Sive Morten
Special Consultant to the FPA
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- 18,639
Fundamentals
The most surprising performance this week was on gold market, especially after CPI release. I just thought, could it be the starting point of reversal that we are waiting for. Indeed, CPI shows that all Fed efforts are in vain and rising of interest rate doesn't help at all. Supposedly it should lead to stronger Fed efforts. 10-year yields, for instance, returns back to 3.2%. This should be negative to the gold market, as real negative rate is narrowing, although remains deeply negative. But, gold shows upside performance instead. And, just occasionally Bloomberg today expresses the same thoughts - whether gold rally stands ahead?
Market overview
Global equity markets slumped and the dollar strengthened on Friday after a bigger-than-expected U.S. inflation spike in May raised concerns the Federal Reserve may tighten policy for too long and cause a sharp slowdown. The U.S. consumer price index increased 8.6% last month, the largest year-on-year increase since December 1981, the Labor Department said. Economists polled by Reuters had expected CPI to rise 8.3% annually.
Many economists and market participants expected the data to show inflation had peaked, but gasoline prices hit a record high, the cost of food soared and rental prices surged. The dollar rose to a near four-week high against a basket of currencies, while U.S. Treasury prices tumbled and short- and intermediate-dated yields hit their highest levels in more than a decade.
The stronger-than-expected CPI data has changed the calculus for what the Fed does in September after "most assuredly" raising rates 50 basis points next week and in July, said Art Hogan, chief market strategist at National Securities. Analysts at Barclays and Jefferies now expect the Fed to deliver its first 75 basis point increase in 28 years next week. Fed funds futures traders expect the Fed's benchmark rate to increase to 3.69% next May, from 0.83% now.
Data for commodity funds showed investors withdrew $492 billion out of gold and precious metal funds in a second weekly net selling. Despite so massive outflows, we do not see the reflection in SPDR Fund reserves data, that shows that investors mostly keep reserves stable, and even slightly increase its value in recent few days. Also pay attention on big difference in price and reserves drop - the latter has changed much smaller than the former. This points on hidden bullish sentiment on gold by our view
The hot inflation reading led to a slump in US banking shares Friday, with Wells Fargo & Co. pacing the worst performers. Riskier assets underperformed the broader market, as biotechnology companies tumbled and Bitcoin sank with other cryptocurrencies.
In the Treasury market, two-year yields topped 3%, a level not seen since 2008, while the move in short rates left 30-year yields below those on five-year notes, signaling the risk that tightening will slow growth.
Separately, the University of Michigan’s preliminary June sentiment index fell to 50.2 from 58.4 in May, data released Friday showed.
A dearth of IPOs, a plunge in stock prices and slowing global economic growth are clouding the outlook for revenue at global investment banks after pandemic spending by governments and central banks fueled a blockbuster 2021. Global investment banking's net revenue fell to $35.6 billion year-to-date, down by nearly 38% from $57.4 billion in the same period a year earlier, data from Dealogic showed. For 2021 as a whole net revenue for global investment banking was a record $132 billion, the data showed.
Credit Suisse warned on Wednesday that challenging market conditions, low levels of capital markets issuance and widening in credit spreads have depressed the financial performance of its investment banking division. Credit Suisse, which warned of a second-quarter loss, has its own problems as it suffered from billions in losses in 2021 via failed investments, plus the impact of multiple legal cases.
Earlier this month, the heads of U.S. banks warned about the health of the global economy, with JPMorgan CEO Jamie Dimon speaking of a coming "hurricane. John Waldron, President and Chief Operating Officer of Goldman Sachs, meanwhile said at a conference earlier in June "the confluence of the number of shocks to the system, to me, is unprecedented."
Christopher Wolfe, who heads up North American banks for Fitch Ratings, said capital markets is one segment that would be more exposed to a slowdown in the economy.
Fee revenue in the second quarter will be hurt by longer closing times for mergers and acquisitions according to Michael Brown, analyst at Keefe, Bruyette & Woods, although he said the pace of merger announcements is improving.
Brown also described debt capital market deals and equity capital market activity such as IPOs as "dormant."
