Sive Morten
Special Consultant to the FPA
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Fundamentals
Last week was relatively quiet, and has given us just some statistics numbers, without surprising speeches or political events. Yesterday we've made in depth analysis of situation in the US, including liquidity level in the banking system and now it seems that it remains balanced. Households have not spent all savings by far, while US Ministry of Finance has ability to redistribute liquidity out from Fed's repo and banking reserves into the system, refilling also its own reserves on the Fed's account.
At the same time, we suspect that something big is preparing, because US Treasury has not started yet its major borrowings, requirement to banking capital supposedly should become tighter and J. Yellen already briefly hinted that it gonna be some problems in banking sector. Number of bankruptcies in corporate sector is rising and coming to the levels fo 2008. S&P agency forecasts its increasing further.
Fed officials start making curious statements that not all US Treasury Bonds are truly safe. With high interest rates Fed's emergency liquidity measures, meet stable demand and now it becomes obvious that banks hardly could return this money back at the current level of interest rates. Despite that we've got a lot of positive US data and now market consensus suggests that Fed is just with two more rate hikes near the pivot, the US yields are keep rising, although it should be the opposite.
Besides, Wall Street whales all together fill the offers for ETF's to SEC. What they intend to do on the market with total capitalization just around $1 Trln, if their total AUM are around 27 Trln? It will be really tight on this market if all of them will get ETF licenses from the SEC. Finally unrest in France and confrontation with China makes picture really interesting. Currently it is not quite clear what they are thinking about, but very interesting. And definitely something is coming, but in more extended perspective, not earlier than in the beginning of 2024 we suppose. Still, recent Gold market performance clearly shows that liquidity slowly but is still draining out.
Finally all central banks start hurry up with CBDC introduction. "Fed Now" is going to be started this month. While EU countries accelerating pilot projects of CBDC. Hardly this happens occasionally and right after BlackRock&Co ETF's files have been sent to SEC. SEC has 240 days to consider these files. Thus, something is going to happen with this term, or even earlier.
Market overview
Gold edged higher as investors assessed increasing geopolitical uncertainty and recessionary signals. Bullion rose as much as 0.6% on Monday after Russian mercenary leader Yevgeny Prigozhin’s extraordinary mutiny. Still, the upside for the haven was limited after Prigozhin suddenly halted his dramatic advance toward Moscow over the weekend.
Bullion is more likely to be influenced by real rates and the dollar, and history suggests that rallies fueled by geopolitical risks tend to be short-lived.
Gold reversed course to slip on Tuesday after strong U.S. economic readings, while traders positioned for Federal Reserve Chair Jerome Powell's speech and more data that could offer clues on future interest rate hikes. U.S. consumer confidence increased in June to the highest level in nearly 1-1/2 years, while new single-family home sales rose by a more-than-expected 12.2% in May.
But for gold, "the key question is the extent to which the internal tensions within Russia or any potential toppling of the government might affect global monetary policy," Commerzbank analysts wrote in a note.
Gold has shed about 2.6% this month — set for a second consecutive monthly fall if losses hold — as bets for higher-for-longer U.S. interest rates dented the zero-yielding asset's appeal and overshadowed its traditional safe-haven role to some extent.
It is interesting guys, but this "unless something else was to break" sounds from many sources...
A surprise drop in initial jobless claims and a sharp upward revision in first-quarter GDP underscored U.S. economic resilience and further cemented the likelihood that the Fed will raise interest rates at least once, and maybe twice more, this year.
Financial markets have priced in an 87% probability that the central bank will implement another 25 basis point hike to the Fed funds target rate at the conclusion of its upcoming July policy meeting, according to CME's FedWatch tool.
Treasury yields rose, with 10-year yields touching their highest level since early March after economic reports painted a picture of a solid U.S. economy, promoting the "higher for longer" scenario with respect to restrictive monetary policy. The dollar touched a two-week high against a basket of world currencies as upbeat economic data provided cushion to the Fed to continue raising rates.
