Sive Morten
Special Consultant to the FPA
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Fundamentals
It seems that Gold now stands among few assets that has no flaws, or maybe the only asset. Despite solid pressure from recent statistics we haven't seen any strong downside retracement. In recent few weeks gold was showing outstanding performance, supported by not only geopolitical tensions but worryings around US Dollar future as reserve currency. Indirectly this is confirmed by activity of Central Banks, that buying gold constantly and in big volumes. Gold has lost relation with the assets of ETFs. And this process has the background.
Market overview
Reflecting bullish sentiment, COMEX gold speculators raised their net long positions by 63,018 contracts to 131,060 in the week ended March 5, data on Friday showed. That rise in open interest implies investors are getting more bullish about gold, rather than just closing out existing short positions.
U.S. consumer prices increased solidly in February, suggesting some stickiness in inflation. Data showed the Consumer Price Index (CPI) rose 0.4% on a monthly basis in February. Annually, it increased 3.2%, above the 3.1% forecast.
Gold slid on Thursday after a larger-than-expected rise in February's U.S. producer price index (PPI) cooled expectations of early rate cuts by the Federal Reserve, boosting Treasury yields and the dollar. U.S. producer prices increased more than expected in February amid a surge in the cost of goods like gasoline and food, which could fan fears that inflation is picking up again.
However, traders continue to bet on interest rate cuts in June, pricing in about a 60% chance, compared with 72% before the CPI data earlier this week, according to the CME Group's FedWatch Tool, opens new tab. The Fed is expected to hold rates steady at its policy meeting next week, but the focus will be on the "dot plot" projections.
Meanwhile, US retail sales rose by less than forecast after a steep drop to start the year. The PPI readings plus the consumer price index released earlier this week signal that inflation remains sticky. That makes for a bumpy road ahead for the Fed and its 2% inflation target.
Gold prices held steady on Friday as they looked set to log their first weekly drop in four as investors lowered expectations of a U.S. interest rate cut after data over the week showed bubbling price pressures.
Still, despite the Thursday pullback, bullion is still holding at elevated levels following a prolonged rise. A dip below $2,135 may trigger long liquidation by speculators such as hedge funds and money managers, according to Hansen.
Gold has finally broken out of the range in which it has been stuck since the beginning of this decade, reaching a record $2,195 per troy ounce this month. A surge in buying in China is likely behind the recent rally.
Swiss exports to China — usually a good proxy of Chinese demand for gold — nearly tripled in January (according to the Swiss Federal Customs Administration), as consumers sought a hedge against turmoil in the country’s stock market and property sector. With the nation’s biggest state-owned lenders slashing deposit rates, putting money in the bank has become relatively less attractive compared with bullion.
In addition, China is among the central banks buying gold to reduce its dependence on the dollar. China has been among the biggest stockpilers of gold in the past year as nations from Poland to Singapore diversify their financial reserves by adding the precious metal. This indicates that the Chinese are seeking refuge in the most ancient form of financial security after a difficult period for the country's property and stock markets. There are other signs that demand for gold is growing overall. Analysts at Societe Generale SA reported record monthly fund manager inflows into gold in February of $11.3 billion.
In contrast to persistent central bank demand for the precious metal, gold-backed exchange-traded funds have cut their holdings for seven consecutive months.Those ETF holdings are likely to stabilize, according to James Steel, an analyst at HSBC Holdings Plc. That could add further momentum to bullion.
Gold prices may continue to rise, but analysts expect silver to soon take the lead. Gold and silver prices have traditionally shown a strong positive correlation, although silver is sometimes called the "poor cousin" of gold. ️Earlier this year, the Silver Institute said in a report that global silver demand is expected to reach 1.2 billion ounces in 2024, the second-highest level ever. The institute expects silver to have a “tremendous year,” especially from a demand perspective. Let us add that silver has an important mark of $26, which someone stubbornly defended with all their might last year. Its breakdown opens the way to any new heights.
In fact, the speed and scale of the move caught many market watchers off guard, particularly in the absence of any significant change in the outlook for when the Federal Reserve would start cutting rates, which has been a key focus. To be sure, the backdrop looks favorable for gold with geopolitical tensions more fraught than ever. And gold’s performance over the past year has surprised some veteran market watchers well before the current surge, as prices remained at elevated levels despite spiking real interest rates.