Deals momentum has slowed sharply in Asia too, due to China's regulatory crackdown and economic slowdown, with the value of IPOs in the financial hub of Hong Kong falling 90% so far this year compared to a year-ago period.
Meantime, Bloomberg suggests that gold may be heading for another rally, with warnings over a global economic slowdown paving the way for a fresh push toward $2,000 an ounce. A potent mix of decades-high inflation, geopolitical turmoil and growing talk of recession should be bullish for the traditional haven, according to speakers interviewed ahead of a precious metals conference in Singapore this week.
Bullion is down about 10% from a peak in mid-March, after the concerns that war in Europe might sprawl into a broader conflict dissipated. But with top banking executives now warning about fresh economic shocks, the situation is ripe for stagflation, which would be bullish for gold.
Gregersen predicts gold and silver could rise to around $2,000 an ounce and $26 an ounce respectively by the end of the year, and could exceed those levels should there be unexpected “black swan” events.
Bullion for August delivery gained 0.5% to settle at $1,852.10 on the Comex. The Bloomberg Dollar Spot Index was little-changed. Silver spot prices inched higher, while platinum and palladium declined. According to Rhona O’Connell, head of market analysis for regions including Asia at StoneX Group, bullion prices are facing resistance at $1,930 an ounce, but if that level is cleared then $2,000 could be reached, propelled by technical trading.
Even as the specter of higher rates and rising bond yields weighs on the non-interest bearing precious metal, the Federal Reserve’s aggressive tightening stance has also triggered recession fears, particularly in the US. The gold price decline in recent months has come as the US central bank started its hiking cycle, when officials raised rates for the first time since 2018 and signaled increases at all six remaining meetings this year.
Goldman Sachs Group Inc. President John Waldron and JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week both warned of shocks to the economy amid challenges including risks from inflation and the fallout from the war in Europe. These uncertainties could well see more investors seeking a store of value.
Still, a hawkish Fed, higher real rates and a relatively robust US dollar backdrop are among factors weighing on bullion, said Citigroup Inc., which cut its three-month gold point-price target by $300 to $1,825. The bank has kept its six-to-12 month forecast at $1,900, with elevated asset market volatility and stagflation tail hedges likely underpinning support at around $1,800, according to a June 1 report. Citigroup shifted its base-case outlook to neutral for the rest of this quarter.
Metals Focus forecasts gold could drop to a low of $1,670 as inflation eases over the rest of the year, and real rates and yields rise. Still, bullion will massively outperform US equities as well as high-yield bonds, and possibly even investment grade bonds in 2022, Nikos Kavalis, managing director at the London-based consultancy, said at the conference.
There are other signs of demand. In April, gold in yen surged to a record on the back of the currency’s weakness. While that prompted some selling in Japan by those who had accumulated bullion over the years to take profit, there was also a wave of buying by the younger generation seeking a hedge against inflation, said Bruce Ikemizu, representative director of the Japan Bullion Market Association.
Physical consumption could be supportive. The Perth Mint has seen strong physical demand for gold and silver minted bars and coins this year, especially in the US, according to Cameron Alexander, manager of business development and industry research at Australia’s largest precious metals refinery.
The Target company slashed its forecast operating margin by more than half on Tuesday because of an excess of unsold goods. It’s one of many companies whose outlook has gone awry since the start of the Covid-19 pandemic. For retailers, the consequences of getting it wrong are especially painful. Target’s profit warning looks worse because it had been such a high-flier. Its shares are up 180% over the past five years – outperforming Amazon.com.
Walmart is grappling with similar problems as its shoppers opt for lower-margin groceries including private label brands, and has reduced its profit outlook for the year. Amazon lost money during the first quarter, admitted it has too much warehouse capacity and said the executive in charge of its consumer business, Dave Clark, is leaving. All have invested heavily in the past to build a trove of data on how their customers shop.
Even big banks – which should also know consumers better than anyone – have got it wrong. JPMorgan, Bank of America and peers set aside huge sums to cover bad debts when Covid-19 hit, only to find that consumers have remained curiously creditworthy. JPMorgan stowed away $20.8 billion of so-called loan loss provisions, yet has unwound $11.1 billion of them. As boss Jamie Dimon said in April: “everybody forecasted, and everyone’s wrong all the time.”
