Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
Yesterday in our FX report we've taken a look at perspectives of the US economy, acceleration of negative processes - so, that they become evident to anybody and talked about reasons of J. Powell's indecision. Our conclusion - destructive processes in the US will accelerate, which, in turn will trigger demand for the safe haven US Dollar, at least at the first stage but later will lead to degradation.
Now it is difficult to talk about more or less significant rally on Gold market, when you expect USD strength. At the same time, we have to acknowledge two moments. First is - rate is around 5.5% already but we do not see any run out of gold and collapse on the market. We see the opposite - the whole interest rate tightening cycle gold was able to hold with just minor 3/8 retracement. Second - strength of US Dollar will be soften by rise of nominal inflation, which should support and reduce pressure on it. Because constant Fed rate with higher nominal inflation pushes down the real interest rate that is major driving factor for the gold market.
Today we will take a look at global economy and political driving factors, as situation changes very fast. Also will cover few specific economical issues.
Market overview
Gold prices gained on Wednesday after a slight pullback in U.S. Treasury yields underpinned bullion above a key $1,900 level as investors await clues from major central bankers on whether the end to their monetary tightening cycle was imminent. The Fed must be open to the possibility that the economy will begin to reaccelerate rather than slow, with potential implications for their inflation fight, Richmond Fed President Thomas Barkin said on Tuesday.
Receding fears of a U.S. slowdown, surging bond yields and the robust performance of equities have gradually eroded the appeal of exchange-traded funds (ETF) backed by traditional safe-haven gold this year, despite sticky inflation. Overall holdings in over 100 gold ETFs tracked by the World Gold Council (WGC) fell to 3,348 metric tons as of Aug. 18, at their lowest level since 3,330 tons in April 2020. The biggest ETF, SPDR Gold Trust , saw holdings dwindle to pre-pandemic levels.
Since then, prices have dropped roughly 9% to five-month lows around $1,890 per ounce.
Recent U.S. economic data has created uncertainty about further rate hikes from the U.S. Federal Reserve and raised some hope for a "soft landing" for the U.S. economy.
Equities have outperformed gold despite higher interest rates, while rival safe-haven Treasury bonds have attracted investors away from gold, which doesn't earn any interest or dividends. Gold has returned 3.5% so far this year, less than the 13.8% from the S&P 500 (.SPX) and the 11% from benchmark 10-year U.S. bond yields .
Gold currently makes up around 1% of global financial assets excluding central bank holdings, according to WGC data, down from about 5% during the 1970s inflation spiral.
The dollar and U.S. yields were pulled back after softer-than-expected global economic data. U.S. business activity approached the stagnation point in August, with growth at its weakest since February, while Britain's economy is also slowing and might be heading for a recession. Traders also firmed up bets that the European Central Bank would pause rate hikes in September as sharp contractions in business activity pointed to deepening economic pain. Safe-haven gold may extend gains into a range of $1,928-$1,934 per ounce, said Reuters technical analyst Wang Tao.
The U.S. dollar raced towards its sixth straight weekly gain, making bullion more expensive for overseas buyers. Two Fed officials on Thursday tentatively welcomed a recent jump in bond market yields, while noting they see a good chance that no more interest rate increases will be needed. The main theme will be "higher for longer" at Jackson Hole, with Fed officials indicating either tighter policy may be necessary, or a longer plateau is required, according to Nicholas Frappell, global head of institutional markets at ABC Refinery.
SPECULATIONS around BRICS
The hot topic of recent week also was possible announcement of the BRICS currency. Previously we said that hardly it will happen so fast and in fact it has not happened, but still few hints have been given. If we take a look at BRICS structure - this is political but not economical block. So they do not have unique common economical strategy to launch own currency - the settlements in national currencies are possible and motion to BRICS currency will start probably with this starting point. Today BRICS do not have single markets that have pricing in domestic currencies - all pricing comes from western exchanges. But the discussion of this topic at the summit was certainly and, taking into account the expansion of the number of participants, there is no doubt that in the fairly near future the issue of at least the settlement system will arise again. And this, of course, will be a very serious blow to the Bretton Woods system.
