Sive Morten
Special Consultant to the FPA
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Fundamentals
No doubts that recent gold rally stands among most important events of the week. The big hype around BTC growth and its exceptional role with ability to replace gold was starting to fade a bit, and gold sceptics become quieter. The majority of analysts explain this with next sentiment change among investors in favor of the Fed rate cut (again!), but we suspect that uncertainty and some political events are the driver of similar strength. Mostly they are related to the US domestic politics.
Market overview
Gold prices hit a three-month peak on Monday, driven by increased bets for a June interest rate cut by the U.S. Federal Reserve. Gold surged about $50 over the course of last week, driven by tepid U.S. manufacturing and construction spending, and weaker price pressures.
A wider robust fundamental backdrop added support, including strong physical demand in Asia and central bank purchases as well as bullion's traditional safe-haven cachet. Central banks have been net buyers of gold for eight consecutive months. From a technical analysis perspective, gold may still have further upside towards $2,180, a Fibonacci projection level.
Gold got an additional fillip as the dollar fell after Fed Chair Jerome Powell indicated a rate cut later this year. Beyond rates, other factors have contributed to gold’s strength. Macro funds, which haven’t been active in the market until recently, were a new force of buying. Options-related buying above $2,100 strike price also helped fuel the rally, according to HSBC’s Steel.
Gold raced to an all-time high on Thursday, extending its record run this week as increasing bets for U.S. monetary easing added to sustained tailwinds for bullion from central bank buying and safe-haven demand. Powell said the Fed is "not far" from getting enough confidence that inflation is heading to the Fed's 2% goal to be able to start interest-rate cuts. A low-interest rate environment translates into reduced opportunity cost of holding non-yielding gold and weighs on the dollar, making bullion cheaper for overseas buyers.
Gold prices surged to another record high on Friday as data showing a rise in the U.S. unemployment rate boosted expectations that the U.S. Federal Reserve could begin cutting interest rates soon. Bullion was set to post its biggest weekly percentage increase since mid-October. Gold reached an all-time high of $2,185.19 after a report showed a rise in the U.S. unemployment rate and a moderation in wage gains despite job growth acceleration in February. Traders boosted bets the Fed could start cutting interest rates in May to around 30% after the jobs report, although June remained the mostly likely scenario at 73%.
Citi raised its gold forecast for the next three months to $2,200 an ounce, and upgraded the projection to $2,300 for the next six to 12 months. It cited recession risks in the second quarter, which can favor gold, “especially given the recent equity and credit market rallies.”
When adjusted for inflation, gold set an all-time high of about $3,200 in 1980, according to Peter Boockvar, chief investment officer at Bleakley Financial Group.
What has happened?
The rally itself was peculiar: gold tends to spike in response to globe-shaking geopolitical or economic developments, and nothing particularly noteworthy had happened to justify the surge. The sharp climb higher has left many analysts and other market watchers casting around for explanations, from big investment funds taking a renewed interest in gold, to the role of algorithmic traders that follow momentum in the market, fueling volatility.
The scale of the move surprised some market watchers, particularly since there hasn’t been a significant change in expectations for the Fed’s easing pivot or other macroeconomic drivers during that time. “The velocity and the speed was very sudden, very fast,” said James Steel, an analyst at HSBC Holdings Plc. “It didn’t seem to have a smoking gun.” After months of mostly treading water, the gold market suddenly sprang to life last Friday.
But the reality is that prices didn’t actually have that far to go before hitting record territory. Gold has been trading for months around the $2,000 mark — a level that would have been viewed as stratospheric just a few years ago, and which was only breached for the first time in 2020 as the global pandemic raged. Even more unusually, prices have traded at such elevated levels despite sky-high real interest rates that are typically bad for gold, which doesn’t pay interest. Why were prices so high in the first place? The one reason is China demand.
While many western investors did indeed dump gold holdings as rates soared last year, global demand was underpinned instead by massive purchases by central banks in emerging market countries, led by China. And regular people are buying too — consumers in China have been stocking up on coins, bars and jewelry despite the high prices, to protect their wealth against turmoil in the country’s stock market and property sector.
Still, bullion has far to go to reach its inflation-adjusted peaks set more than a decade ago. Gold has risen more than 600% since the turn of the millennium, though adjusted for inflation it remains below the high of $850 touched in January 1980, equivalent to more than $3,000 in today’s dollars. Recent gains have still been relatively modest compared with some record-notching rallies of the past. That’s partly because prices were already elevated thanks to buying by central banks seeking to diversify their reserves away from a dependency on the dollar.
