Sive Morten
Special Consultant to the FPA
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Fundamentals
So, a lot of discussion was around recent CPI numbers. Recent markets' moves across the board suggest that investors' sentiment is also changing. Gold market, despite everything - keep going higher. Yesterday in our FX report we've discussed CPI components and have explained, why we're still concerned with inflation, and think that it is too early to celebrate, as inspiration could turn back to despear very soon. But gold market is very specific asset. Some things that definitely will be negative for stocks and other markets are not necessary will be the same for the gold.
Market overview
Gold prices cooled slightly after hitting an eight-month high on Monday, as a weak dollar's boost was offset by Federal Reserve officials reiterating their aggressive stance against inflation.
World stocks rallied on Monday to their highest levels since mid-December after China reopened its borders while benchmark Treasury yields drifted lower as investors scaled back expectations for further rate hikes by the Federal Reserve.
Gold prices rose over 1%, hovering near the $1,900 per ounce pivot on Thursday after data showing signs of cooling inflation in the United States boosted bets for slower rate hikes from the Federal Reserve. U.S. consumer prices grew 6.5% on an annual basis in December, in line with expectations, after a 7.1% rise last month. Core inflation was in line with expectations as well.
Members of the Fed were quick to highlight that while the CPI numbers were moving in the right direction, they stood by their stance to bring levels back to 2%. They see rates rising "slower but longer and potentially higher." Philadelphia Federal Reserve Bank President Patrick Harker and St. Louis Fed President James Bullard see rates landing north of 5% to tame inflation, which peaked to 9.1% in June 2022.
Investors are pricing in a roughly 90% chance for a 25 basis point hike to a range of 4.50% to 4.75% at the next Fed meeting.
Recent CPI data together with NFP report last week were treated as highly positive, although we've shown in yesterday's FX report and in report last week that they are not quite so. Nevertheless, BofA reports that investors poured money into equity and bond funds and moved money out of gold in the week to Wednesday, according to BofA Global Research, taking heart from a string of positive data points and policy changes.
"You don’t get more Goldilocks than that," the report said of Thursday numbers that showed U.S. consumer prices dipped by 0.1% month on month and unemployment claims were a muted 205,000, a reference to something being "just right" as in the fairy tale.
The lower CPI data offered hope that inflation was now on a sustained downward trend, which should allow the Federal Reserve to further scale back the pace of its interest rate increases next month. Bofa also pointed to the impact of China reopening its borders after COVID-19 restrictions, lower EU energy prices and encouraging U.S. fiscal and labour market data, as all factors behind the moves.
The report found there were weekly flows into funds investing in bonds ($17.5bn), cash ($8.3bn), and stocks ($7.2bn), and out of gold ($0.4bn). The analysts said the moves were a "classic January reversal" with the "2022 losers of crypto, (US Treasuries), China, credit (and) stocks smashing '22 winners of cash (and)commodities".
Meantime, the World Bank slashed its 2023 growth forecasts on Tuesday to levels teetering on the brink of recession for many countries as the impact of central bank rate hikes intensifies, Russia's war in Ukraine continues, and the world's major economic engines sputter. The development lender said it expected global GDP growth of 1.7% in 2023 from previous June forecast of 3%, the slowest pace outside the 2009 and 2020 recessions since 1993. The bank said major slowdowns in advanced economies, including sharp cuts to its forecast to 0.5% for the United States and flat GDP for the euro zone, could foreshadow a new global recession less than three years after the last one.
Besides, some of the world’s largest asset managers such as BlackRock Inc., Fidelity Investments and Carmignac are warning markets are underestimating both inflation and the ultimate peak of US rates, just like a year ago.
The stakes are immense after Wall Street almost unanimously underestimated inflation’s trajectory. Global stocks saw $18 trillion wiped out, while the US Treasury market suffered its worst year in history. And yet, going by inflation swaps, expectations are again that inflation will be relatively tame and drop toward the Federal Reserve’s 2% target within a year, while money markets are betting the central bank will start cutting rates.
That’s set markets up for another brutal ride, according to Frederic Leroux, a member of the investment committee and head of the cross asset team at €44 billion ($47 billion) French asset manager Carmignac, since worker shortages are likely to fuel higher-than-expected inflation.
He added that one of the biggest mispricings in the market today is the expectation that inflation will come down to 2.5% next year.
BlackRock Inc. strategists say traders that have started to bet on a sharp slowdown in inflation are setting themselves up for disappointment.
