Sive Morten
Special Consultant to the FPA
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Fundamentals
We have not many comments on the gold market this week, despite it has shown explosive spike on Thursday, just because everybody understands the major driving factor now. But on the next week, gold might return back in the "financial" area, when we start watching J.Powell's testimony in Washington and NFP data on Friday. Investors are now mostly concerned about new speeches about possible stagflation, which could slow down as the global economy as the Fed rate change.
Market overview
Gold hit its highest in nearly nine months on Tuesday before pulling back as investors waiting for developments in the Ukraine crisis repositioned near the pivotal $1,900 an ounce mark.
Wall Street's main indexes slumped as the prospect of harsh Western sanctions against Russia kept investors on edge, while oil prices hit their highest level since 2014. The Biden administration could deprive Russia of a vast swath of low- and high-tech U.S. and foreign-made goods, people familiar with the matter told Reuters.
Analysts attributed gold's slight pullback to some profit-taking. Saxo Bank analyst Ole Hansen said this was "because there is obviously at this point quite an elevated risk premium baked into the price of gold".
Palladium rose 4.5% to a near six-month peak on Wednesday, driven by fears of a hit to supply from top producer Russia, while gold firmed above the key $1,900 level as Ukraine declared a state of emergency. Russia is the world's third-largest producer of gold, while the country's Nornickel is also a major producer of palladium and platinum, both of which are used in catalytic converters to clean car exhaust fumes. Russia produced 2.6 million troy ounces of palladium last year, or 40% of global mine production, and 641,000 ounces of platinum, or about 10% of total mine production.
While it was "still too early" to tell if supply issues would materialize, "if we see a set of sanctions that reduce financing and free flow of the material to the rest of the world, we could see a significant tightening of conditions for palladium probably in the not too distant future," said Bart Melek, head of commodity strategies at TD Securities. Platinum group metals could see a "pretty significant rally" with palladium likely to reach record highs seen last year over $3,000 an ounce, Melek added.
Exchange-traded funds (ETFs) that invest in gold and other precious metals have seen massive inflows as investors rush to shield themselves against the rising geopolitical tensions between Russia and NATO. Data from Refinitiv Lipper showed gold and other precious metal ETFs have seen an inflow of $4.7 billion this year, after witnessing outflows worth $7.8 billion last year.
The SPDR Gold Shares led with inflows worth $3.2 billion, while iShares Silver Trust and iShares Gold Trust received over $400 million each.
Also, physical gold held by exchange-traded funds has risen 2.1% to 69.5 million ounces this year, according to data from Refinitiv. Oil prices broke above $100 a barrel for the first time since 2014, heightening further concerns over inflation levels.
Precious metals reversed course on Thursday with gold slipping below the key $1,900 per ounce level and palladium shedding more than 5% as equities rebounded after U.S. President Joe Biden unveiled harsh new sanctions against Russia. Biden hit Russia with a wave of sanctions on Thursday measures that impede Russia's ability to do business in major currencies along with sanctions against banks and state-owned enterprises.
"If current sanctions are the limit of the response, the economic impact is limited. So we are seeing short-covering in stocks," said Tai Wong, an independent metals trader in New York.
Wall Street advanced in volatile afternoon trading, with the Nasdaq up nearly 2% after Biden's comments on Russia.
A senior U.S. official said the deployment of Russian troops to the breakaway enclaves did not merit the harshest sanctions. Any measures should for now stop short of cutting off Russia's access to international payments systems.
Second, money markets have priced out chances of a 50 basis-point rate hike by the Federal Reserve in March. More policy easing may be on its way in China too; Finance Minister Liu Kun flagged bigger tax and fee cuts to support the economy.
Finally, remember, markets had more or less already priced a Russian incursion into the two eastern Ukrainian provinces; Goldman Sachs estimates U.S. and European stocks already carried discounts of 5% and 8% respectively. Worst case? Further 6%-9% falls. But we are not there - yet.
Federal Reserve policymakers on Thursday signaled the conflict in Ukraine will not budge them from their expected course of rate hikes ahead. U.S. Federal Reserve officials on Thursday began taking stock of how the unfolding conflict in Ukraine might influence the economy and their planned shift to tighter monetary policy, with investors and some officials suggesting it could slow but likely not stop a planned round of interest rate increases.
