of control, which should become the blossom of the gold demand. Hardly this happens later than the mid of 2023.
Other factors could accelerate this, if EU lost patience earlier or geopolitical games will escalate or go out of the control either in Europe, Taiwan or wherever else.
So, in our FX Report recently we've taken in depth view on recent Fed minutes, real estate market and overall situation in the US economy. Still as we have big amount of important data, some part of it we consider here, in Gold report, which brings us more or less full picture to monitor. Gold market right now also is a kind of victim of recent Fed steps, but still, it stands in better conditions as overall background is supportive for safe haven demand.
Market overview
Gold headed for the first weekly decline in five as traders weighed reiteration from Federal Reserve officials that they’re determined to hike interest rates to fight inflation. Policy makers offered divergent views on the size of the next interest-rate increase, but they agreed on the need to keep raising interest rates. St. Louis’s James Bullard urged another 75 basis-point move while Kansas City’s Esther George struck a more cautious tone. Richmond’s Thomas Barkin echoed that resolve on Friday, noting the risk those efforts could cause a recession.
Bullion dropped to a three-week low as the dollar and Treasury yields strengthened, bringing the precious metal’s weekly loss to 3.1%.
George also noted that the Fed was shrinking its $8.9 trillion balance sheet while raising rates, which would also help to restrain the economy. The pace of decline steps up next month to an annual pace of around $1 trillion. Although yesterday we've considered that Fed totally fails QT programme, while promising from its representatives still sound. Policy makers saw the federal funds rate reaching a range of 3.25% to 3.5% this year, according to the median estimate of their June projections. The forecasts will be updated in September when the Fed next meets.
The officials spoke a day after the release of minutes from the July Fed policy meeting, which showed officials judged it would eventually be appropriate to slow the pace of interest-rate increases, with some advocating the Fed keep them at elevated levels for some time after increases concluded.
Fed officials who have spoken since the July meeting have pushed back against any perception that they’d be pivoting away from tightening any time soon. They’ve made it clear that curbing the hottest inflation in four decades is their top priority.
Gold slipped as the dollar advanced after latest data pointed to a still-healthy US labor market, potentially leaving the door open for the Federal Reserve to continue carrying out an aggressive path of interest rate hikes.
Applications for US unemployment insurance fell for the first time in three weeks, Labor Department data showed Thursday, with initial claims decreasing by 2,000 to 250,000 in the week ended Aug. 13. The median estimate in a Bloomberg survey of economists called for 264,000 applications. A gauge of manufacturing activity in the Philadelphia area unexpectedly expanded in August for the first time in three months. A gauge of the greenback advanced after the print, while the benchmark 10-year Treasury yield inched lower.
Gold could rally above $2,000 an ounce next year as inflation remains elevated, underpinning support for the metal often viewed as a traditional hedge against price pressures, an industry veteran said.
Gold to Rebound When Fed Pivots, FS Investments’ Gayeski Says
Gold stands to rebound when the Federal Reserve pivots to easier monetary policy after about a year, although prices may drop before that as it goes on shrinking its balance sheet, according to FS Investments. The FS Chiron Capital Allocation Fund’s bullion exposure may rise from 4% once the Fed begins to ease aggressively, said Troy Gayeski, who joined the Philadelphia-based asset manager as chief market strategist in October. Before that “it’s rational to assume another mild leg down,” he said in an interview.
Initially, he expects the Fed to stop hiking and shrinking its balance sheet, then likely start easing in 12 to 18 months.
Based on our "magic" chart we see that despite a lot of argumentations around recent Fed minutes protocol, data releases and so on - the sentiment mostly stands stable, the full percent hike until the end of the year and perspective of starting policy easing on next 12 months.
It means that all noise in the media concerning coming aggressive Fed steps are just short term outbreaks that have short-term impact and makes no difference to longer term picture, which stands blur for US economy and inspiring for the gold market.
Our major conclusion right now that US government, Fed and Treasury have space only for tactical moves due existed reserves of 400+ Bln Treasury cash, 2.2 Trln, of banks' reserves on the Fed account, denying of QT programme and holding aside new debt issues by US Treasury.