The BRICS countries are considering the creation of a single unit of account, an alternative to the dollar, Russian Finance Minister Anton Siluanov said. According to him, it is about creating a unit of account, not a currency. If you remember, before EUR has been introduced - there was an "ECU" in Europe, (European Currency Unit) - it was not a currency per se. So, now BRICS consider something of this kind:
To understand why western financial society treats it as potential hazard, I briefly show you what BRICS is:
Translating from political to common language "reform" means destroy and build the new one. Accordingly, it is not difficult to understand that in the coming year we are waiting for the second series of financial separation: the United States and China, which will lead exactly to the same as in the case of the Russian Federation, but on a global scale. I know that you are not familiar with recent performance of Russian economy, so here few numbers - you need just replace Russian domestic indexes by global ones and you understand the scale of changes in global economy of the US and China separation:
Let's refresh current results with the date of "still conditionally normal economy" on November 1, 2021:
oil and gold will not decrease at least, but rather grow, the yuan will most likely depreciate for a year and a half, because there is the same story with the movement of capital as in the ruble, only bigger.
So Adventures in the ruble smoothly flow into the yuan. In general, it is logical if the withdrawal of capital from China begins. The scheme is the same: selling assets at a discount for yuan and exchanging yuan for less dollars. But if the movement is mutual, then the US market will have to collapse a little more, mainly treasuries. Because the Chinese will also come out. This process is already underway. First news about dumping of Chinese stock market by foreign investors have appeared in May-June. But this process is not slowing down. In recent 13 sessions foreign investors sold Chinese A-rated stocks for ~ $10.7 Bln - fastest pace ever. Total loss of foreign investors for now is around $900 Bln. It is interesting that China has approximately the same amount (~ $1 Trln) in US Treasuries. The magic of numbers... Problems in China already have started - in real estate and developing sector:
China in turn, actively sells US debt (and not only China). China's central bank has asked domestic lenders to reduce investment in bonds, Reuters reported, citing two confidential sources with direct knowledge of the situation. This measure continues a series of increasingly decisive steps aimed at supporting the yuan exchange rate. The directive, issued this week, calls on banks to restrict purchases under the Bond Connect scheme and is aimed at limiting the supply of yuan abroad.
And The dollar index can serve as an indicator of the activity of ongoing events. Economists suggest, that most likely, it will rally to 114-115 in the next 6-12 months, and after the Chinese exit from American assets is completed, will collapse somewhere to 80. Now you easily could imagine, what gold performance will be, and why we tell that it will remain under pressure in nearest time.
At first glance, it looks like the holders of dollar assets are winning: the dollar is getting more expensive, rates are rising, etc. But on the other hand, if you sell real assets and buy, for example, treasuries, that is, the debts of the issuer, which even theoretically will not be able to repay them, the evaluation of the combination becomes less categorical.
In general, the main thing here is not to miss the reversal, because after the completion of mutual separation, the United States will have no other sources of debt financing other than the printing machine. And dollar bonds in this case can very quickly "catch up" with yuan ones in terms of unattractiveness.
Well, as soon as everyone is released, there will be very, very strong inflation in the dollar. Something like this. The key moment, I remind you, is February 2025, in theory, the disengagement should end before this date and it will be possible not to remember about the global economy anymore. In fact, insiders already tell about it. For example, Wall Street Journal on August 18th - "Get ready for a collapse of the yuan not seen since the global financial crisis".
JP Morgan, in turn, speaks on stock markets - The 2023 stock market rally is over as the Fed isn't easing anytime soon and a hard landing of the economy is inevitable, JP Morgan's chief stock strategist says. See - the same story as in Russia but in a scale of a Global world... While many on Wall Street are still predicting new highs to come for the S&P 500 this year, even as the market struggles in August, any further upside is likely capped by a host of factors, Lakos said.
Consumer savings are also dwindling fast, he said, which will remove a buffer that's been cushioning the economy from tight financial conditions.