China’s central bank added gold to its reserves for a 16th straight month in February, extending a long buying spree that’s helped to support the precious metal’s surge to a record high. Bullion held by the People’s Bank of China rose by about 390,000 troy ounces last month, according to official data released Thursday. That takes total holdings to 72.58 million troy ounces, equivalent to about 2,257 tons.
But overall, the backdrop means the rally could have further to go. And despite the many parallels between the latest record-breaking run and previous gold peaks, the role played by central banks and Asian buying sets it apart.
The lost major driving factor
Yesterday we've talked about it, but from economical point of view - outstanding pace of the US national debt raising. But you could ask "why is this factor treated as "lost" one if we've discussed it? Because the majority consider it only as the US budget problems. In reality, the exponential US debt growth has wider spectre of problems. First is - this is the major source of the US stock market growth. Most of the federal budget spending, having gone through several circles in the economy, sooner or later ends up in pension savings, insurance funds, and deposits. This ever-growing liability base translates into growth in the stock, bond, land and real estate markets.
With a such pace, the US economy will collapse into a budget crisis: money from taxes is already not enough to cover all mandatory expenses. An ever-growing item - interest on the debt will increase exponentially and at one point the market simply will not be able to satisfy the entire demand for money from the Treasury. And the new issue from the Fed means inflation and rising borrowing costs. Market players understand this and are already purchasing anti-dollars - silver, gold and even bitcoin.
However, the amount of gold in the reserves of world central banks is now close to historical minimums. And although central banks have been actively buying metal in recent years, dollars and euros have been printed much faster. Against the backdrop of the loss of control over the growth of public debt on the part of the G7 countries, it is logical that there will be a gradual change in attitudes towards the quality of debts and a revaluation of gold as a reserve metal on the part of the Central Bank. Therefore, we should expect a gradual restoration of the share of gold in the reserves of central banks to the normality that has developed over half a century - 40%, and as a result, a further increase in its value.
The government budget deficit in the United States is larger than in Italy. At the same time, the level of public debt to GDP in Italy is now higher than in the United States, but, according to IMF forecasts, these indicators will approach in the coming years. The government's net interest payments in the United States and Italy are similar. Despite this similarity, Italy has a BBB rating and the United States has an AAA rating. If the US continues to follow the budget trajectory projected by CBO, then there are increasing risks that the US rating will be downgraded later this year. Nobody is so naive, suggesting that rating agencies are "independent", but the divergence in ratings become too evident and there are less and less of those who wants to overpay for "bubbled" rating.
Thus, some things that previously should have had to be silenced - now are coming on the surface. De-dollarization comes from where nobody expected. Gold's new price record signals that global central banks are likely to stockpile the precious metal in an attempt to diversify away from the dollar, as persistently large budget deficits threaten to further erode its real value and lead to higher inflation. ️The bulk of seasonal shopping, such as Diwali in India, is probably behind us. In addition, silver did not participate in the growth. It is therefore reasonable to assume that the official sector, i.e. central banks, has been an important driver of gold's recent rally to new highs.
Official unemployment figures in the United States are slowly growing, despite the fact that the impending growth of this indicator has long been signaled by the length of the working week, which is very close to the minimums of the era of Covid lockdowns. By the way, the lows of the 2008 crisis era are only about half an hour a week away.
If we add here the drawn and regularly revised figures for job creation, which in 3 years already differ by several million (due to incorrect accounting of people working 2 jobs) and 3 million immigrants who arrived in 3 years, then we can make the conclusion is that everything is no longer as positive as the Fed claims, when it is looking for extra reasons not to lower the rate as long as possible, just to keep the global dollar system and the debt market as a whole afloat.
What can a steady increase in the price of gold and an increase in yields in the treasury market indicate against the backdrop of an inflating techs, and crypto bubble?
The mood of most funds and managers is rather risk-off, not counting the Bigwigs from Wall Street that are selling Nvidia shares to housewives at 800 bucks.
By the way, gold reached a historic high two weeks ago, despite the fact that the dollar index has also been growing since the beginning of the year. Physical demand from global central banks remains high, and speculators have reduced short-selling activity due to geopolitical escalation. They are frightened.
But now is most interesting thing. Gold rally has started after epic events in the US politics. First is - D. Trump finally won long lasting process and Supreme Court has let him to take part in coming elections. Right after this decision, V. Nuland and J. Kerry has leaved their posts. J. Biden team is falling apart. Michelle Obama will not take part in 2024 President's run. In fact, Democrats do not have any candidate who could equally compete with D. Trump. As some experts suggest, It means that the US domestic elites have made some fateful decision - the power goes to Republicans and most probable to D. Trump as an only serious candidate for now.