Gold typically has an inverse relationship with bond yields, but has been supported by strong central bank buying and demand from consumers in China in particular. US real yields have been tracking down since last October, but gold’s recent jump has far outpaced what might have been expected.
So, now we deal with the paradox of investment growth. An unusual situation is emerging on the market: gold, which traditionally grows during periods of falling stock market, is forming a different pattern. In fact we have - gold at highs, S&P 500 at highs, at least the dollar is not falling and Bitcoin broke through $70,000. It turns out that no matter where you invest, everything is good. But it's not that simple. Each point has its own explanation. This system cant not work indefinitely and when the wind blows in the other direction, something will begin to fall noticeably.
Special factors of gold rally
For the first time in 20 years, the price of gold is rising amid an outflow of funds from exchange-traded funds (ETFs). Analysts are wondering what's going on?
Several analysts say none of the factors that have driven gold’s bull run over the past 16 months are the likely catalyst for this recent rally. Those include record levels of central bank buying, Chinese households looking for havens for their money or the war in Ukraine and the Middle East.
The size of the moves in Treasury yields and the dollar did not appear to wholly justify the rally in gold, say analysts. The rate-sensitive two-year yield has fallen 0.12 percentage points since the start of March to 4.5 per cent, still much higher than January’s low of 4.12 per cent, while the greenback is still higher against a basket of six currencies than it was at the start of the year.
The nominal high has come despite outflows from gold-backed exchange traded funds of 21mn ounces in the past year, according to Bloomberg. Rhona O’Connell, analyst at commodities brokerage StoneX, said none of those common factors was behind last week’s move, and instead pointed to momentum traders — computer funds that latch on to rising prices — piling in after gold broke through a key price level. Neither could he attribute it to renewed demand from Chinese retail investors, because the premium for gold in China over London has narrowed, nor renewed central bank buying, as official institutions tend to buy slowly and want to go unnoticed.
The lack of immediately available data on flows in the market has led to suggestions that over-the-counter purchases by stealth buyers of gold, which are hard to trace, have dragged prices up.
In fact, a classic margin call occurs - the forced closure of short positions of speculators who were betting on lower prices. Very large banking groups are likely to exit. In particular, in the United States there were many claims against JPMorgan Bank for manipulations in the adjacent gold market - the silver market. Large American banks, the founders of the Fed, have a vested interest in a stable gold price. Against the backdrop of the endless issue of all leading currencies, the price of gold is the only adequate measure of the value of an American.
But the margin call could not happen by itself; for this to happen, the balance in the market would need to be greatly disrupted, and obviously this was done by the Bank of China. The regulator carefully studied the freezing of Russian assets in Europe and the United States and began to aggressively buy physical gold, removing it from global holdings, thereby reducing the available supply. Following him, other central banks began to export their gold from storage facilities in the USA and Great Britain. As real physical gold turns to moving on the back of delivery demands - paper gold system starts falling apart.
Specific of 2024
Most likely, 2024 could decide two major questions about gold - its future role in global trade as a reserve asset and whether its paper price has been artificially suppressed in Western markets. Regarding the first, it is important to mention that the US and Britain are pushing for the confiscation of Russian (Iranian, Korean and whoever else) assets worth about $300 billion. Obviously, this is fraught with dangerous legal and geopolitical consequences.
In general, this decision was expected to be made on February 24, 2024, but common sense has taken the lead for awhile -
As you understand the question is not about Russia. It might be assets of any other country. The question is with precedent of confiscation (i.e. stealing) of the assets of sovereign country with breaking all legal protocols, contracts etc. Other words, breaking of the core, basics of western legal norms.
Many political experts suggest that this decision is most likely to be made in the summer. The stupidity of this decision is obvious and it makes no economic sense. ONLY political. Or it may be directly “sabotage” for the global dollar system. Firstly, there is something to compensate for these losses from frozen and “not yet frozen” foreign assets within Russia. But this is not even the pont. Most important that Arabs, Chinese, Indians and many others that to be thought as "nowhere to escape from the dollar and euro", really could start worry. “What if we are not pleased with something?”