Oil and commodity price shocks and a possible blow to global growth and confidence were clear risks, analysts said, and one Fed policymaker said the events of the last 24 hours could weigh on upcoming Fed decisions.
The risks could be as obvious as high oil prices weighing on consumer spending and raising inflation even further, or as unknowable as how Russia might respond to U.S. sanctions. The Fed plans to raise interest rates beginning in March as it battles inflation that has hit multi-decade highs.
Investors have now all but ruled out a larger half-percentage-point rate increase at the Fed's March meeting. CME Group's widely followed FedWatch tool was signaling at one point that the probability of a hike that large had fallen overnight from about 33% to less than 10%. A quarter-point increase is still anticipated as the Fed begins to lift its target policy rate from the near zero level set at the outset of the pandemic.
But the events overnight have dealt the central bank an unexpected new dynamic, an echo of the oil price shocks of the 1970s that were also driven by geopolitical conflict. In that case it was war and other tension in the Middle East, and came at a time when the U.S. economy was far more dependent on imported energy, and U.S. industry far less energy efficient.
Still, Fed officials were beginning to think through the implications of an event that had the potential to both slow growth and add to inflation.
San Francisco Fed President Mary Daly said that with U.S. inflation as high as it is and the labor market strong, the Fed should go ahead with rate hikes even with the uncertainty of a NATO - Russia conflict.
But officials may now tread a touch more carefully until the breadth of Russia's actions, and how they affect oil prices, financial markets, and the broader economy, become clearer.
The immediate economic risk appears larger for Europe than the United States, with European Central Bank policymakers convening Thursday in a previously scheduled "informal" gathering that may become a crisis meeting
Still, the crisis threatens to delay the resolution of prominent factors that have fanned U.S. inflation higher such as global supply bottlenecks, which could keep price pressures high while denting growth prospects.
Beyond the very near term, "the impact of the stagflationary shock is ambiguous and could be net hawkish," Evercore ISI analysts wrote. "Both the adverse sides of the macro distribution move up: the right tail risk of continued excess inflation in the medium term and the left tail risk that efforts to curb this inflation...end up causing a recession."
But the impact on the U.S. economy could be felt in sundry ways, from the price people pay for gasoline at the pump to a hit to household wealth. Here is a look at a few of them. If oil prices stay at about $100 a barrel, energy costs for U.S. households could rise by $750 on average this year from last year, leaving them with less money to spend on other goods and services, said Gregory Daco, chief economist for EY-Parthenon. Those added expenses could also be a drag on economic growth, said Daco, who projects that higher oil prices could lift inflation by 0.6 percentage point this year and slow economic growth by 0.4 percentage point.
Consumer prices last month rose 7.5% from a year earlier, the fastest pace in nearly 40 years.
With American consumers already straining against steep rises in the cost of living for everything from autos to food as supply chains continue to be snarled by the COVID-19 pandemic, the invasion and any further escalation in the conflict could help keep inflation pressures elevated. The price of palladium rose to its highest level since July on Thursday, and any disruption of Russian supplies would impact auto production, still suffering from pandemic-related supply shortages of semiconductor chips.
Major U.S. stock indexes dropped in the hours after Russia's Ukraine invasion, and though they recovered after U.S. President Joe Biden announced sanctions on Russia, "absent any improvement in the situation (in Ukraine), they may have further to run," wrote Capital Economics' Jonas Goltermann. Any drop erodes - at least on paper - a mainstay of U.S. household wealth, potentially dealing a blow to consumer confidence and squelching demand. After an initial plunge at the start of the pandemic, stocks have doubled in value, and direct holdings of stocks and mutual funds swelled to account for a record share of household wealth.
That could drive consumer sentiment gauges - some of which are already at a decade low due to stiff inflation - even lower still and threaten the outlook for consumer spending.
That being said, as Monetary Policy Analytics' Larry Meyer wrote, "weak demand in the U.S. is far from being a concern," and with inflation already high, policymakers may be less sanguine about the jump in energy prices than would otherwise be the case. "Should demand weaken substantially, the Fed would certainly have tough decisions to make, and we think the Fed would react," he wrote. "But today’s risk environment does not afford them the luxury of focusing only on downside risks when it comes to risk management."