Gold prices are still trading under the 100-day moving average, a key support level breached earlier this month as prospects for further monetary tightening by US and European central banks remained at the fore. The “sluggish technicals” could see bullion sink to anywhere between $1,875 and $1,880, Citigroup Inc. strategists led by Aakash Doshi said in a note, adding that losses are unlikely to push gold below $1,800.
Money managers have been turning positive on gold again, increasing net-long positions by 1.4% in the week ending June 20 after bullish bets plunged nearly 20% in the previous session.
The jitters affecting the world’s second-biggest economy are starting to feed through into China’s gold market.A surge in purchases by Chinese residents, driven by pent-up demand after three years of pandemic restrictions and optimism that the economy would quickly rebound, is starting to slow — yet another sign that the recovery is losing momentum.
The rapid expansion in retail sales of gold and silver jewelry looks to have topped out, rising 24% year-on-year in May to 26.6 billion yuan ($3.7 billion). That’s slower than the 44% and 37% growth recorded in the previous two months. The same period last year included the extended lockdown of Shanghai, when demand for goods and services cratered across the economy.
A key demand indicator for the precious metal suggests a further weakening in June. From a premium of $44.20 an ounce in March, the Shanghai gold price is now trading at a discount to the international market, according to the World Gold Council.
Although China’s buying spree has slowed, retail sales should stay elevated in the near term as gold remains a sound investment while inflation concerns persist, particularly in the US, said Zhang Ting, an analyst with Sichuan Tianfu Bank Co. Further purchases from the People’s Bank of China could also offset declines in retail sales, said Shanghai Shandong’s Jiang.
Tyler Cowen says the precious metal has been considered “a harbinger of disaster for both fiat currency and Western civilization.” But not anymore, Tyler argues: “Gold is no longer a good hedge against bad times (???), as it correlates with both low interest rates and global economic growth.” Instead, he assures readers, having high gold prices is perfectly fine because gold is now just like any other cyclical economic asset. But if gold can’t ring the economic alarm bells anymore, then how the heck are we supposed to tell if we’re about to have a “richcession”? Or a “rolling recession”? Or no recession at all?
“Waiting for this recession feels ever more like Waiting for Godot. When is it coming? Could it even ... be time to say openly that it’s been canceled?” Isabelle Lee asks. Jonathan Levin is of the belief that yes, we should just stop with this “economic downturn” nonsense: “These just aren’t the sorts of numbers you see in an economy careering toward a recession,” he writes. In other words, its not the economy that’s dying, it’s the prospect of a recession itself.
Some economists even tell that Gold is no more the safe haven in bad times. Even if it’s trading around a record high of $2,000 these days, gold is a little boring and likely to remain so for the foreseeable future. According to a new study from the National Bureau of Economic Research, gold prices have followed some fairly standard principles since at least 1990. To put it simply, gold prices decline when real interest rates rise. That is because gold itself has zero direct yield, so at higher interest rates the opportunity cost of holding gold goes up. 1 In this regard, gold is like many other assets, including crypto, tech companies, and real estate.
The price of gold also goes up (down) when demand for it as a commodity goes up (down). So, if say China becomes a major global economic power, the Chinese economy will need more gold, if only for its commodity uses, and that in turn will boost gold prices, as it did starting in 2002. There is also sizeable gold jewelry demand from India, so as that country becomes wealthier that too will boost the demand for gold and thus its price.
Under both mechanisms, gold is no longer a good hedge against bad times, as it correlates with both low interest rates and global economic growth. Gold becomes another cyclical economic asset, and that is a big part of the reason why gold prices are no longer followed so closely or seen as useful harbingers of social and economic collapse. Instead, it is perfectly fine to have a high or rising price of gold.
We have absolutely different view and to response on this article I would ask - what really "bad times" have happened in last 30 years, since 1990's? Last time, the changes of the same scale was only after WWII and maybe in late 50's. Now we're coming to epic times, and when thunder really strikes, nobody will be thinking about this theory and what the level of real interest rates and what rates will be "real" at those moment. Everybody will think only about to safe the assets but not to get return on them. This is the big difference.