Stocks could tumble 15% even in the event of a mild downturn, JP Morgan's Marko Kolanovic predicted in a recent note. If you have prepared to see S&P around 2800 area - this will be soft landing for you, but if you're not - this will be the hard one. Its simple... Situation on bond market is not better. First is, the have to refinance 40% of national debt in nearest 2 years. This is about $14 Trln:
And It will push US budget expenditures by another $600 billion to $1.6 trillion/year.
OTHER ISSUES TO CONSIDER
Gold does not lose its appeal. Many investment managers expect to maintain or increase their share in the next 12 months. In recent weeks, the price of gold has been declining under the influence of many factors, starting with the rapid growth of real yields and ending with the strengthening of the US dollar and the prospect that US rates will remain high. Prices will be higher in a year, according to the survey participants. The Fed's actions on rates will be crucial for bullion. The potential zone of uncertainty for the price is the timing of the start of the Fed rate cut. Global central banks continue to struggle with persistent inflation, and the US labor market remains surprisingly resilient in the face of aggressive monetary policy tightening. The combination of these factors keeps the market in suspense regarding the Fed's further actions. According to the poll of 602 responses, gold will be trading at around $2,021 per ounce in 12 months. World Gold Council also tells that breaking the correlation between stocks and bonds — the cornerstone of the popular 60/40 investment strategy — also helps justify gold's ability to diversify portfolios.
The US households savings are nearly depleted, according to a study released by the Federal Reserve Bank of San Francisco. Aggregate savings peaked at $2.1 trillion in August 2021. As of June, the San Francisco Fed estimated that aggregate savings had dropped to $190 billion. In other words, Americans have blown through $1.9 trillion in savings in just two years. American consumers pulled $100 billion per month on average from savings beginning in 2022. Unless this trend reverses, excess savings will be completely depleted sometime this quarter.
That raises a question: with no savings, how will Americans keep spending and continue to prop up this bubble economy? Up until recently, the answer was credit cards. In the second quarter of this year, credit card debt alone rose above $1 trillion for the first time ever. But there are signs that Americans are also reaching their credit card limits. Revolving debt suddenly contracted in June, indicating that Americans slowed down spending.
The fact that excess savings are nearly depleted and credit card spending is slowing down isn’t good news for the US economy. An ING economist called declining credit card spending “a troubling sign” given that consumer spending makes up two-thirds of the US economy. With savings exhausted and credit cards maxed out, consumers have little choice but to stop spending. This undercuts the notion that the Fed can slay price inflation while simultaneously bringing the economy to a “soft landing.”
The bottom line is that Americans turned to their savings accounts and credit cards because they didn’t have any other way to make ends meet with soaring price inflation. People don’t spend all of their savings and run up their Visa balance month after month to buy groceries when they are in “very strong” financial shape.
The stimulus checks are long gone. Savings are being depleted. Of course, this was never a sustainable trajectory. The large amount of saving accumulated during the pandemic allowed American consumers to kick the inflation can down the road.
We may be getting close to the end of the road.
That's being said - we see multiple confirmation of our own view from many sources, as investors do either. We see this by gold price - it is not falling, although we have more than enough reasons for that. This indirectly confirms the reality of drastic changes in Global financial system and that investors are preparing to it either. Otherwise - why they constantly buy gold, keeping it at relatively high levels, despite that the Fed rate at the top in two decades.
Our long term strategy remains the same - accumulating physical gold at any deep. It seems it is not too much time left until it turns up again. For a trading purposes - we should try to not miss this point. 2024 BRICS meeting might be one of the epic events of this story...
Yesterday in our FX report we've taken a look at perspectives of the US economy, acceleration of negative processes - so, that they become evident to anybody and talked about reasons of J. Powell's indecision. Our conclusion - destructive processes in the US will accelerate, which, in turn will trigger demand for the safe haven US Dollar, at least at the first stage but later will lead to degradation.