Some analysts clanged alarm bells.
High-Frequency Economics' Carl Weinberg said he expected Vladimir Putin's move into Ukraine to shift the economies of Europe, and possibly the United States, onto a "wartime footing," resulting in goods shortages and further upward price pressure. He also warned that Russia could try to counter sanctions with cyber attacks on U.S. or European financial infrastructures, among other possibilities.
Another economist, Carl Tannenbaum of Northern Trust, wrote, "a broader conflict in Eastern Europe could provoke a wholesale reevaluation of the outlook" for monetary policy, fueling uncertainty and pushing down sentiment. But he added: "For now, risks are tilted to the upside, and central banks will be tightening policy in response."
Western economic sanctions to punish Russia for its invasion of Ukraine heap a new set of unknowables on a global economy already distorted by the coronavirus pandemic and a decade of ultra-cheap money. The bid to exclude from the trading system whole chunks of the world's 11th largest economy -- and supplier of one-sixth of all commodities -- has no precedent in the globalized age.
Sanctions unveiled so far will hit Russian banks' business in dollars, euros, pounds and yen. U.S. export curbs will restrict Russian access to electronics and computers while European capitals are fine-tuning similar export controls and measures to target the energy and transport sectors.
Oxford Economics said it now sees global inflation this year at 6.1%, up from 5.4%, citing the impact of sanctions, financial market disruption and higher gas, oil and food prices.
That small dose of "stagflation" is a headache for central banks trying to reduce stimulus and return base rates to something like normal after a decade near zero.
High inflation in the United States and elsewhere makes it unlikely the Federal Reserve, the European Central Bank, and the Bank of England will fully pause what has been a joint turn towards tighter monetary policy.
Soaring energy prices fuelled a dash for inflation-linked bonds - securities whose payouts rise in line with inflation. That has sent real yields - borrowing costs after adjusting for inflation - sharply lower, while so-called breakevens, indicating where markets see future inflation, rose sharply. Essentially, that implies belief that central banks may have to go slower than earlier forecast with interest rate rises to battle inflation as economic growth also takes a hit.
Yields on rate-sensitive Treasury Inflation-Protected Securities (TIPS) slipped while breakevens rose towards 3% this past week. In Germany, vulnerable to surging European gas prices, two-year real yields slumped around 30 bps and breakevens rose as high as 3.7% TIPS funds received net inflows for the first time in five weeks, BofA data shows.
Gold prices reversed course to slide 1% on Friday, and palladium also slipped, as a military escalation in Eastern Europe triggered sharp swings in the precious metals market.
COT Report
Here is guys, commentaries are not necessary. Obviously we should have got big jump in net long positions and we've got it. Numbers shows big increase of positions and ~ 10-12% jump in open interest:
SPDR Fund also shows inflows:
From a short-term perspective, the major question is a gold market response to Fed rate change. Now, as the US doesn't impact by conflict in Europe directly, and it has minimal trading relationships with Russia and with Ukraine, it could get only indirect impact through global factors, such as petrol and metal prices. At the same time, this impact comes at the most wrong time. The US already has high inflation which hurts the wealth of households and now they intend to hike the rate which makes debt servicing more expensive. Currently it is not vital - although Debt-to-Income ratio stands around 90%:
But Debt service costs about 8% by far:
But potentially it could rise more as far Fed will go with the rate increase. Now chances that the rate will be changed only for 25 points is positive for the gold, which probably will be treated as a dovish decision. Especially when real interest rates turn down again, back to negative values.
In the longer-term, geopolitical conflicts have a unique feature to be hardly forecasted and you never know in what direction it could turn. Right now there are two questions on the table - whether Russia imposes mutual sanctions, say on commodities export, and whether NATO intrudes the conflict. But even these two things are enough to keep investors nervous. Thus, hardly we get a real downside reversal on gold and a big drop in demand. Most probable, that in some easing moments, it turns to sideways action. Now, for instance, it might be 1850-1900$ until the next geopolitical step will be made.