Potential consequences range from a collapse of the debt markets of Western countries due to the exit of non-residents, to a fall in the exchange rate of the dollar, euro and pound and an inflationary surge, when there is not enough other currency for everyone who wants to exit and everyone will have to take their assets through the purchase of goods (with limited supply) produced in the USA and Europe and assets owned by American and European companies outside these countries (increasing liquidity). And, of course, buy gold and repatriate it.
Third, but no less important, is that the Russian assets under confiscation are predominantly state assets, while the assets of non-residents frozen inside Russia are mostly private ones. There will be dissatisfied people who lost their assets in Russia and did not receive any compensation in return. It is clear that reserves for Russian assets were created 2 years ago, but this will definitely destabilize the situation. Reserves are a probability, and losses are a reality.
The combination of high inflation, another QE and growing budget deficits to save the drowning US economy will make treasury/debt assets useless for storing reserves, due to the impossibility of maintaining purchasing power. It will bring real losses adjusted for inflation. Therefore gold and [exchange-traded ] goods will become an asset where everyone will try to preserve value". we can add the above-mentioned factor of the unreliability of Western jurisdictions and the risk of confiscation.
A bit more about economy
We've considered most important statistics yesterday. Here we add just few points, that could be interesting. According to recent Bain company research, in 2023 the market of direct investments have collapsed to 10 year lows. PE funds now own a record 28,000 unsold companies, i.e. $3.2 trillion in illiquid assets:
And the second one - the purchasing structure of US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance companies ). This could become an issue once the Fed starts cutting rates, as it could mean less demand from yield-sensitive buyers, ultimately leading to a steeper yield curve.
Against the backdrop of rising inflation, this is further confirmation of the thesis about the inflation of cryptocurrencies, gold and raw materials in conditions of an overvalued stock market and uninteresting bond yields. The problem is, that households resources are near the exhausting point. Scenario that the Fed could even raise the rate instead doesn't look impossible, and with ended BTFP programme the hole in bank balances will increase. It could increase even without rate hike. It could happen if longer-term rates just start moving higher as a by-product of bonds supply boost from the US Treasury.
Conclusion:
So, together with important things that we've considered yesterday, we see few alternatives to the gold, at least in a role of the asset that could preserve wealth in long-term perspectives. Yes, technical pullbacks unavoidable, but you do not care when you do not use the leverage and just keep physical gold in your pocket. We keep our long-term bullish view on gold and, actually are just entering in active stage. In fact when 3% US GDP growth is generated by 8% budget deficit growth - this is the bad deal, making gold flawless asset for wealth preservation and long-term investment. Situation is going to be even worse. This was brushed official data. In reality I bet that real numbers are worse.
It seems that Gold now stands among few assets that has no flaws, or maybe the only asset. Despite solid pressure from recent statistics we haven't seen any strong downside retracement. In recent few weeks gold was showing outstanding performance, supported by not only geopolitical tensions but worryings around US Dollar future as reserve currency. Indirectly this is confirmed by activity of Central Banks, that buying gold constantly and in big volumes. Gold has lost relation with the assets of ETFs. And this process has the background.
Market overview
Reflecting bullish sentiment, COMEX gold speculators raised their net long positions by 63,018 contracts to 131,060 in the week ended March 5, data on Friday showed. That rise in open interest implies investors are getting more bullish about gold, rather than just closing out existing short positions.
"With large speculators having increased net-long exposure at their fastest weekly pace in 3.5 years last Tuesday, gold is clearly in demand and not a market to short for any length of time whilst traders expect Fed cuts," City Index senior analyst Matt Simpson said.
U.S. consumer prices increased solidly in February, suggesting some stickiness in inflation. Data showed the Consumer Price Index (CPI) rose 0.4% on a monthly basis in February. Annually, it increased 3.2%, above the 3.1% forecast.
"CPI comes in a bit sweaty but the market was expecting a high print so the initial reaction was a bit muted but prices have been volatile since," said Tai Wong, a New York-based independent metals trader. He said gold bulls would still look for reasons to drive it higher. "Now focus will shift to next week's Fed meeting where there will be an updated dot plot," Wong said, referring to central bankers' interest rate forecasts.
In the short run, prices will see some consolidation and probably stabilise around $2,100 level and will break above $2,200 by the end of the second quarter this year, said Aakash Doshi, head of commodities, North America at Citi Research.