Now it is difficult to talk about more or less significant rally on Gold market, when you expect USD strength. At the same time, we have to acknowledge two moments. First is - rate is around 5.5% already but we do not see any run out of gold and collapse on the market. We see the opposite - the whole interest rate tightening cycle gold was able to hold with just minor 3/8 retracement. Second - strength of US Dollar will be soften by rise of nominal inflation, which should support and reduce pressure on it. Because constant Fed rate with higher nominal inflation pushes down the real interest rate that is major driving factor for the gold market.
Today we will take a look at global economy and political driving factors, as situation changes very fast. Also will cover few specific economical issues.
Market overview
Gold prices gained on Wednesday after a slight pullback in U.S. Treasury yields underpinned bullion above a key $1,900 level as investors await clues from major central bankers on whether the end to their monetary tightening cycle was imminent. The Fed must be open to the possibility that the economy will begin to reaccelerate rather than slow, with potential implications for their inflation fight, Richmond Fed President Thomas Barkin said on Tuesday.
Receding fears of a U.S. slowdown, surging bond yields and the robust performance of equities have gradually eroded the appeal of exchange-traded funds (ETF) backed by traditional safe-haven gold this year, despite sticky inflation. Overall holdings in over 100 gold ETFs tracked by the World Gold Council (WGC) fell to 3,348 metric tons as of Aug. 18, at their lowest level since 3,330 tons in April 2020. The biggest ETF, SPDR Gold Trust , saw holdings dwindle to pre-pandemic levels.
Since then, prices have dropped roughly 9% to five-month lows around $1,890 per ounce.
Recent U.S. economic data has created uncertainty about further rate hikes from the U.S. Federal Reserve and raised some hope for a "soft landing" for the U.S. economy.
Equities have outperformed gold despite higher interest rates, while rival safe-haven Treasury bonds have attracted investors away from gold, which doesn't earn any interest or dividends. Gold has returned 3.5% so far this year, less than the 13.8% from the S&P 500 (.SPX) and the 11% from benchmark 10-year U.S. bond yields .
Gold currently makes up around 1% of global financial assets excluding central bank holdings, according to WGC data, down from about 5% during the 1970s inflation spiral.
The dollar and U.S. yields were pulled back after softer-than-expected global economic data. U.S. business activity approached the stagnation point in August, with growth at its weakest since February, while Britain's economy is also slowing and might be heading for a recession. Traders also firmed up bets that the European Central Bank would pause rate hikes in September as sharp contractions in business activity pointed to deepening economic pain. Safe-haven gold may extend gains into a range of $1,928-$1,934 per ounce, said Reuters technical analyst Wang Tao.
The U.S. dollar raced towards its sixth straight weekly gain, making bullion more expensive for overseas buyers. Two Fed officials on Thursday tentatively welcomed a recent jump in bond market yields, while noting they see a good chance that no more interest rate increases will be needed. The main theme will be "higher for longer" at Jackson Hole, with Fed officials indicating either tighter policy may be necessary, or a longer plateau is required, according to Nicholas Frappell, global head of institutional markets at ABC Refinery.
SPECULATIONS around BRICS
The hot topic of recent week also was possible announcement of the BRICS currency. Previously we said that hardly it will happen so fast and in fact it has not happened, but still few hints have been given. If we take a look at BRICS structure - this is political but not economical block. So they do not have unique common economical strategy to launch own currency - the settlements in national currencies are possible and motion to BRICS currency will start probably with this starting point. Today BRICS do not have single markets that have pricing in domestic currencies - all pricing comes from western exchanges. But the discussion of this topic at the summit was certainly and, taking into account the expansion of the number of participants, there is no doubt that in the fairly near future the issue of at least the settlement system will arise again. And this, of course, will be a very serious blow to the Bretton Woods system.