Scott Thiel, its chief fixed-income strategist, sees US inflation only easing to 3.50% toward the end of 2023 amid persistent labor shortages, higher wages and falling inventories. That contrasts with one-year consumer-price index swaps at 2.38% and 10-year breakevens at 2.14%.
Thiel sees longer-term structural shifts that will keep inflation elevated. That means there is no reason for the Fed to be “anything but hawkish” for now, he said. US and European policy makers alike warned last week that rates have further to go than markets expect. BlackRock is also recommending being underweight government bonds as Thiel said they will provide little protection in this environment. Long-dated yields may have underpriced the risk of rates staying high for longer and the fact that central banks will have to reduce their massive crisis-era bond holdings, increasing the supply of debt.
In EU there were a lot of hints from ECB members that markets underprice the degree of potential rate hike by ECB. Money markets expect the ECB to raise the rate it pays on bank deposits by nearly 150 basis points by the summer before reversing course in late 2023 and next year, likely implying a downturn in growth and inflation.
But Kazaks told Reuters he failed to see a "rationale" for that and that rates should continue to rise to curb inflation, which is running at nearly five times the ECB's 2% target in the euro area.
The European Central Bank must still raise interest rates "significantly" over its coming meetings to restrict growth and dampen inflation, which has been far too high, Finnish central bank chief Olli Rehn said on Wednesday. "Policy rates will still have to rise significantly," Rehn, who sits on the ECB's rate-setting Governing Council, told a webinar with the Peterson Institute for International Economics. "This means significant rate hikes at this winter's remaining meetings."
The European Central Bank expects to continue raising interest rates "significantly" at future meetings, at a sustained pace, to ensure that inflation returns to the 2% target over the medium term, ECB policymaker Pablo Hernandez de Cos said on Wednesday.
Thus, European bondholders are coming to terms with the fact that this year’s devastating losses may have further to run in 2023. The worst-ever year for the region’s bonds is ending with one of the most brutal sell-offs in months, after a chorus of central bankers warned investors that interest rates will rise more than expected. With traders already betting on another 130 basis points of hikes, versus barely a half-point increase from the Federal Reserve, a fresh wave of selling looks to be in store.
The market has been quick to respond to ECB warnings. Since its Thursday meeting, investors have raised their wagers for a peak rate to 3.30%.
The ECB’s uncompromising tone has cemented recommendations from Deutsche Bank AG and UBS Group AG to position for European yields to rise closer toward US peers. Already in the past week, the spread between German and US 10-year yields has narrowed by the most since March 2020.
Despite the sharp re-pricing so far, there is some cynicism that the ECB will be able to deliver the level of tightening promised. That’s because soaring borrowing costs threaten to tip the region into a deeper recession, compounding the damage already wreaked by the energy crisis.
Although recently we've explained, why there is no sign of recovery in US economy and so-called "soft landing", here is a bit more confirmation. China's exports shrank sharply in December as global demand cooled, highlighting risks to the country's economic recovery this year. They hope on recovery of domestic demand that was "killed" by new wave of anti-CV19 repressions. Now China denies "zero CV" policy and relax the population. In fact, this is the next stage of global experiment, which is aimed to find out how totally vaccinated population survives under impact of the virus without any limitations. And it is not the fact yet that domestic demand will recover.
Exports contracted 9.9% year-on-year in December, extending a 8.7% drop in November, though slightly beating expectations, customs data showed on Friday. The drop was the worst since February 2020.
Meantime, US import has dropped almost 20% - December 2022 U.S. container import volume topped 1.9 million 20-foot equivalent units (TEUs), according to Descartes Systems Group. That was down 19% from the year earlier, but 1% above December 2019, the logistics software provider said.
Finally, Global banks are in the process of cutting over 6,000 jobs as profits at lucrative investment banking units come under pressure from volatility in capital markets and fast-rising interest rates, according to a Reuters tally of reported cuts.
Markets are gambling on the reasons of Gold market rally
Gold prices are on a tear lately, having rallied by over $200 per ounce since early November. The rise has puzzled analysts, who note that there aren’t any obvious macro narratives to drive gold’s move. Have inflation fears picked up over the last two months? No, and if anything it’s the opposite case. Movement in gold is often associated with geopolitics. Yet nothing particularly novel has happened on that front of late.
And in recent history, there’s been a decent inverse relationship between the price of gold and real rates as measured by the TIPs market, but that link has broken down as well lately.