Few months ago we've considered Z. Pozsar's "Bretton Woods III" theory when he spoke on new global financial order. One other newly formed opinion that will shape Pozsar’s research: The support mechanisms that the Fed dialed up for banks during the mini-financial crisis earlier this year are here to stay. They included programs such as the Bank Term Funding Program (BTFP), which offers cash to banks in exchange for US Treasuries and agency-backed mortgage bonds.
And here is another great answer to gold skeptics. The North Carolina House of Representatives has approved a bill allowing the State Treasury to invest in gold and bitcoin. After approval by the House of Representatives, the bill will be considered by the Senate and, if the outcome is positive, by the Governor of North Carolina.
China economy boom is cracking
Right after the taking off all CV19 limitations, everybody were expecting that financial crisis should start moving to an end. Now China triggers consumption and we're at the edge of new economy boom, they spoke. But, everything goes in different direction. China in recent time sends worrying signs. Economy is slowing, domestic consumption fizzles, national currency is dropping despite strong support measures from PBoC. Started economy confrontation with the west also doesn't make situation better. Those who said that yuan soon should replace dollar now keep silence. But it is not all bad news for China.
As you know, our major theory, concerning global order is based on the struggle between AUKUS and China. West has to isolate China from global markets building the "controlling defence belt" in China Sea, relying on allies in Japan, Australia, Philippines, S. Korea, if necessary and controlling trading way by land to Indian ocean.
If AUKUS will not succeed in this startup - they will loose global competition. Recent trading piking, started with semiconductor goods bans and other stuff, now is continued by investments outflow.
Financial fragmentation among the world's major economies is on the rise. Gross cross-border investment flows are declining in major economies. In 2021, the gross value of cross-border financial transactions involving the US, China and the euro area was $7.9 trillion. In 2022, that figure was only $2.8 trillion. China is the hardest hit by financial fragmentation.
Thus, investment flows in China are turning : there is a net outflow of capital. By the way, this may be a marker of an imminent aggravation of the political situation: everyone who needs to be warned and the result is obvious. Soon it's a quarter or two. Hardly the United States will have a war with China until the year end. We must prepare to create reserves - that is, commodity markets should have to rise some time before the escalation. And then grow again when it all starts....
Wall Street bank JPMorgan said on Tuesday it was staying "bearish" on China's yuan despite its recent slide and that the country's central bank could look to step in to prevent the move accelerating.
Second is, this is not only in China. Since the beginning of 2023, investors have withdrawn $27 billion from European funds. This was reported by Bloomberg, citing data from Bank of America. Over the past seven days, $4.6 billion has been withdrawn from European funds. An outflow of investments has been observed in Europe for the 16th week in a row, writes Bloomberg. Europe was also the only major region to experience an outflow of investment in June. Investors have turned to US funds as the US economy appears to be more resilient amid fears of a slowdown in global economic growth.
Thus, it seems American shares are not going to fall yet, as new financial source has appeared. So it is unlikely that the US will collapse strongly in the coming months. Probably smooth sales will start closer to 2024.
So, here is how "most reliable" alternative to US Dollar looks like:
To be continued...
Last week was relatively quiet, and has given us just some statistics numbers, without surprising speeches or political events. Yesterday we've made in depth analysis of situation in the US, including liquidity level in the banking system and now it seems that it remains balanced. Households have not spent all savings by far, while US Ministry of Finance has ability to redistribute liquidity out from Fed's repo and banking reserves into the system, refilling also its own reserves on the Fed's account.
At the same time, we suspect that something big is preparing, because US Treasury has not started yet its major borrowings, requirement to banking capital supposedly should become tighter and J. Yellen already briefly hinted that it gonna be some problems in banking sector. Number of bankruptcies in corporate sector is rising and coming to the levels fo 2008. S&P agency forecasts its increasing further.
Fed officials start making curious statements that not all US Treasury Bonds are truly safe. With high interest rates Fed's emergency liquidity measures, meet stable demand and now it becomes obvious that banks hardly could return this money back at the current level of interest rates. Despite that we've got a lot of positive US data and now market consensus suggests that Fed is just with two more rate hikes near the pivot, the US yields are keep rising, although it should be the opposite.