The BRICS countries are considering the creation of a single unit of account, an alternative to the dollar, Russian Finance Minister Anton Siluanov said. According to him, it is about creating a unit of account, not a currency. If you remember, before EUR has been introduced - there was an "ECU" in Europe, (European Currency Unit) - it was not a currency per se. So, now BRICS consider something of this kind:
To understand why western financial society treats it as potential hazard, I briefly show you what BRICS is:
- Argentina, Egypt, Ethiopia, Iran, UAE and Saudi Arabia are join to BRICS. This involves 80% of crude oil market and treats petrodollar pricing system;
- About 3.7 billion people live in the countries of the growing union;
- Emerging economies of the "Global South" in total approach 37% of world GDP and overtake the G7;
- Last year, US Dollar was used only in 28.7% of export-import transactions between the BRICS countries;
- Capital investments of countries within the bloc have grown 6 times in 10 years;
- About 40 countries are already showing interest in cooperation;
- The holding of the BRICS Sports Games in Kazan next year gives particular relevance to this format as a possible basis for a new international sports movement, alternative to the IOC.
Translating from political to common language "reform" means destroy and build the new one. Accordingly, it is not difficult to understand that in the coming year we are waiting for the second series of financial separation: the United States and China, which will lead exactly to the same as in the case of the Russian Federation, but on a global scale. I know that you are not familiar with recent performance of Russian economy, so here few numbers - you need just replace Russian domestic indexes by global ones and you understand the scale of changes in global economy of the US and China separation:
Let's refresh current results with the date of "still conditionally normal economy" on November 1, 2021:
- The RTS stock index (dollar) has collapsed by about 40%;
- The Ruble fell by 32% - from 71.2 to 94.3
- Oil, oddly enough, cost the same as now - $84.6
- Gold rose 7% from $1,792 to $1,926
oil and gold will not decrease at least, but rather grow, the yuan will most likely depreciate for a year and a half, because there is the same story with the movement of capital as in the ruble, only bigger.
So Adventures in the ruble smoothly flow into the yuan. In general, it is logical if the withdrawal of capital from China begins. The scheme is the same: selling assets at a discount for yuan and exchanging yuan for less dollars. But if the movement is mutual, then the US market will have to collapse a little more, mainly treasuries. Because the Chinese will also come out. This process is already underway. First news about dumping of Chinese stock market by foreign investors have appeared in May-June. But this process is not slowing down. In recent 13 sessions foreign investors sold Chinese A-rated stocks for ~ $10.7 Bln - fastest pace ever. Total loss of foreign investors for now is around $900 Bln. It is interesting that China has approximately the same amount (~ $1 Trln) in US Treasuries. The magic of numbers... Problems in China already have started - in real estate and developing sector:
China in turn, actively sells US debt (and not only China). China's central bank has asked domestic lenders to reduce investment in bonds, Reuters reported, citing two confidential sources with direct knowledge of the situation. This measure continues a series of increasingly decisive steps aimed at supporting the yuan exchange rate. The directive, issued this week, calls on banks to restrict purchases under the Bond Connect scheme and is aimed at limiting the supply of yuan abroad.
And The dollar index can serve as an indicator of the activity of ongoing events. Economists suggest, that most likely, it will rally to 114-115 in the next 6-12 months, and after the Chinese exit from American assets is completed, will collapse somewhere to 80. Now you easily could imagine, what gold performance will be, and why we tell that it will remain under pressure in nearest time.
At first glance, it looks like the holders of dollar assets are winning: the dollar is getting more expensive, rates are rising, etc. But on the other hand, if you sell real assets and buy, for example, treasuries, that is, the debts of the issuer, which even theoretically will not be able to repay them, the evaluation of the combination becomes less categorical.
In general, the main thing here is not to miss the reversal, because after the completion of mutual separation, the United States will have no other sources of debt financing other than the printing machine. And dollar bonds in this case can very quickly "catch up" with yuan ones in terms of unattractiveness.
Well, as soon as everyone is released, there will be very, very strong inflation in the dollar. Something like this. The key moment, I remind you, is February 2025, in theory, the disengagement should end before this date and it will be possible not to remember about the global economy anymore. In fact, insiders already tell about it. For example, Wall Street Journal on August 18th - "Get ready for a collapse of the yuan not seen since the global financial crisis".