That’s true even taking into account speculative positioning, which data from the Commodity Futures Trading Commission suggests is fairly muted. On the other hand, central bank holdings of gold — as reported by the World Gold Council — have surged.
So it’s a head scratcher. But what if there’s a gold whale? Or, massive buying from from a single investor for some unknown reason? Commodities strategists at TD Securities are on the case, speculating in a note published on Monday that the gold whale could be the Chinese official sector.
To start, the one group of speculative traders who can be seen really adding to their positions are in Shanghai right now.
While TD might be able to trace buying to China, it’s not entirely clear to them what’s driving those purchases. Here, the strategists theorize about a number of possibilities stretching from extra demand stemming from recent reopening measures as well as restocking ahead of China’s Lunar New Year. But there’s also the possibility that China is purchasing gold for strategic, rather than strictly economic factors:
All of which is reminiscent of the Bretton Woods 3.0 narrative advanced by Zoltan Pozsar over roughly the last year. The theory is basically that as the global economy becomes more fragmented, with access to critical commodities more difficult, that governments around the world will feel a greater impulse to accumulate ‘stuff’ rather than US dollars. The world also discovered last year that not all dollars are the same after Russia was cut off from its dollar holdings, following sanctions imposed.
Pozsar’s theory has been tested somewhat. For one thing, demand for dollars was exceptionally strong for most of the last year. We've also seen some of the more critical commodities — such as oil — fall in price by quite a lot. However a few months of market movements doesn’t invalidate anything, especially when it comes to national strategic priorities. Pozsar himself, in a note that was published on Friday, says that 2023 will continue on the same themes, noting that:
To be continued...
So, a lot of discussion was around recent CPI numbers. Recent markets' moves across the board suggest that investors' sentiment is also changing. Gold market, despite everything - keep going higher. Yesterday in our FX report we've discussed CPI components and have explained, why we're still concerned with inflation, and think that it is too early to celebrate, as inspiration could turn back to despear very soon. But gold market is very specific asset. Some things that definitely will be negative for stocks and other markets are not necessary will be the same for the gold.
Market overview
Gold prices cooled slightly after hitting an eight-month high on Monday, as a weak dollar's boost was offset by Federal Reserve officials reiterating their aggressive stance against inflation.
"Interest rates are looking like they're going to continue higher. But they do have a limit of what they can do and the market is pricing that in," said Bob Haberkorn, senior market strategist at RJO Futures. We are also seeing some flight to safety. Technically, gold looks like it has more room to go because it's been strong through all these resistance points that we continue to see."
World stocks rallied on Monday to their highest levels since mid-December after China reopened its borders while benchmark Treasury yields drifted lower as investors scaled back expectations for further rate hikes by the Federal Reserve.
"Investors are operating under the assumption that once the Fed pauses, the only next possible outcome would be a cut (!!!) - and if futures pricing is to be believed, the market sees the first cuts by year-end," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
Gold prices rose over 1%, hovering near the $1,900 per ounce pivot on Thursday after data showing signs of cooling inflation in the United States boosted bets for slower rate hikes from the Federal Reserve. U.S. consumer prices grew 6.5% on an annual basis in December, in line with expectations, after a 7.1% rise last month. Core inflation was in line with expectations as well.
Members of the Fed were quick to highlight that while the CPI numbers were moving in the right direction, they stood by their stance to bring levels back to 2%. They see rates rising "slower but longer and potentially higher." Philadelphia Federal Reserve Bank President Patrick Harker and St. Louis Fed President James Bullard see rates landing north of 5% to tame inflation, which peaked to 9.1% in June 2022.
Investors are pricing in a roughly 90% chance for a 25 basis point hike to a range of 4.50% to 4.75% at the next Fed meeting.
"Real yields easing and the dollar softening have buoyed gold, as the two key headwinds for gold through 2022 are showing signs of subsiding," said Standard Chartered analyst Suki Cooper, adding the Fed could hike by 25 bps in February before pausing and then cutting in the second half of 2023. "The 50-day moving average has crossed the 200-day moving average; the favourable technicals - a golden cross – imply upside risk in the near term although prices are also closing in on overbought territory," Cooper highlighted.
Recent CPI data together with NFP report last week were treated as highly positive, although we've shown in yesterday's FX report and in report last week that they are not quite so. Nevertheless, BofA reports that investors poured money into equity and bond funds and moved money out of gold in the week to Wednesday, according to BofA Global Research, taking heart from a string of positive data points and policy changes.