The big difference is that when banks pile up more provisions than they need to cover future problems, they can always change course later and use the money elsewhere. That’s not true for retailers facing piles of unwanted TVs and toasters. Worse, Target said in May that its inventory was up by 43% year-on-year, yet it took three weeks to spell out the effect on its profit margin. Its shares are down a third this year so far. Those who don’t know their customers will struggle to please their investors.
And it is not a surprise - just take a look at consumer sentiment and economy conditions charts:
Conclusion:
Now guys, combining all information and our in-depth analysis for previous few weeks, including bond market, US national debt, stock market, yesterday analysis of energy sector in the US - the whole picture starts forming, that explains that gold start to show bullish outbreaks, when overall situation doesn't suggest it, at least at first glance.
We should start from the households' wealth. It is drastically decreasing. The "easy money" of covid stimulus from the government is coming to an end. Personal savings stand at very low levels, telling that people start "eating" their savings. Savings are barely above the lowest ever level of 2005.
Previously we've estimated that approximately 5 mln people sit on stock market "welfare" that they earn by investing "Covid" money. With the stock market started falling, weekly jobless claims tuns north. 5 mln people is approximately two times greater than current Unemployment rate of 3.6% increases. It means that potential unemployment stands for 8.5-9% but not for 3.6%
The US households strongly exposed to stock market risk, as they have become one of the primary source of its bubbled rally. Take a look that people have bought shares for ~3.5 Trln. dollars, this is 75% of all Covid money, provided by government. As we know that stock market is doomed, we explained it few weeks ago, how do you think, where all these people will go?
The Banks problems topic comes to the surface not occasionally. Since bond market and IPO market is totally paralyzed (we also talked about it in our previous researches), how companies and people finance their needs? Right - this is loans. Now take a look at this picture. Banks have very slow interest margin (difference between interest earned and interest paid). In fact it stands at lowest levels, while they have high default provision reserves:
Rising interest rates hurts households' wealth, making loans more expensive, as everything else around, increasing default risk. Banks, in turn have to pay more on their expenses, while earnings could drop significantly.
Final component of this puzzle is the US Debt market. We know that it is toxic and Fed has problems with refinancing and servicing existed debt. Since companies were not able to sell new bonds they get financing from bank loans. With rising interest rates many "weak" companies, from the High-yield sector will default. Since all talks about inflation stabilization is definitely an absurd, Fed will keep rising rates, while it is already no difference between 6-month T-Bill rate of 1.75% and S&P 500 dividend yield of ~1.68%. At the same time, Fed has no choice but suck money out of the stocks, because it vitally needs funds to finance national debt. These two factors together leads to collapse on stock market, that actually already stands underway. We expect 2500 S&P level in medium term, with more extension below 2000 level in longer term period.
This makes us think that we should speak not even about the years, but about few months when chain crisis reaction starts. Gold reaction stands due evident deteriorating of sentiment and anticipation of recession. For the gold it is double deuce - high inflation that can't be defeated by Fed rate and recession with negative GDP rates at once. Although Bloomberg above tells just about 2000 level on gold, we suggest two times US Dollar devaluation, which leads us to the 3000-3500$ level of gold in long term perspective.
Maybe recent jump on gold was not very strong, but it has happened in a moment when all theoretical drivers suggest downside action, as higher 10 year bonds yield, CPI suggest higher Fed rate. The "irrational" gold reaction means that investors start to suspect something by watching at sentiment indicators, such as PMI that has collapsed to multi years lows.
Thus, we expect stronger drop on stock market, rising unemployment, dropping of NFP, starting next month, higher Fed interest rates, stable high inflation, dropping of consumption, deterioration of households' wealth, real estate market and mortgage business, corporate bankruptcies starting from HY and junk sector and solvency problems in banking sector. Potentially it might be collapse on the US national debt sector that might become a nightmare, but Fed could print as many money as they want to avoid theoretical default. In practice, this way will mean just another inflationary spiral.
For us major task now is to check our theory, based on technical performance that could confirm our suggestion to not miss the entry point for long term investing into gold market. Because, it seems that negative processes are accelerating and culmination point could come earlier than we thought initially.