Also the US has contracted strongly the budget deficit in recent two years but there is no additional source to contract it more. Meantime, rising consumption leading to huge disbalance in Trade and current accounts rising debt expenses and drop for US Treasuries everywhere force the US search ways of additional financing. The global sources become thin and no really free money exist to support the US. They try to stay until November elections with visuality of success but to survive they have to collapse consumption or start pump out money from domestic markets, such a stocks, where sell-off has not started yet.
We see big financial bomb here, mostly because of investments size from EU and other countries to the US stock market. This construction still holds just because EU is still could hold the tension its own economy and hasn't started yet to sell foreign assets to finance record trade deficit. But this patience is limited - amount of cashflows to the US stocks are start dropping slowly. The deadpoint is not passed yet, as the US households also have not started massive sell-off, thanks to the Fed that supports market with liquidity, but reserves are gradually exhausting, people loose wealth and sell-off stands not too far over horizon.
EU holds solid bulk of these investments as well:
The pressure on the market in the first half of the year was largely provided by non–residents who sold $ 211 billion worth of American shares - this is the most significant capitulation of non-residents in the entire history of the market. It is noteworthy here that for 10 years the accumulated financial flows into American stocks from non-residents are equal to zero!
Before fleeing the market in 2022, non-residents actively entered in 2020. The main impulse came in April 2020-March 2021, when $ 400 billion was placed – then it became the most intensive purchases in history, and now it is the most intensive sales. Everything is classic, nothing changes in this world.
The main sales have come from offshore companies from the Cayman Islands for $ 73 billion, which can be assumed that these non–residents are directly or indirectly affiliated with residents of the United States, Canada is in second place with 67 billion sales, followed by the United Kingdom - 45 billion, and Singapore – 33 billion sales, i.e. all the others worked almost zero.
For example, the Eurozone countries are symbolic plus 2 billion, but the dynamics inside are multidirectional. The Netherlands sold for 14 billion, and Germany bought for 10 billion. Why we focus on the Eurozone? Because EU countries have generated almost half of the net inflow into stocks 2020-2021, but have not started the sell-off... So, everything is still ahead against the background of record trade deficits in the region.
Among of the four major buyers of the market, the only one remained – it is corporate buybacks. The Fed has left the scene, foreigners have become net sellers, and households are devastated after closing the valves of helicopter money, trying to support current consumption through savings.
Therefore, speaking about prospects, it is necessary to understand, and who is the buyer? Now these are only corporations, but the money will be reduced from the third quarter on the trajectory of margin compression and falling demand. Bitcoin already shows the leading warning on coming trend change, like a storm crower - this week traders have liquidated $605 mln in positions just on Friday.
Many times we've warned that market makers together with Fed will create the "bullish traps", making the visuality of reversals, to catch into trap trusted people and sell them their stock positions - big banks also need to exist somehow! That's what we see now. Recent rally stands due big 400 Bln money pump from the Fed (right after first collapse when foreign investors have started selling) which has helped to stabilize market for some time. Now pressure is growing again and Fed will have to use next bulk of reserves to not let them crush!
Current market action accurately repeats performance of 2008 subprime S&P crush...
Conclusion:
Despite that few last pictures looks interesting - let's keep lyrics aside. What do we have in dry residual that could let the US to keep control over the markets and even to follow with some tightening policy? It is reserves of ~ $2.5 Trln. They will have to spend them on holding markets on the surface and buying new debt issues that should come from the US Treasury in Sep- Dec. By our calculation, Fed could stay relatively comfortable within 6-12 months, using this reserves, and another rate hike, up to 3.5% will not make the big hurt.
It means that in nearest 6-9 months we can't expect final reversal on the gold market. At the same time we do not expect the collapse either, despite it remains under pressure of the Fed policy. Because statistics keep going from bad to worse, while providing Fed liquidity should keep inflation on high levels. Thus, it is more prominent to expect rising volatility on the gold market in some range, without big drops. This is a kind of preparation stage for final reversal up.
Once all sources will exhaust Fed meets with financial drought because no other sources of capital exist now and they start to pump money out of the US stocks market. Foreign investors will do the same. The US debt market will be destabilized turning situation out of control, which should become the blossom of the gold demand. Hardly this happens later than the mid of 2023.
Other factors could accelerate this, if EU lost patience earlier or geopolitical games will escalate or go out of the control either in Europe, Taiwan or wherever else.