"You don’t get more Goldilocks than that," the report said of Thursday numbers that showed U.S. consumer prices dipped by 0.1% month on month and unemployment claims were a muted 205,000, a reference to something being "just right" as in the fairy tale.
The lower CPI data offered hope that inflation was now on a sustained downward trend, which should allow the Federal Reserve to further scale back the pace of its interest rate increases next month. Bofa also pointed to the impact of China reopening its borders after COVID-19 restrictions, lower EU energy prices and encouraging U.S. fiscal and labour market data, as all factors behind the moves.
The report found there were weekly flows into funds investing in bonds ($17.5bn), cash ($8.3bn), and stocks ($7.2bn), and out of gold ($0.4bn). The analysts said the moves were a "classic January reversal" with the "2022 losers of crypto, (US Treasuries), China, credit (and) stocks smashing '22 winners of cash (and)commodities".
Meantime, the World Bank slashed its 2023 growth forecasts on Tuesday to levels teetering on the brink of recession for many countries as the impact of central bank rate hikes intensifies, Russia's war in Ukraine continues, and the world's major economic engines sputter. The development lender said it expected global GDP growth of 1.7% in 2023 from previous June forecast of 3%, the slowest pace outside the 2009 and 2020 recessions since 1993. The bank said major slowdowns in advanced economies, including sharp cuts to its forecast to 0.5% for the United States and flat GDP for the euro zone, could foreshadow a new global recession less than three years after the last one.
Besides, some of the world’s largest asset managers such as BlackRock Inc., Fidelity Investments and Carmignac are warning markets are underestimating both inflation and the ultimate peak of US rates, just like a year ago.
The stakes are immense after Wall Street almost unanimously underestimated inflation’s trajectory. Global stocks saw $18 trillion wiped out, while the US Treasury market suffered its worst year in history. And yet, going by inflation swaps, expectations are again that inflation will be relatively tame and drop toward the Federal Reserve’s 2% target within a year, while money markets are betting the central bank will start cutting rates.
That’s set markets up for another brutal ride, according to Frederic Leroux, a member of the investment committee and head of the cross asset team at €44 billion ($47 billion) French asset manager Carmignac, since worker shortages are likely to fuel higher-than-expected inflation.
“Inflation is here to stay,” said Leroux in a phone interview. “After the crisis central bankers thought they could decide the level of interest rates. In the past two years they realized they don’t: inflation does.”
He added that one of the biggest mispricings in the market today is the expectation that inflation will come down to 2.5% next year.
“We have to live in a very different environment than before,” Leroux said. Gold, Japanese stocks and trusty, steady companies will make a comeback, in his view, as negative real yields persist and central banks will be unwilling to inflict too much pain. The market’s focus on the Fed’s potential pivot is “a sideshow,” as there will be a point when investors realize that inflation is stickier than they’d thought. “At some point the market will have to understand that more rate hikes are coming .
BlackRock Inc. strategists say traders that have started to bet on a sharp slowdown in inflation are setting themselves up for disappointment.
“Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets. If anything, policy rates may stay higher for longer than the market is expecting,” a team of analysts including Jean Boivin, the head of the Institute, wrote last week.
Scott Thiel, its chief fixed-income strategist, sees US inflation only easing to 3.50% toward the end of 2023 amid persistent labor shortages, higher wages and falling inventories. That contrasts with one-year consumer-price index swaps at 2.38% and 10-year breakevens at 2.14%.
“We simply think that is too low,” said Thiel in an interview. “Volatility in the CPI numbers is something that the market should expect. It’s going to be hard to call month-on-month. But it’s probably easier to come down from 7% to 5% than from 5% to 3%.” “Looking ahead, geopolitical risk, demographics and a transition to net-zero will keep inflation high,” said Thiel. “Should policy rates come down from 5% to 3% over the next two years? Not in that environment.”
Thiel sees longer-term structural shifts that will keep inflation elevated. That means there is no reason for the Fed to be “anything but hawkish” for now, he said. US and European policy makers alike warned last week that rates have further to go than markets expect. BlackRock is also recommending being underweight government bonds as Thiel said they will provide little protection in this environment. Long-dated yields may have underpriced the risk of rates staying high for longer and the fact that central banks will have to reduce their massive crisis-era bond holdings, increasing the supply of debt.