Besides, Wall Street whales all together fill the offers for ETF's to SEC. What they intend to do on the market with total capitalization just around $1 Trln, if their total AUM are around 27 Trln? It will be really tight on this market if all of them will get ETF licenses from the SEC. Finally unrest in France and confrontation with China makes picture really interesting. Currently it is not quite clear what they are thinking about, but very interesting. And definitely something is coming, but in more extended perspective, not earlier than in the beginning of 2024 we suppose. Still, recent Gold market performance clearly shows that liquidity slowly but is still draining out.
Finally all central banks start hurry up with CBDC introduction. "Fed Now" is going to be started this month. While EU countries accelerating pilot projects of CBDC. Hardly this happens occasionally and right after BlackRock&Co ETF's files have been sent to SEC. SEC has 240 days to consider these files. Thus, something is going to happen with this term, or even earlier.
Market overview
Gold edged higher as investors assessed increasing geopolitical uncertainty and recessionary signals. Bullion rose as much as 0.6% on Monday after Russian mercenary leader Yevgeny Prigozhin’s extraordinary mutiny. Still, the upside for the haven was limited after Prigozhin suddenly halted his dramatic advance toward Moscow over the weekend.
Bullion is more likely to be influenced by real rates and the dollar, and history suggests that rallies fueled by geopolitical risks tend to be short-lived.
“Gold seems to be trying to price a wide range of possible outcomes all at once, with downside from higher rates and upside from inflation/growth risks,” Morgan Stanley analysts led by Amy Sergeant said in an emailed note. “Although gold has been coming off from the highs, it still looks very strong relative to where yields are.”
Gold reversed course to slip on Tuesday after strong U.S. economic readings, while traders positioned for Federal Reserve Chair Jerome Powell's speech and more data that could offer clues on future interest rate hikes. U.S. consumer confidence increased in June to the highest level in nearly 1-1/2 years, while new single-family home sales rose by a more-than-expected 12.2% in May.
"Gold did not like the news," said Edward Moya, senior market analyst at OANDA, as "that better economic data is going to drive those Fed tightening expectations and that should push up yields as well".
But for gold, "the key question is the extent to which the internal tensions within Russia or any potential toppling of the government might affect global monetary policy," Commerzbank analysts wrote in a note.
Gold has shed about 2.6% this month — set for a second consecutive monthly fall if losses hold — as bets for higher-for-longer U.S. interest rates dented the zero-yielding asset's appeal and overshadowed its traditional safe-haven role to some extent.
"Between now and Thursday, you're going to see a drifting, no-man's-land trading, sideways market here in gold, unless something else was to break," said Bob Haberkorn, senior market strategist at RJO Futures.
It is interesting guys, but this "unless something else was to break" sounds from many sources...
A surprise drop in initial jobless claims and a sharp upward revision in first-quarter GDP underscored U.S. economic resilience and further cemented the likelihood that the Fed will raise interest rates at least once, and maybe twice more, this year.
"The continued strength in the economy has given the Fed a free hand to keep increasing interest rates without causing a recession," said Joseph Sroka, chief investment officer at NovaPoint in Atlanta. "Economic growth has been good and there's optimism that if the economy were to stumble, the Fed now has the ammunition to respond."
Financial markets have priced in an 87% probability that the central bank will implement another 25 basis point hike to the Fed funds target rate at the conclusion of its upcoming July policy meeting, according to CME's FedWatch tool.
Treasury yields rose, with 10-year yields touching their highest level since early March after economic reports painted a picture of a solid U.S. economy, promoting the "higher for longer" scenario with respect to restrictive monetary policy. The dollar touched a two-week high against a basket of world currencies as upbeat economic data provided cushion to the Fed to continue raising rates.
Gold prices are still trading under the 100-day moving average, a key support level breached earlier this month as prospects for further monetary tightening by US and European central banks remained at the fore. The “sluggish technicals” could see bullion sink to anywhere between $1,875 and $1,880, Citigroup Inc. strategists led by Aakash Doshi said in a note, adding that losses are unlikely to push gold below $1,800.
Money managers have been turning positive on gold again, increasing net-long positions by 1.4% in the week ending June 20 after bullish bets plunged nearly 20% in the previous session.