"The situation for gold bulls right now is a win-win, if Fed cuts rates, gold jumps substantially, if they don't cut rates, there will be concerns on inflation that could push gold higher," Bob Haberkorn, senior market strategist at RJO Futures, said, adding that gold's upside today shows buying on dips.
Gold slid on Thursday after a larger-than-expected rise in February's U.S. producer price index (PPI) cooled expectations of early rate cuts by the Federal Reserve, boosting Treasury yields and the dollar. U.S. producer prices increased more than expected in February amid a surge in the cost of goods like gasoline and food, which could fan fears that inflation is picking up again.
"I expect to see continued pressure (on gold), with all of the data showing the U.S. economy is strong, the labor market still strong," said Chris Gaffney, president of world markets at EverBank. It really makes investors question just how quickly the Fed's going to decide to start cutting (rates)."
However, traders continue to bet on interest rate cuts in June, pricing in about a 60% chance, compared with 72% before the CPI data earlier this week, according to the CME Group's FedWatch Tool, opens new tab. The Fed is expected to hold rates steady at its policy meeting next week, but the focus will be on the "dot plot" projections.
"Gold is an uncertainty hedge, an inflation hedge with higher inflation and more uncertainty. I think that provides a good floor for precious metals pricing," Gaffney added.
Meanwhile, US retail sales rose by less than forecast after a steep drop to start the year. The PPI readings plus the consumer price index released earlier this week signal that inflation remains sticky. That makes for a bumpy road ahead for the Fed and its 2% inflation target.
Gold prices held steady on Friday as they looked set to log their first weekly drop in four as investors lowered expectations of a U.S. interest rate cut after data over the week showed bubbling price pressures.
"Gold has already priced in whatever positive boost it would get from expectations that interest rates are going down... if inflation starts to kick higher again, it means that policymakers are going to have to keep monetary policy more restrictive for longer," said Everett Millman, chief market analyst at Gainesville Coins. "Although gold does not particularly like a high interest rate environment, if the reasons for interest rates to stay that high is because inflation is running hot... that naturally means people will again turn to gold," Millman added.
Fed officials “are and have been cautious for a while. The PPI number did not change that outlook,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S."We increase our average gold price forecast for 2024 from $2,090/toz to $2,180/toz, targeting a move to $2,300/toz by year-end," Goldman Sachs wrote in a note.
Still, despite the Thursday pullback, bullion is still holding at elevated levels following a prolonged rise. A dip below $2,135 may trigger long liquidation by speculators such as hedge funds and money managers, according to Hansen.
Gold has finally broken out of the range in which it has been stuck since the beginning of this decade, reaching a record $2,195 per troy ounce this month. A surge in buying in China is likely behind the recent rally.
Swiss exports to China — usually a good proxy of Chinese demand for gold — nearly tripled in January (according to the Swiss Federal Customs Administration), as consumers sought a hedge against turmoil in the country’s stock market and property sector. With the nation’s biggest state-owned lenders slashing deposit rates, putting money in the bank has become relatively less attractive compared with bullion.
In addition, China is among the central banks buying gold to reduce its dependence on the dollar. China has been among the biggest stockpilers of gold in the past year as nations from Poland to Singapore diversify their financial reserves by adding the precious metal. This indicates that the Chinese are seeking refuge in the most ancient form of financial security after a difficult period for the country's property and stock markets. There are other signs that demand for gold is growing overall. Analysts at Societe Generale SA reported record monthly fund manager inflows into gold in February of $11.3 billion.
In contrast to persistent central bank demand for the precious metal, gold-backed exchange-traded funds have cut their holdings for seven consecutive months.Those ETF holdings are likely to stabilize, according to James Steel, an analyst at HSBC Holdings Plc. That could add further momentum to bullion.
Gold prices may continue to rise, but analysts expect silver to soon take the lead. Gold and silver prices have traditionally shown a strong positive correlation, although silver is sometimes called the "poor cousin" of gold. ️Earlier this year, the Silver Institute said in a report that global silver demand is expected to reach 1.2 billion ounces in 2024, the second-highest level ever. The institute expects silver to have a “tremendous year,” especially from a demand perspective. Let us add that silver has an important mark of $26, which someone stubbornly defended with all their might last year. Its breakdown opens the way to any new heights.