Indirectly we could make the same conclusion based on recent J. Powell speech - he was more confident and calm than usual. He did not say any new theses, but some conclusions can be drawn from his speech. Last summer, noting how nervous Powell was, It was seemed that he had been given a hard deadline to fix the situation until 2024 election year. The situation, as it is clear, has not improved, but Powell began to talk about long deadlines ("not quickly, but correctly"). What is the reason for this?
It seems that there are two reasons for that. First is - war in Ukraine and Middle East situation are going wrong and against of 2022 expectations that indirectly negatively impacts on global economy and the US own economy. Now everybody knows that this has happened under Democrats government. Second is - Trump's phenomenal success. With the high degree of certainty we could say that if everything would go with the Democrats' plans in Ukraine and in Middle East - domestic political balance would be in favor of Democrats now and attacks on D. Trump would continue, so they could even imprison him.
The logic of last year was that those forces (transnational financiers, the elite of the "Western" global project) that stand behind Biden planned to remain in power after the elections. And today they are clearly ready to give way to alternative elite groups behind Trump. And, accordingly, financiers are now interested not in ensuring that there is no collapse before the elections, but in making it as difficult as possible for the new Trump administration to transition to economic growth.
This is in any case impossible in the next 3-4 years (the structural crisis will continue until a state of economic equilibrium is reached). Note that in official GDP figures, the collapse of the bubble in financial markets can lead to a sharp decline, but in real US GDP figures (about 15-16 trillion dollars before the start of covid), the rate of decline will remain the same, 6-8% per year, taking into account government support. In any case, the probability of a crisis has increased significantly this year.
Correspondingly, everybody in the world see this and trying to insure against big shakes as nobody can foresee the scale of possible crisis. This is the primary reason. All other things, including the Fed policy etc. is just a consequence from major political events. That's why it is very difficult to explain recent gold dynamic by purely economic factors.
No doubts that recent gold rally stands among most important events of the week. The big hype around BTC growth and its exceptional role with ability to replace gold was starting to fade a bit, and gold sceptics become quieter. The majority of analysts explain this with next sentiment change among investors in favor of the Fed rate cut (again!), but we suspect that uncertainty and some political events are the driver of similar strength. Mostly they are related to the US domestic politics.
Market overview
Gold prices hit a three-month peak on Monday, driven by increased bets for a June interest rate cut by the U.S. Federal Reserve. Gold surged about $50 over the course of last week, driven by tepid U.S. manufacturing and construction spending, and weaker price pressures.
A wider robust fundamental backdrop added support, including strong physical demand in Asia and central bank purchases as well as bullion's traditional safe-haven cachet. Central banks have been net buyers of gold for eight consecutive months. From a technical analysis perspective, gold may still have further upside towards $2,180, a Fibonacci projection level.
Holdings in gold-backed exchange-traded funds (ETF), other major part of gold demand, continue to slide for now. The world's largest gold-backed ETF - SPDR Gold Trust's GLD holdings - dropped 7% so far this year. The gold-platinum ratio has reached the highest since March 2020, when the start of the pandemic drove it to a record high.
Gold got an additional fillip as the dollar fell after Fed Chair Jerome Powell indicated a rate cut later this year. Beyond rates, other factors have contributed to gold’s strength. Macro funds, which haven’t been active in the market until recently, were a new force of buying. Options-related buying above $2,100 strike price also helped fuel the rally, according to HSBC’s Steel.
Gold raced to an all-time high on Thursday, extending its record run this week as increasing bets for U.S. monetary easing added to sustained tailwinds for bullion from central bank buying and safe-haven demand. Powell said the Fed is "not far" from getting enough confidence that inflation is heading to the Fed's 2% goal to be able to start interest-rate cuts. A low-interest rate environment translates into reduced opportunity cost of holding non-yielding gold and weighs on the dollar, making bullion cheaper for overseas buyers.
Gold prices surged to another record high on Friday as data showing a rise in the U.S. unemployment rate boosted expectations that the U.S. Federal Reserve could begin cutting interest rates soon. Bullion was set to post its biggest weekly percentage increase since mid-October. Gold reached an all-time high of $2,185.19 after a report showed a rise in the U.S. unemployment rate and a moderation in wage gains despite job growth acceleration in February. Traders boosted bets the Fed could start cutting interest rates in May to around 30% after the jobs report, although June remained the mostly likely scenario at 73%.