To be continued...
The most surprising performance this week was on gold market, especially after CPI release. I just thought, could it be the starting point of reversal that we are waiting for. Indeed, CPI shows that all Fed efforts are in vain and rising of interest rate doesn't help at all. Supposedly it should lead to stronger Fed efforts. 10-year yields, for instance, returns back to 3.2%. This should be negative to the gold market, as real negative rate is narrowing, although remains deeply negative. But, gold shows upside performance instead. And, just occasionally Bloomberg today expresses the same thoughts - whether gold rally stands ahead?
Market overview
Global equity markets slumped and the dollar strengthened on Friday after a bigger-than-expected U.S. inflation spike in May raised concerns the Federal Reserve may tighten policy for too long and cause a sharp slowdown. The U.S. consumer price index increased 8.6% last month, the largest year-on-year increase since December 1981, the Labor Department said. Economists polled by Reuters had expected CPI to rise 8.3% annually.
Many economists and market participants expected the data to show inflation had peaked, but gasoline prices hit a record high, the cost of food soared and rental prices surged. The dollar rose to a near four-week high against a basket of currencies, while U.S. Treasury prices tumbled and short- and intermediate-dated yields hit their highest levels in more than a decade.
The stronger-than-expected CPI data has changed the calculus for what the Fed does in September after "most assuredly" raising rates 50 basis points next week and in July, said Art Hogan, chief market strategist at National Securities. Analysts at Barclays and Jefferies now expect the Fed to deliver its first 75 basis point increase in 28 years next week. Fed funds futures traders expect the Fed's benchmark rate to increase to 3.69% next May, from 0.83% now.
Data for commodity funds showed investors withdrew $492 billion out of gold and precious metal funds in a second weekly net selling. Despite so massive outflows, we do not see the reflection in SPDR Fund reserves data, that shows that investors mostly keep reserves stable, and even slightly increase its value in recent few days. Also pay attention on big difference in price and reserves drop - the latter has changed much smaller than the former. This points on hidden bullish sentiment on gold by our view
The hot inflation reading led to a slump in US banking shares Friday, with Wells Fargo & Co. pacing the worst performers. Riskier assets underperformed the broader market, as biotechnology companies tumbled and Bitcoin sank with other cryptocurrencies.
In the Treasury market, two-year yields topped 3%, a level not seen since 2008, while the move in short rates left 30-year yields below those on five-year notes, signaling the risk that tightening will slow growth.
Separately, the University of Michigan’s preliminary June sentiment index fell to 50.2 from 58.4 in May, data released Friday showed.
A dearth of IPOs, a plunge in stock prices and slowing global economic growth are clouding the outlook for revenue at global investment banks after pandemic spending by governments and central banks fueled a blockbuster 2021. Global investment banking's net revenue fell to $35.6 billion year-to-date, down by nearly 38% from $57.4 billion in the same period a year earlier, data from Dealogic showed. For 2021 as a whole net revenue for global investment banking was a record $132 billion, the data showed.
Credit Suisse warned on Wednesday that challenging market conditions, low levels of capital markets issuance and widening in credit spreads have depressed the financial performance of its investment banking division. Credit Suisse, which warned of a second-quarter loss, has its own problems as it suffered from billions in losses in 2021 via failed investments, plus the impact of multiple legal cases.
Earlier this month, the heads of U.S. banks warned about the health of the global economy, with JPMorgan CEO Jamie Dimon speaking of a coming "hurricane. John Waldron, President and Chief Operating Officer of Goldman Sachs, meanwhile said at a conference earlier in June "the confluence of the number of shocks to the system, to me, is unprecedented."
Christopher Wolfe, who heads up North American banks for Fitch Ratings, said capital markets is one segment that would be more exposed to a slowdown in the economy.
Fee revenue in the second quarter will be hurt by longer closing times for mergers and acquisitions according to Michael Brown, analyst at Keefe, Bruyette & Woods, although he said the pace of merger announcements is improving.
Brown also described debt capital market deals and equity capital market activity such as IPOs as "dormant."
Deals momentum has slowed sharply in Asia too, due to China's regulatory crackdown and economic slowdown, with the value of IPOs in the financial hub of Hong Kong falling 90% so far this year compared to a year-ago period.