In fact, the speed and scale of the move caught many market watchers off guard, particularly in the absence of any significant change in the outlook for when the Federal Reserve would start cutting rates, which has been a key focus. To be sure, the backdrop looks favorable for gold with geopolitical tensions more fraught than ever. And gold’s performance over the past year has surprised some veteran market watchers well before the current surge, as prices remained at elevated levels despite spiking real interest rates.
Gold typically has an inverse relationship with bond yields, but has been supported by strong central bank buying and demand from consumers in China in particular. US real yields have been tracking down since last October, but gold’s recent jump has far outpaced what might have been expected.
So, now we deal with the paradox of investment growth. An unusual situation is emerging on the market: gold, which traditionally grows during periods of falling stock market, is forming a different pattern. In fact we have - gold at highs, S&P 500 at highs, at least the dollar is not falling and Bitcoin broke through $70,000. It turns out that no matter where you invest, everything is good. But it's not that simple. Each point has its own explanation. This system cant not work indefinitely and when the wind blows in the other direction, something will begin to fall noticeably.
Special factors of gold rally
For the first time in 20 years, the price of gold is rising amid an outflow of funds from exchange-traded funds (ETFs). Analysts are wondering what's going on?
Several analysts say none of the factors that have driven gold’s bull run over the past 16 months are the likely catalyst for this recent rally. Those include record levels of central bank buying, Chinese households looking for havens for their money or the war in Ukraine and the Middle East.
It has been the quietest, most confusing rally,” said Nicky Shiels, precious metals analyst at MKS Pamp, a Swiss gold refinery and trading house. “What took it from $2,000 [last month] to above $2,150 is the head-scratching part.”
The size of the moves in Treasury yields and the dollar did not appear to wholly justify the rally in gold, say analysts. The rate-sensitive two-year yield has fallen 0.12 percentage points since the start of March to 4.5 per cent, still much higher than January’s low of 4.12 per cent, while the greenback is still higher against a basket of six currencies than it was at the start of the year.
“Previously when we have had a rally of $70 to $80, it is usually accompanied by a new catalyst or risk event,” said Suki Cooper, analyst at Standard Chartered. “But this time there has been no significant shift in current events.”
The nominal high has come despite outflows from gold-backed exchange traded funds of 21mn ounces in the past year, according to Bloomberg. Rhona O’Connell, analyst at commodities brokerage StoneX, said none of those common factors was behind last week’s move, and instead pointed to momentum traders — computer funds that latch on to rising prices — piling in after gold broke through a key price level. Neither could he attribute it to renewed demand from Chinese retail investors, because the premium for gold in China over London has narrowed, nor renewed central bank buying, as official institutions tend to buy slowly and want to go unnoticed.
The lack of immediately available data on flows in the market has led to suggestions that over-the-counter purchases by stealth buyers of gold, which are hard to trace, have dragged prices up.
“It’s the first time I’ve sat down discounting stuff rather than just saying what it is” that is moving the price, Bernard Dahdah, senior commodities analyst at French bank Natixis said. “The ones who would be doing this would be a big hedge fund or asset manager” using derivatives.
In fact, a classic margin call occurs - the forced closure of short positions of speculators who were betting on lower prices. Very large banking groups are likely to exit. In particular, in the United States there were many claims against JPMorgan Bank for manipulations in the adjacent gold market - the silver market. Large American banks, the founders of the Fed, have a vested interest in a stable gold price. Against the backdrop of the endless issue of all leading currencies, the price of gold is the only adequate measure of the value of an American.
But the margin call could not happen by itself; for this to happen, the balance in the market would need to be greatly disrupted, and obviously this was done by the Bank of China. The regulator carefully studied the freezing of Russian assets in Europe and the United States and began to aggressively buy physical gold, removing it from global holdings, thereby reducing the available supply. Following him, other central banks began to export their gold from storage facilities in the USA and Great Britain. As real physical gold turns to moving on the back of delivery demands - paper gold system starts falling apart.