JP Morgan, in turn, speaks on stock markets - The 2023 stock market rally is over as the Fed isn't easing anytime soon and a hard landing of the economy is inevitable, JP Morgan's chief stock strategist says. See - the same story as in Russia but in a scale of a Global world... While many on Wall Street are still predicting new highs to come for the S&P 500 this year, even as the market struggles in August, any further upside is likely capped by a host of factors, Lakos said.
Consumer savings are also dwindling fast, he said, which will remove a buffer that's been cushioning the economy from tight financial conditions.
Stocks could tumble 15% even in the event of a mild downturn, JP Morgan's Marko Kolanovic predicted in a recent note. If you have prepared to see S&P around 2800 area - this will be soft landing for you, but if you're not - this will be the hard one. Its simple... Situation on bond market is not better. First is, the have to refinance 40% of national debt in nearest 2 years. This is about $14 Trln:
And It will push US budget expenditures by another $600 billion to $1.6 trillion/year.
OTHER ISSUES TO CONSIDER
Gold does not lose its appeal. Many investment managers expect to maintain or increase their share in the next 12 months. In recent weeks, the price of gold has been declining under the influence of many factors, starting with the rapid growth of real yields and ending with the strengthening of the US dollar and the prospect that US rates will remain high. Prices will be higher in a year, according to the survey participants. The Fed's actions on rates will be crucial for bullion. The potential zone of uncertainty for the price is the timing of the start of the Fed rate cut. Global central banks continue to struggle with persistent inflation, and the US labor market remains surprisingly resilient in the face of aggressive monetary policy tightening. The combination of these factors keeps the market in suspense regarding the Fed's further actions. According to the poll of 602 responses, gold will be trading at around $2,021 per ounce in 12 months. World Gold Council also tells that breaking the correlation between stocks and bonds — the cornerstone of the popular 60/40 investment strategy — also helps justify gold's ability to diversify portfolios.
The US households savings are nearly depleted, according to a study released by the Federal Reserve Bank of San Francisco. Aggregate savings peaked at $2.1 trillion in August 2021. As of June, the San Francisco Fed estimated that aggregate savings had dropped to $190 billion. In other words, Americans have blown through $1.9 trillion in savings in just two years. American consumers pulled $100 billion per month on average from savings beginning in 2022. Unless this trend reverses, excess savings will be completely depleted sometime this quarter.
That raises a question: with no savings, how will Americans keep spending and continue to prop up this bubble economy? Up until recently, the answer was credit cards. In the second quarter of this year, credit card debt alone rose above $1 trillion for the first time ever. But there are signs that Americans are also reaching their credit card limits. Revolving debt suddenly contracted in June, indicating that Americans slowed down spending.
The fact that excess savings are nearly depleted and credit card spending is slowing down isn’t good news for the US economy. An ING economist called declining credit card spending “a troubling sign” given that consumer spending makes up two-thirds of the US economy. With savings exhausted and credit cards maxed out, consumers have little choice but to stop spending. This undercuts the notion that the Fed can slay price inflation while simultaneously bringing the economy to a “soft landing.”
The bottom line is that Americans turned to their savings accounts and credit cards because they didn’t have any other way to make ends meet with soaring price inflation. People don’t spend all of their savings and run up their Visa balance month after month to buy groceries when they are in “very strong” financial shape.
The stimulus checks are long gone. Savings are being depleted. Of course, this was never a sustainable trajectory. The large amount of saving accumulated during the pandemic allowed American consumers to kick the inflation can down the road.
We may be getting close to the end of the road.
That's being said - we see multiple confirmation of our own view from many sources, as investors do either. We see this by gold price - it is not falling, although we have more than enough reasons for that. This indirectly confirms the reality of drastic changes in Global financial system and that investors are preparing to it either. Otherwise - why they constantly buy gold, keeping it at relatively high levels, despite that the Fed rate at the top in two decades.
Our long term strategy remains the same - accumulating physical gold at any deep. It seems it is not too much time left until it turns up again. For a trading purposes - we should try to not miss this point. 2024 BRICS meeting might be one of the epic events of this story...
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