Citi raised its gold forecast for the next three months to $2,200 an ounce, and upgraded the projection to $2,300 for the next six to 12 months. It cited recession risks in the second quarter, which can favor gold, “especially given the recent equity and credit market rallies.”
When adjusted for inflation, gold set an all-time high of about $3,200 in 1980, according to Peter Boockvar, chief investment officer at Bleakley Financial Group.
What has happened?
The rally itself was peculiar: gold tends to spike in response to globe-shaking geopolitical or economic developments, and nothing particularly noteworthy had happened to justify the surge. The sharp climb higher has left many analysts and other market watchers casting around for explanations, from big investment funds taking a renewed interest in gold, to the role of algorithmic traders that follow momentum in the market, fueling volatility.
The scale of the move surprised some market watchers, particularly since there hasn’t been a significant change in expectations for the Fed’s easing pivot or other macroeconomic drivers during that time. “The velocity and the speed was very sudden, very fast,” said James Steel, an analyst at HSBC Holdings Plc. “It didn’t seem to have a smoking gun.” After months of mostly treading water, the gold market suddenly sprang to life last Friday.
But the reality is that prices didn’t actually have that far to go before hitting record territory. Gold has been trading for months around the $2,000 mark — a level that would have been viewed as stratospheric just a few years ago, and which was only breached for the first time in 2020 as the global pandemic raged. Even more unusually, prices have traded at such elevated levels despite sky-high real interest rates that are typically bad for gold, which doesn’t pay interest. Why were prices so high in the first place? The one reason is China demand.
While many western investors did indeed dump gold holdings as rates soared last year, global demand was underpinned instead by massive purchases by central banks in emerging market countries, led by China. And regular people are buying too — consumers in China have been stocking up on coins, bars and jewelry despite the high prices, to protect their wealth against turmoil in the country’s stock market and property sector.
Still, bullion has far to go to reach its inflation-adjusted peaks set more than a decade ago. Gold has risen more than 600% since the turn of the millennium, though adjusted for inflation it remains below the high of $850 touched in January 1980, equivalent to more than $3,000 in today’s dollars. Recent gains have still been relatively modest compared with some record-notching rallies of the past. That’s partly because prices were already elevated thanks to buying by central banks seeking to diversify their reserves away from a dependency on the dollar.
China’s central bank added gold to its reserves for a 16th straight month in February, extending a long buying spree that’s helped to support the precious metal’s surge to a record high. Bullion held by the People’s Bank of China rose by about 390,000 troy ounces last month, according to official data released Thursday. That takes total holdings to 72.58 million troy ounces, equivalent to about 2,257 tons.
But overall, the backdrop means the rally could have further to go. And despite the many parallels between the latest record-breaking run and previous gold peaks, the role played by central banks and Asian buying sets it apart.
The lost major driving factor
Yesterday we've talked about it, but from economical point of view - outstanding pace of the US national debt raising. But you could ask "why is this factor treated as "lost" one if we've discussed it? Because the majority consider it only as the US budget problems. In reality, the exponential US debt growth has wider spectre of problems. First is - this is the major source of the US stock market growth. Most of the federal budget spending, having gone through several circles in the economy, sooner or later ends up in pension savings, insurance funds, and deposits. This ever-growing liability base translates into growth in the stock, bond, land and real estate markets.
With a such pace, the US economy will collapse into a budget crisis: money from taxes is already not enough to cover all mandatory expenses. An ever-growing item - interest on the debt will increase exponentially and at one point the market simply will not be able to satisfy the entire demand for money from the Treasury. And the new issue from the Fed means inflation and rising borrowing costs. Market players understand this and are already purchasing anti-dollars - silver, gold and even bitcoin.
However, the amount of gold in the reserves of world central banks is now close to historical minimums. And although central banks have been actively buying metal in recent years, dollars and euros have been printed much faster. Against the backdrop of the loss of control over the growth of public debt on the part of the G7 countries, it is logical that there will be a gradual change in attitudes towards the quality of debts and a revaluation of gold as a reserve metal on the part of the Central Bank. Therefore, we should expect a gradual restoration of the share of gold in the reserves of central banks to the normality that has developed over half a century - 40%, and as a result, a further increase in its value.