Meantime, Bloomberg suggests that gold may be heading for another rally, with warnings over a global economic slowdown paving the way for a fresh push toward $2,000 an ounce. A potent mix of decades-high inflation, geopolitical turmoil and growing talk of recession should be bullish for the traditional haven, according to speakers interviewed ahead of a precious metals conference in Singapore this week.
Bullion is down about 10% from a peak in mid-March, after the concerns that war in Europe might sprawl into a broader conflict dissipated. But with top banking executives now warning about fresh economic shocks, the situation is ripe for stagflation, which would be bullish for gold.
Gregersen predicts gold and silver could rise to around $2,000 an ounce and $26 an ounce respectively by the end of the year, and could exceed those levels should there be unexpected “black swan” events.
Bullion for August delivery gained 0.5% to settle at $1,852.10 on the Comex. The Bloomberg Dollar Spot Index was little-changed. Silver spot prices inched higher, while platinum and palladium declined. According to Rhona O’Connell, head of market analysis for regions including Asia at StoneX Group, bullion prices are facing resistance at $1,930 an ounce, but if that level is cleared then $2,000 could be reached, propelled by technical trading.
Even as the specter of higher rates and rising bond yields weighs on the non-interest bearing precious metal, the Federal Reserve’s aggressive tightening stance has also triggered recession fears, particularly in the US. The gold price decline in recent months has come as the US central bank started its hiking cycle, when officials raised rates for the first time since 2018 and signaled increases at all six remaining meetings this year.
Goldman Sachs Group Inc. President John Waldron and JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week both warned of shocks to the economy amid challenges including risks from inflation and the fallout from the war in Europe. These uncertainties could well see more investors seeking a store of value.
Still, a hawkish Fed, higher real rates and a relatively robust US dollar backdrop are among factors weighing on bullion, said Citigroup Inc., which cut its three-month gold point-price target by $300 to $1,825. The bank has kept its six-to-12 month forecast at $1,900, with elevated asset market volatility and stagflation tail hedges likely underpinning support at around $1,800, according to a June 1 report. Citigroup shifted its base-case outlook to neutral for the rest of this quarter.
Metals Focus forecasts gold could drop to a low of $1,670 as inflation eases over the rest of the year, and real rates and yields rise. Still, bullion will massively outperform US equities as well as high-yield bonds, and possibly even investment grade bonds in 2022, Nikos Kavalis, managing director at the London-based consultancy, said at the conference.
There are other signs of demand. In April, gold in yen surged to a record on the back of the currency’s weakness. While that prompted some selling in Japan by those who had accumulated bullion over the years to take profit, there was also a wave of buying by the younger generation seeking a hedge against inflation, said Bruce Ikemizu, representative director of the Japan Bullion Market Association.
Physical consumption could be supportive. The Perth Mint has seen strong physical demand for gold and silver minted bars and coins this year, especially in the US, according to Cameron Alexander, manager of business development and industry research at Australia’s largest precious metals refinery.
The Target company slashed its forecast operating margin by more than half on Tuesday because of an excess of unsold goods. It’s one of many companies whose outlook has gone awry since the start of the Covid-19 pandemic. For retailers, the consequences of getting it wrong are especially painful. Target’s profit warning looks worse because it had been such a high-flier. Its shares are up 180% over the past five years – outperforming Amazon.com.
Walmart is grappling with similar problems as its shoppers opt for lower-margin groceries including private label brands, and has reduced its profit outlook for the year. Amazon lost money during the first quarter, admitted it has too much warehouse capacity and said the executive in charge of its consumer business, Dave Clark, is leaving. All have invested heavily in the past to build a trove of data on how their customers shop.
Even big banks – which should also know consumers better than anyone – have got it wrong. JPMorgan, Bank of America and peers set aside huge sums to cover bad debts when Covid-19 hit, only to find that consumers have remained curiously creditworthy. JPMorgan stowed away $20.8 billion of so-called loan loss provisions, yet has unwound $11.1 billion of them. As boss Jamie Dimon said in April: “everybody forecasted, and everyone’s wrong all the time.”