The jitters affecting the world’s second-biggest economy are starting to feed through into China’s gold market.A surge in purchases by Chinese residents, driven by pent-up demand after three years of pandemic restrictions and optimism that the economy would quickly rebound, is starting to slow — yet another sign that the recovery is losing momentum.
The rapid expansion in retail sales of gold and silver jewelry looks to have topped out, rising 24% year-on-year in May to 26.6 billion yuan ($3.7 billion). That’s slower than the 44% and 37% growth recorded in the previous two months. The same period last year included the extended lockdown of Shanghai, when demand for goods and services cratered across the economy.
A key demand indicator for the precious metal suggests a further weakening in June. From a premium of $44.20 an ounce in March, the Shanghai gold price is now trading at a discount to the international market, according to the World Gold Council.
“Residents are pretty cautious in spending cash right now amid various uncertainties,” said Jiang Shu, general manager of the precious metals department at Shanghai Shandong Gold Industrial Development Co. “We may not see a rapid surge in purchases again without a slump in gold prices.”
Although China’s buying spree has slowed, retail sales should stay elevated in the near term as gold remains a sound investment while inflation concerns persist, particularly in the US, said Zhang Ting, an analyst with Sichuan Tianfu Bank Co. Further purchases from the People’s Bank of China could also offset declines in retail sales, said Shanghai Shandong’s Jiang.
Tyler Cowen says the precious metal has been considered “a harbinger of disaster for both fiat currency and Western civilization.” But not anymore, Tyler argues: “Gold is no longer a good hedge against bad times (???), as it correlates with both low interest rates and global economic growth.” Instead, he assures readers, having high gold prices is perfectly fine because gold is now just like any other cyclical economic asset. But if gold can’t ring the economic alarm bells anymore, then how the heck are we supposed to tell if we’re about to have a “richcession”? Or a “rolling recession”? Or no recession at all?
“Waiting for this recession feels ever more like Waiting for Godot. When is it coming? Could it even ... be time to say openly that it’s been canceled?” Isabelle Lee asks. Jonathan Levin is of the belief that yes, we should just stop with this “economic downturn” nonsense: “These just aren’t the sorts of numbers you see in an economy careering toward a recession,” he writes. In other words, its not the economy that’s dying, it’s the prospect of a recession itself.
Some economists even tell that Gold is no more the safe haven in bad times. Even if it’s trading around a record high of $2,000 these days, gold is a little boring and likely to remain so for the foreseeable future. According to a new study from the National Bureau of Economic Research, gold prices have followed some fairly standard principles since at least 1990. To put it simply, gold prices decline when real interest rates rise. That is because gold itself has zero direct yield, so at higher interest rates the opportunity cost of holding gold goes up. 1 In this regard, gold is like many other assets, including crypto, tech companies, and real estate.
The price of gold also goes up (down) when demand for it as a commodity goes up (down). So, if say China becomes a major global economic power, the Chinese economy will need more gold, if only for its commodity uses, and that in turn will boost gold prices, as it did starting in 2002. There is also sizeable gold jewelry demand from India, so as that country becomes wealthier that too will boost the demand for gold and thus its price.
Under both mechanisms, gold is no longer a good hedge against bad times, as it correlates with both low interest rates and global economic growth. Gold becomes another cyclical economic asset, and that is a big part of the reason why gold prices are no longer followed so closely or seen as useful harbingers of social and economic collapse. Instead, it is perfectly fine to have a high or rising price of gold.
We have absolutely different view and to response on this article I would ask - what really "bad times" have happened in last 30 years, since 1990's? Last time, the changes of the same scale was only after WWII and maybe in late 50's. Now we're coming to epic times, and when thunder really strikes, nobody will be thinking about this theory and what the level of real interest rates and what rates will be "real" at those moment. Everybody will think only about to safe the assets but not to get return on them. This is the big difference.
Few months ago we've considered Z. Pozsar's "Bretton Woods III" theory when he spoke on new global financial order. One other newly formed opinion that will shape Pozsar’s research: The support mechanisms that the Fed dialed up for banks during the mini-financial crisis earlier this year are here to stay. They included programs such as the Bank Term Funding Program (BTFP), which offers cash to banks in exchange for US Treasuries and agency-backed mortgage bonds.