We have not many comments on the gold market this week, despite it has shown explosive spike on Thursday, just because everybody understands the major driving factor now. But on the next week, gold might return back in the "financial" area, when we start watching J.Powell's testimony in Washington and NFP data on Friday. Investors are now mostly concerned about new speeches about possible stagflation, which could slow down as the global economy as the Fed rate change.
Market overview
Gold hit its highest in nearly nine months on Tuesday before pulling back as investors waiting for developments in the Ukraine crisis repositioned near the pivotal $1,900 an ounce mark.
Wall Street's main indexes slumped as the prospect of harsh Western sanctions against Russia kept investors on edge, while oil prices hit their highest level since 2014. The Biden administration could deprive Russia of a vast swath of low- and high-tech U.S. and foreign-made goods, people familiar with the matter told Reuters.
Analysts attributed gold's slight pullback to some profit-taking. Saxo Bank analyst Ole Hansen said this was "because there is obviously at this point quite an elevated risk premium baked into the price of gold".
Palladium rose 4.5% to a near six-month peak on Wednesday, driven by fears of a hit to supply from top producer Russia, while gold firmed above the key $1,900 level as Ukraine declared a state of emergency. Russia is the world's third-largest producer of gold, while the country's Nornickel is also a major producer of palladium and platinum, both of which are used in catalytic converters to clean car exhaust fumes. Russia produced 2.6 million troy ounces of palladium last year, or 40% of global mine production, and 641,000 ounces of platinum, or about 10% of total mine production.
While it was "still too early" to tell if supply issues would materialize, "if we see a set of sanctions that reduce financing and free flow of the material to the rest of the world, we could see a significant tightening of conditions for palladium probably in the not too distant future," said Bart Melek, head of commodity strategies at TD Securities. Platinum group metals could see a "pretty significant rally" with palladium likely to reach record highs seen last year over $3,000 an ounce, Melek added.
Exchange-traded funds (ETFs) that invest in gold and other precious metals have seen massive inflows as investors rush to shield themselves against the rising geopolitical tensions between Russia and NATO. Data from Refinitiv Lipper showed gold and other precious metal ETFs have seen an inflow of $4.7 billion this year, after witnessing outflows worth $7.8 billion last year.
The SPDR Gold Shares led with inflows worth $3.2 billion, while iShares Silver Trust and iShares Gold Trust received over $400 million each.
Also, physical gold held by exchange-traded funds has risen 2.1% to 69.5 million ounces this year, according to data from Refinitiv. Oil prices broke above $100 a barrel for the first time since 2014, heightening further concerns over inflation levels.
Precious metals reversed course on Thursday with gold slipping below the key $1,900 per ounce level and palladium shedding more than 5% as equities rebounded after U.S. President Joe Biden unveiled harsh new sanctions against Russia. Biden hit Russia with a wave of sanctions on Thursday measures that impede Russia's ability to do business in major currencies along with sanctions against banks and state-owned enterprises.
"If current sanctions are the limit of the response, the economic impact is limited. So we are seeing short-covering in stocks," said Tai Wong, an independent metals trader in New York.
Wall Street advanced in volatile afternoon trading, with the Nasdaq up nearly 2% after Biden's comments on Russia.
A senior U.S. official said the deployment of Russian troops to the breakaway enclaves did not merit the harshest sanctions. Any measures should for now stop short of cutting off Russia's access to international payments systems.
Second, money markets have priced out chances of a 50 basis-point rate hike by the Federal Reserve in March. More policy easing may be on its way in China too; Finance Minister Liu Kun flagged bigger tax and fee cuts to support the economy.
Finally, remember, markets had more or less already priced a Russian incursion into the two eastern Ukrainian provinces; Goldman Sachs estimates U.S. and European stocks already carried discounts of 5% and 8% respectively. Worst case? Further 6%-9% falls. But we are not there - yet.
Federal Reserve policymakers on Thursday signaled the conflict in Ukraine will not budge them from their expected course of rate hikes ahead. U.S. Federal Reserve officials on Thursday began taking stock of how the unfolding conflict in Ukraine might influence the economy and their planned shift to tighter monetary policy, with investors and some officials suggesting it could slow but likely not stop a planned round of interest rate increases.