“Yields will have to go higher,” Thiel said.
In EU there were a lot of hints from ECB members that markets underprice the degree of potential rate hike by ECB. Money markets expect the ECB to raise the rate it pays on bank deposits by nearly 150 basis points by the summer before reversing course in late 2023 and next year, likely implying a downturn in growth and inflation.
But Kazaks told Reuters he failed to see a "rationale" for that and that rates should continue to rise to curb inflation, which is running at nearly five times the ECB's 2% target in the euro area.
The European Central Bank must still raise interest rates "significantly" over its coming meetings to restrict growth and dampen inflation, which has been far too high, Finnish central bank chief Olli Rehn said on Wednesday. "Policy rates will still have to rise significantly," Rehn, who sits on the ECB's rate-setting Governing Council, told a webinar with the Peterson Institute for International Economics. "This means significant rate hikes at this winter's remaining meetings."
The European Central Bank expects to continue raising interest rates "significantly" at future meetings, at a sustained pace, to ensure that inflation returns to the 2% target over the medium term, ECB policymaker Pablo Hernandez de Cos said on Wednesday.
Thus, European bondholders are coming to terms with the fact that this year’s devastating losses may have further to run in 2023. The worst-ever year for the region’s bonds is ending with one of the most brutal sell-offs in months, after a chorus of central bankers warned investors that interest rates will rise more than expected. With traders already betting on another 130 basis points of hikes, versus barely a half-point increase from the Federal Reserve, a fresh wave of selling looks to be in store.
The market has been quick to respond to ECB warnings. Since its Thursday meeting, investors have raised their wagers for a peak rate to 3.30%.
“It’s a lot less controversial now to not only see European yields reset higher in absolute terms, but we also see European rates markets underperform the US very meaningfully throughout all of 2023,” said Ralf Preusser, global head of rates strategy at Bank of America Securities.
The ECB’s uncompromising tone has cemented recommendations from Deutsche Bank AG and UBS Group AG to position for European yields to rise closer toward US peers. Already in the past week, the spread between German and US 10-year yields has narrowed by the most since March 2020.
Despite the sharp re-pricing so far, there is some cynicism that the ECB will be able to deliver the level of tightening promised. That’s because soaring borrowing costs threaten to tip the region into a deeper recession, compounding the damage already wreaked by the energy crisis.
“Overly aggressive monetary policy risks engineering a sharper recession and widening of peripheral spreads, which will raise fragmentation risks,” said Mohit Kumar, a rates strategist at Jefferies International. It’s possible ECB President Christine Lagarde “went a bit overboard” in efforts to convey another half-point hike in February.
Although recently we've explained, why there is no sign of recovery in US economy and so-called "soft landing", here is a bit more confirmation. China's exports shrank sharply in December as global demand cooled, highlighting risks to the country's economic recovery this year. They hope on recovery of domestic demand that was "killed" by new wave of anti-CV19 repressions. Now China denies "zero CV" policy and relax the population. In fact, this is the next stage of global experiment, which is aimed to find out how totally vaccinated population survives under impact of the virus without any limitations. And it is not the fact yet that domestic demand will recover.
Exports contracted 9.9% year-on-year in December, extending a 8.7% drop in November, though slightly beating expectations, customs data showed on Friday. The drop was the worst since February 2020.
Meantime, US import has dropped almost 20% - December 2022 U.S. container import volume topped 1.9 million 20-foot equivalent units (TEUs), according to Descartes Systems Group. That was down 19% from the year earlier, but 1% above December 2019, the logistics software provider said.
Finally, Global banks are in the process of cutting over 6,000 jobs as profits at lucrative investment banking units come under pressure from volatility in capital markets and fast-rising interest rates, according to a Reuters tally of reported cuts.
Markets are gambling on the reasons of Gold market rally
Gold prices are on a tear lately, having rallied by over $200 per ounce since early November. The rise has puzzled analysts, who note that there aren’t any obvious macro narratives to drive gold’s move. Have inflation fears picked up over the last two months? No, and if anything it’s the opposite case. Movement in gold is often associated with geopolitics. Yet nothing particularly novel has happened on that front of late.
And in recent history, there’s been a decent inverse relationship between the price of gold and real rates as measured by the TIPs market, but that link has broken down as well lately.
That’s true even taking into account speculative positioning, which data from the Commodity Futures Trading Commission suggests is fairly muted. On the other hand, central bank holdings of gold — as reported by the World Gold Council — have surged.