“It’s a part of the system now. I think the BTFP is going to be there as a standard feature of the system, much like the standing repo facility and swap lines are there,” he says. “Imagine the Treasury market coming under strain because some of these banks have to meet, you know, liquidity shortfalls and then instead of pledging to the Fed off-market to get liquidity, you basically have to dump it on dealers and imagine what that would’ve done to the Treasury market? Nothing good. So we just basically kept these Treasuries off the grid, so to speak.”
“Credit has yet to have its reckoning and commercial real estate has yet to have its reckoning. But again, it’s better to suffer those losses in non-banks than banks because banking crises are very nasty things,” he says. “But if these losses get booked and absorbed in balance sheets that are — I don’t want to say not levered because they are — but that leverage doesn't really have much to do with money markets, that's orders of magnitude better to deal with than dealing with a lot of these concentrated exporters in the banking system.”
And here is another great answer to gold skeptics. The North Carolina House of Representatives has approved a bill allowing the State Treasury to invest in gold and bitcoin. After approval by the House of Representatives, the bill will be considered by the Senate and, if the outcome is positive, by the Governor of North Carolina.
The initiative aims to "protect the state's assets. Many people in the world of cryptocurrencies, as well as in the world of precious metals, know […] that the US government is consistently and knowingly devaluing its currency,” Congressman Mark Brody said.
China economy boom is cracking
Right after the taking off all CV19 limitations, everybody were expecting that financial crisis should start moving to an end. Now China triggers consumption and we're at the edge of new economy boom, they spoke. But, everything goes in different direction. China in recent time sends worrying signs. Economy is slowing, domestic consumption fizzles, national currency is dropping despite strong support measures from PBoC. Started economy confrontation with the west also doesn't make situation better. Those who said that yuan soon should replace dollar now keep silence. But it is not all bad news for China.
As you know, our major theory, concerning global order is based on the struggle between AUKUS and China. West has to isolate China from global markets building the "controlling defence belt" in China Sea, relying on allies in Japan, Australia, Philippines, S. Korea, if necessary and controlling trading way by land to Indian ocean.
If AUKUS will not succeed in this startup - they will loose global competition. Recent trading piking, started with semiconductor goods bans and other stuff, now is continued by investments outflow.
Financial fragmentation among the world's major economies is on the rise. Gross cross-border investment flows are declining in major economies. In 2021, the gross value of cross-border financial transactions involving the US, China and the euro area was $7.9 trillion. In 2022, that figure was only $2.8 trillion. China is the hardest hit by financial fragmentation.
Thus, investment flows in China are turning : there is a net outflow of capital. By the way, this may be a marker of an imminent aggravation of the political situation: everyone who needs to be warned and the result is obvious. Soon it's a quarter or two. Hardly the United States will have a war with China until the year end. We must prepare to create reserves - that is, commodity markets should have to rise some time before the escalation. And then grow again when it all starts....
Wall Street bank JPMorgan said on Tuesday it was staying "bearish" on China's yuan despite its recent slide and that the country's central bank could look to step in to prevent the move accelerating.
"As spot currency weakness and depreciation expectations tend to be self-reinforcing, the People's Bank of China might find it necessary to introduce some circuit breaker, with stronger fixings (the central bank's official daily FX rate) a preemptive move to prevent currency weakness going non-linear," JPMorgan's analysts said in a research note.
Second is, this is not only in China. Since the beginning of 2023, investors have withdrawn $27 billion from European funds. This was reported by Bloomberg, citing data from Bank of America. Over the past seven days, $4.6 billion has been withdrawn from European funds. An outflow of investments has been observed in Europe for the 16th week in a row, writes Bloomberg. Europe was also the only major region to experience an outflow of investment in June. Investors have turned to US funds as the US economy appears to be more resilient amid fears of a slowdown in global economic growth.
Thus, it seems American shares are not going to fall yet, as new financial source has appeared. So it is unlikely that the US will collapse strongly in the coming months. Probably smooth sales will start closer to 2024.
So, here is how "most reliable" alternative to US Dollar looks like:
To be continued...