Oil and commodity price shocks and a possible blow to global growth and confidence were clear risks, analysts said, and one Fed policymaker said the events of the last 24 hours could weigh on upcoming Fed decisions.
The risks could be as obvious as high oil prices weighing on consumer spending and raising inflation even further, or as unknowable as how Russia might respond to U.S. sanctions. The Fed plans to raise interest rates beginning in March as it battles inflation that has hit multi-decade highs.
Investors have now all but ruled out a larger half-percentage-point rate increase at the Fed's March meeting. CME Group's widely followed FedWatch tool was signaling at one point that the probability of a hike that large had fallen overnight from about 33% to less than 10%. A quarter-point increase is still anticipated as the Fed begins to lift its target policy rate from the near zero level set at the outset of the pandemic.
But the events overnight have dealt the central bank an unexpected new dynamic, an echo of the oil price shocks of the 1970s that were also driven by geopolitical conflict. In that case it was war and other tension in the Middle East, and came at a time when the U.S. economy was far more dependent on imported energy, and U.S. industry far less energy efficient.
Still, Fed officials were beginning to think through the implications of an event that had the potential to both slow growth and add to inflation.
San Francisco Fed President Mary Daly said that with U.S. inflation as high as it is and the labor market strong, the Fed should go ahead with rate hikes even with the uncertainty of a NATO - Russia conflict.
But officials may now tread a touch more carefully until the breadth of Russia's actions, and how they affect oil prices, financial markets, and the broader economy, become clearer.
The immediate economic risk appears larger for Europe than the United States, with European Central Bank policymakers convening Thursday in a previously scheduled "informal" gathering that may become a crisis meeting
Still, the crisis threatens to delay the resolution of prominent factors that have fanned U.S. inflation higher such as global supply bottlenecks, which could keep price pressures high while denting growth prospects.
Beyond the very near term, "the impact of the stagflationary shock is ambiguous and could be net hawkish," Evercore ISI analysts wrote. "Both the adverse sides of the macro distribution move up: the right tail risk of continued excess inflation in the medium term and the left tail risk that efforts to curb this inflation...end up causing a recession."
But the impact on the U.S. economy could be felt in sundry ways, from the price people pay for gasoline at the pump to a hit to household wealth. Here is a look at a few of them. If oil prices stay at about $100 a barrel, energy costs for U.S. households could rise by $750 on average this year from last year, leaving them with less money to spend on other goods and services, said Gregory Daco, chief economist for EY-Parthenon. Those added expenses could also be a drag on economic growth, said Daco, who projects that higher oil prices could lift inflation by 0.6 percentage point this year and slow economic growth by 0.4 percentage point.
Consumer prices last month rose 7.5% from a year earlier, the fastest pace in nearly 40 years.
With American consumers already straining against steep rises in the cost of living for everything from autos to food as supply chains continue to be snarled by the COVID-19 pandemic, the invasion and any further escalation in the conflict could help keep inflation pressures elevated. The price of palladium rose to its highest level since July on Thursday, and any disruption of Russian supplies would impact auto production, still suffering from pandemic-related supply shortages of semiconductor chips.
Major U.S. stock indexes dropped in the hours after Russia's Ukraine invasion, and though they recovered after U.S. President Joe Biden announced sanctions on Russia, "absent any improvement in the situation (in Ukraine), they may have further to run," wrote Capital Economics' Jonas Goltermann. Any drop erodes - at least on paper - a mainstay of U.S. household wealth, potentially dealing a blow to consumer confidence and squelching demand. After an initial plunge at the start of the pandemic, stocks have doubled in value, and direct holdings of stocks and mutual funds swelled to account for a record share of household wealth.
That could drive consumer sentiment gauges - some of which are already at a decade low due to stiff inflation - even lower still and threaten the outlook for consumer spending.
That being said, as Monetary Policy Analytics' Larry Meyer wrote, "weak demand in the U.S. is far from being a concern," and with inflation already high, policymakers may be less sanguine about the jump in energy prices than would otherwise be the case. "Should demand weaken substantially, the Fed would certainly have tough decisions to make, and we think the Fed would react," he wrote. "But today’s risk environment does not afford them the luxury of focusing only on downside risks when it comes to risk management."