So it’s a head scratcher. But what if there’s a gold whale? Or, massive buying from from a single investor for some unknown reason? Commodities strategists at TD Securities are on the case, speculating in a note published on Monday that the gold whale could be the Chinese official sector.
“The rally in gold prices over the past two months has defied analyst expectations for continued weakness, including TD Securities.Yet, we see little evidence that the rise in gold prices is associated with a changing macro narrative. Given the bearish macro backdrop, speculative interest in gold has remained exceptionally lackluster as the world barrels towards a recession,” senior commodity strategist Daniel Ghali writes. Armed with a flows-based approach, we present strong evidence that behemoth Chinese and official sector purchases may have single-handedly catalyzed a $150/oz mispricing in gold markets,” he adds. “What is less clear is what has driven these massive purchases.”
To start, the one group of speculative traders who can be seen really adding to their positions are in Shanghai right now.
While TD might be able to trace buying to China, it’s not entirely clear to them what’s driving those purchases. Here, the strategists theorize about a number of possibilities stretching from extra demand stemming from recent reopening measures as well as restocking ahead of China’s Lunar New Year. But there’s also the possibility that China is purchasing gold for strategic, rather than strictly economic factors:
Reserve Currency Ambitions: A contingent of market participants has suggested that gold is gaining market share as a reserve asset. After all, USD valuations have moved to extremes following the build-up in USD cash and associated stagflation hedges. European data surprises are surging with growth expectations on the rise as extremely mild weather helped the region fare with the ongoing energy shock, at the same time as a fast-paced Chinese reopening bolsters rest-of-world growth — factors which are all in support of a cyclical peak in USD value. Most importantly, however, is the rise in perceived sanctions risks associated with USD reserves held in the East, following the introduction of Western sanctions on Russia this year; these have likely bolstered official purchases. This is consistent with official purchases announced by Turkey, Qatar and other nations … While the long-term resilience of this thesis is difficult to rank in the present, this narrative is certainly consistent with price action associated with a steep accumulation of gold in support of the renminbi.”
All of which is reminiscent of the Bretton Woods 3.0 narrative advanced by Zoltan Pozsar over roughly the last year. The theory is basically that as the global economy becomes more fragmented, with access to critical commodities more difficult, that governments around the world will feel a greater impulse to accumulate ‘stuff’ rather than US dollars. The world also discovered last year that not all dollars are the same after Russia was cut off from its dollar holdings, following sanctions imposed.
Pozsar’s theory has been tested somewhat. For one thing, demand for dollars was exceptionally strong for most of the last year. We've also seen some of the more critical commodities — such as oil — fall in price by quite a lot. However a few months of market movements doesn’t invalidate anything, especially when it comes to national strategic priorities. Pozsar himself, in a note that was published on Friday, says that 2023 will continue on the same themes, noting that:
I don’t think 2023 will be different: in a number of regions in Europe and Asia, the threat of a hot war is real. The BRICS are set to expand with new members (“BRICSpansion”), which means more de-dollarization of EM trade flows. CBDCs are spreading like kudzu, with Türkiye the latest country to launch one; and with the launch of every new CBDC, the potential of Project m-Bridge to diminish the role of the dollar in FX transactions and trade invoicing will rise as it interweaves BRICS (and soon BRICS+) central banks into a global network to rival the global network of correspondent banks on which the dollar system runs.
And while TD may have solved the ‘who’ portion of the mysterious Moby Dick in gold, it hasn’t figured out the ‘why’ part. This, the firm says, leaves gold prices vulnerable to a potential correction if China’s puzzling buying were to come to an abrupt stop.War – in one form or another – was a theme that defined macro not only last year, but basically every year since 2019: trade war with China; the war on Covid-19; war finance to deal with lockdowns; war on inflation, as we overdid war finance; and war then spread to engulf Ukraine, finance, commodities, chips, and straits as discussed above. Monetary and fiscal responses were just that – responses to mother nature and geopolitics – and with geopolitics getting more complicated, not less, investors should remain mindful of the threat of non-linear risks in 2023.
“Chinese demand appears unrelenting for the time being, but barring a grandiose geopolitical regime change, we find that it would likely subside towards normal levels in coming months,” Ghali concludes. “This would leave gold prices vulnerable to a steep consolidation lower, given gold's lack of alternative buyers and its current mispricing relative to its recent historical relationship with real rates.”
To be continued...