Specific of 2024
Most likely, 2024 could decide two major questions about gold - its future role in global trade as a reserve asset and whether its paper price has been artificially suppressed in Western markets. Regarding the first, it is important to mention that the US and Britain are pushing for the confiscation of Russian (Iranian, Korean and whoever else) assets worth about $300 billion. Obviously, this is fraught with dangerous legal and geopolitical consequences.
In general, this decision was expected to be made on February 24, 2024, but common sense has taken the lead for awhile -
“International banks have warned the UK government it must set the legal guidelines before seizing billions of pounds of Russian assets, otherwise it risks upheaval for the global financial system and exposes institutions to legal action. Now on its second war anniversary, a global campaign by politicians and activists is calling for assets to be confiscated and the proceeds sent to Kyiv. US Secretary of State Antony Blinken and his British counterpart David Cameron are among those who have called for the confiscation, while political leaders in the EU have been more cautious. About two-thirds of the Russian central bank's $300 billion is stuck in Euroclear."
As you understand the question is not about Russia. It might be assets of any other country. The question is with precedent of confiscation (i.e. stealing) of the assets of sovereign country with breaking all legal protocols, contracts etc. Other words, breaking of the core, basics of western legal norms.
Many political experts suggest that this decision is most likely to be made in the summer. The stupidity of this decision is obvious and it makes no economic sense. ONLY political. Or it may be directly “sabotage” for the global dollar system. Firstly, there is something to compensate for these losses from frozen and “not yet frozen” foreign assets within Russia. But this is not even the pont. Most important that Arabs, Chinese, Indians and many others that to be thought as "nowhere to escape from the dollar and euro", really could start worry. “What if we are not pleased with something?”
Potential consequences range from a collapse of the debt markets of Western countries due to the exit of non-residents, to a fall in the exchange rate of the dollar, euro and pound and an inflationary surge, when there is not enough other currency for everyone who wants to exit and everyone will have to take their assets through the purchase of goods (with limited supply) produced in the USA and Europe and assets owned by American and European companies outside these countries (increasing liquidity). And, of course, buy gold and repatriate it.
Third, but no less important, is that the Russian assets under confiscation are predominantly state assets, while the assets of non-residents frozen inside Russia are mostly private ones. There will be dissatisfied people who lost their assets in Russia and did not receive any compensation in return. It is clear that reserves for Russian assets were created 2 years ago, but this will definitely destabilize the situation. Reserves are a probability, and losses are a reality.
The combination of high inflation, another QE and growing budget deficits to save the drowning US economy will make treasury/debt assets useless for storing reserves, due to the impossibility of maintaining purchasing power. It will bring real losses adjusted for inflation. Therefore gold and [exchange-traded ] goods will become an asset where everyone will try to preserve value". we can add the above-mentioned factor of the unreliability of Western jurisdictions and the risk of confiscation.
A bit more about economy
We've considered most important statistics yesterday. Here we add just few points, that could be interesting. According to recent Bain company research, in 2023 the market of direct investments have collapsed to 10 year lows. PE funds now own a record 28,000 unsold companies, i.e. $3.2 trillion in illiquid assets:
And the second one - the purchasing structure of US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance companies ). This could become an issue once the Fed starts cutting rates, as it could mean less demand from yield-sensitive buyers, ultimately leading to a steeper yield curve.
Against the backdrop of rising inflation, this is further confirmation of the thesis about the inflation of cryptocurrencies, gold and raw materials in conditions of an overvalued stock market and uninteresting bond yields. The problem is, that households resources are near the exhausting point. Scenario that the Fed could even raise the rate instead doesn't look impossible, and with ended BTFP programme the hole in bank balances will increase. It could increase even without rate hike. It could happen if longer-term rates just start moving higher as a by-product of bonds supply boost from the US Treasury.
Conclusion:
So, together with important things that we've considered yesterday, we see few alternatives to the gold, at least in a role of the asset that could preserve wealth in long-term perspectives. Yes, technical pullbacks unavoidable, but you do not care when you do not use the leverage and just keep physical gold in your pocket. We keep our long-term bullish view on gold and, actually are just entering in active stage. In fact when 3% US GDP growth is generated by 8% budget deficit growth - this is the bad deal, making gold flawless asset for wealth preservation and long-term investment. Situation is going to be even worse. This was brushed official data. In reality I bet that real numbers are worse.