The big difference is that when banks pile up more provisions than they need to cover future problems, they can always change course later and use the money elsewhere. That’s not true for retailers facing piles of unwanted TVs and toasters. Worse, Target said in May that its inventory was up by 43% year-on-year, yet it took three weeks to spell out the effect on its profit margin. Its shares are down a third this year so far. Those who don’t know their customers will struggle to please their investors.
And it is not a surprise - just take a look at consumer sentiment and economy conditions charts:
Conclusion:
Now guys, combining all information and our in-depth analysis for previous few weeks, including bond market, US national debt, stock market, yesterday analysis of energy sector in the US - the whole picture starts forming, that explains that gold start to show bullish outbreaks, when overall situation doesn't suggest it, at least at first glance.
We should start from the households' wealth. It is drastically decreasing. The "easy money" of covid stimulus from the government is coming to an end. Personal savings stand at very low levels, telling that people start "eating" their savings. Savings are barely above the lowest ever level of 2005.
Previously we've estimated that approximately 5 mln people sit on stock market "welfare" that they earn by investing "Covid" money. With the stock market started falling, weekly jobless claims tuns north. 5 mln people is approximately two times greater than current Unemployment rate of 3.6% increases. It means that potential unemployment stands for 8.5-9% but not for 3.6%
The US households strongly exposed to stock market risk, as they have become one of the primary source of its bubbled rally. Take a look that people have bought shares for ~3.5 Trln. dollars, this is 75% of all Covid money, provided by government. As we know that stock market is doomed, we explained it few weeks ago, how do you think, where all these people will go?
The Banks problems topic comes to the surface not occasionally. Since bond market and IPO market is totally paralyzed (we also talked about it in our previous researches), how companies and people finance their needs? Right - this is loans. Now take a look at this picture. Banks have very slow interest margin (difference between interest earned and interest paid). In fact it stands at lowest levels, while they have high default provision reserves:
Rising interest rates hurts households' wealth, making loans more expensive, as everything else around, increasing default risk. Banks, in turn have to pay more on their expenses, while earnings could drop significantly.
Final component of this puzzle is the US Debt market. We know that it is toxic and Fed has problems with refinancing and servicing existed debt. Since companies were not able to sell new bonds they get financing from bank loans. With rising interest rates many "weak" companies, from the High-yield sector will default. Since all talks about inflation stabilization is definitely an absurd, Fed will keep rising rates, while it is already no difference between 6-month T-Bill rate of 1.75% and S&P 500 dividend yield of ~1.68%. At the same time, Fed has no choice but suck money out of the stocks, because it vitally needs funds to finance national debt. These two factors together leads to collapse on stock market, that actually already stands underway. We expect 2500 S&P level in medium term, with more extension below 2000 level in longer term period.
This makes us think that we should speak not even about the years, but about few months when chain crisis reaction starts. Gold reaction stands due evident deteriorating of sentiment and anticipation of recession. For the gold it is double deuce - high inflation that can't be defeated by Fed rate and recession with negative GDP rates at once. Although Bloomberg above tells just about 2000 level on gold, we suggest two times US Dollar devaluation, which leads us to the 3000-3500$ level of gold in long term perspective.
Maybe recent jump on gold was not very strong, but it has happened in a moment when all theoretical drivers suggest downside action, as higher 10 year bonds yield, CPI suggest higher Fed rate. The "irrational" gold reaction means that investors start to suspect something by watching at sentiment indicators, such as PMI that has collapsed to multi years lows.
Thus, we expect stronger drop on stock market, rising unemployment, dropping of NFP, starting next month, higher Fed interest rates, stable high inflation, dropping of consumption, deterioration of households' wealth, real estate market and mortgage business, corporate bankruptcies starting from HY and junk sector and solvency problems in banking sector. Potentially it might be collapse on the US national debt sector that might become a nightmare, but Fed could print as many money as they want to avoid theoretical default. In practice, this way will mean just another inflationary spiral.
For us major task now is to check our theory, based on technical performance that could confirm our suggestion to not miss the entry point for long term investing into gold market. Because, it seems that negative processes are accelerating and culmination point could come earlier than we thought initially.
To be continued...