The government budget deficit in the United States is larger than in Italy. At the same time, the level of public debt to GDP in Italy is now higher than in the United States, but, according to IMF forecasts, these indicators will approach in the coming years. The government's net interest payments in the United States and Italy are similar. Despite this similarity, Italy has a BBB rating and the United States has an AAA rating. If the US continues to follow the budget trajectory projected by CBO, then there are increasing risks that the US rating will be downgraded later this year. Nobody is so naive, suggesting that rating agencies are "independent", but the divergence in ratings become too evident and there are less and less of those who wants to overpay for "bubbled" rating.
Thus, some things that previously should have had to be silenced - now are coming on the surface. De-dollarization comes from where nobody expected. Gold's new price record signals that global central banks are likely to stockpile the precious metal in an attempt to diversify away from the dollar, as persistently large budget deficits threaten to further erode its real value and lead to higher inflation. ️The bulk of seasonal shopping, such as Diwali in India, is probably behind us. In addition, silver did not participate in the growth. It is therefore reasonable to assume that the official sector, i.e. central banks, has been an important driver of gold's recent rally to new highs.
Official unemployment figures in the United States are slowly growing, despite the fact that the impending growth of this indicator has long been signaled by the length of the working week, which is very close to the minimums of the era of Covid lockdowns. By the way, the lows of the 2008 crisis era are only about half an hour a week away.
If we add here the drawn and regularly revised figures for job creation, which in 3 years already differ by several million (due to incorrect accounting of people working 2 jobs) and 3 million immigrants who arrived in 3 years, then we can make the conclusion is that everything is no longer as positive as the Fed claims, when it is looking for extra reasons not to lower the rate as long as possible, just to keep the global dollar system and the debt market as a whole afloat.
What can a steady increase in the price of gold and an increase in yields in the treasury market indicate against the backdrop of an inflating techs, and crypto bubble?
The mood of most funds and managers is rather risk-off, not counting the Bigwigs from Wall Street that are selling Nvidia shares to housewives at 800 bucks.
By the way, gold reached a historic high two weeks ago, despite the fact that the dollar index has also been growing since the beginning of the year. Physical demand from global central banks remains high, and speculators have reduced short-selling activity due to geopolitical escalation. They are frightened.
But now is most interesting thing. Gold rally has started after epic events in the US politics. First is - D. Trump finally won long lasting process and Supreme Court has let him to take part in coming elections. Right after this decision, V. Nuland and J. Kerry has leaved their posts. J. Biden team is falling apart. Michelle Obama will not take part in 2024 President's run. In fact, Democrats do not have any candidate who could equally compete with D. Trump. As some experts suggest, It means that the US domestic elites have made some fateful decision - the power goes to Republicans and most probable to D. Trump as an only serious candidate for now.
Indirectly we could make the same conclusion based on recent J. Powell speech - he was more confident and calm than usual. He did not say any new theses, but some conclusions can be drawn from his speech. Last summer, noting how nervous Powell was, It was seemed that he had been given a hard deadline to fix the situation until 2024 election year. The situation, as it is clear, has not improved, but Powell began to talk about long deadlines ("not quickly, but correctly"). What is the reason for this?
It seems that there are two reasons for that. First is - war in Ukraine and Middle East situation are going wrong and against of 2022 expectations that indirectly negatively impacts on global economy and the US own economy. Now everybody knows that this has happened under Democrats government. Second is - Trump's phenomenal success. With the high degree of certainty we could say that if everything would go with the Democrats' plans in Ukraine and in Middle East - domestic political balance would be in favor of Democrats now and attacks on D. Trump would continue, so they could even imprison him.
The logic of last year was that those forces (transnational financiers, the elite of the "Western" global project) that stand behind Biden planned to remain in power after the elections. And today they are clearly ready to give way to alternative elite groups behind Trump. And, accordingly, financiers are now interested not in ensuring that there is no collapse before the elections, but in making it as difficult as possible for the new Trump administration to transition to economic growth.
This is in any case impossible in the next 3-4 years (the structural crisis will continue until a state of economic equilibrium is reached). Note that in official GDP figures, the collapse of the bubble in financial markets can lead to a sharp decline, but in real US GDP figures (about 15-16 trillion dollars before the start of covid), the rate of decline will remain the same, 6-8% per year, taking into account government support. In any case, the probability of a crisis has increased significantly this year.
Correspondingly, everybody in the world see this and trying to insure against big shakes as nobody can foresee the scale of possible crisis. This is the primary reason. All other things, including the Fed policy etc. is just a consequence from major political events. That's why it is very difficult to explain recent gold dynamic by purely economic factors.