Some analysts clanged alarm bells.
High-Frequency Economics' Carl Weinberg said he expected Vladimir Putin's move into Ukraine to shift the economies of Europe, and possibly the United States, onto a "wartime footing," resulting in goods shortages and further upward price pressure. He also warned that Russia could try to counter sanctions with cyber attacks on U.S. or European financial infrastructures, among other possibilities.
Another economist, Carl Tannenbaum of Northern Trust, wrote, "a broader conflict in Eastern Europe could provoke a wholesale reevaluation of the outlook" for monetary policy, fueling uncertainty and pushing down sentiment. But he added: "For now, risks are tilted to the upside, and central banks will be tightening policy in response."
Western economic sanctions to punish Russia for its invasion of Ukraine heap a new set of unknowables on a global economy already distorted by the coronavirus pandemic and a decade of ultra-cheap money. The bid to exclude from the trading system whole chunks of the world's 11th largest economy -- and supplier of one-sixth of all commodities -- has no precedent in the globalized age.
Sanctions unveiled so far will hit Russian banks' business in dollars, euros, pounds and yen. U.S. export curbs will restrict Russian access to electronics and computers while European capitals are fine-tuning similar export controls and measures to target the energy and transport sectors.
Oxford Economics said it now sees global inflation this year at 6.1%, up from 5.4%, citing the impact of sanctions, financial market disruption and higher gas, oil and food prices.
That small dose of "stagflation" is a headache for central banks trying to reduce stimulus and return base rates to something like normal after a decade near zero.
High inflation in the United States and elsewhere makes it unlikely the Federal Reserve, the European Central Bank, and the Bank of England will fully pause what has been a joint turn towards tighter monetary policy.
Soaring energy prices fuelled a dash for inflation-linked bonds - securities whose payouts rise in line with inflation. That has sent real yields - borrowing costs after adjusting for inflation - sharply lower, while so-called breakevens, indicating where markets see future inflation, rose sharply. Essentially, that implies belief that central banks may have to go slower than earlier forecast with interest rate rises to battle inflation as economic growth also takes a hit.
Yields on rate-sensitive Treasury Inflation-Protected Securities (TIPS) slipped while breakevens rose towards 3% this past week. In Germany, vulnerable to surging European gas prices, two-year real yields slumped around 30 bps and breakevens rose as high as 3.7% TIPS funds received net inflows for the first time in five weeks, BofA data shows.
Gold prices reversed course to slide 1% on Friday, and palladium also slipped, as a military escalation in Eastern Europe triggered sharp swings in the precious metals market.
COT Report
Here is guys, commentaries are not necessary. Obviously we should have got big jump in net long positions and we've got it. Numbers shows big increase of positions and ~ 10-12% jump in open interest:
SPDR Fund also shows inflows:
From a short-term perspective, the major question is a gold market response to Fed rate change. Now, as the US doesn't impact by conflict in Europe directly, and it has minimal trading relationships with Russia and with Ukraine, it could get only indirect impact through global factors, such as petrol and metal prices. At the same time, this impact comes at the most wrong time. The US already has high inflation which hurts the wealth of households and now they intend to hike the rate which makes debt servicing more expensive. Currently it is not vital - although Debt-to-Income ratio stands around 90%:
But Debt service costs about 8% by far:
But potentially it could rise more as far Fed will go with the rate increase. Now chances that the rate will be changed only for 25 points is positive for the gold, which probably will be treated as a dovish decision. Especially when real interest rates turn down again, back to negative values.
In the longer-term, geopolitical conflicts have a unique feature to be hardly forecasted and you never know in what direction it could turn. Right now there are two questions on the table - whether Russia imposes mutual sanctions, say on commodities export, and whether NATO intrudes the conflict. But even these two things are enough to keep investors nervous. Thus, hardly we get a real downside reversal on gold and a big drop in demand. Most probable, that in some easing moments, it turns to sideways action. Now, for instance, it might be 1850-1900$ until the next geopolitical step will be made.
