Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Fundamentals
Gold once again is becoming absolutely unique asset that totally ignores all economical drivers. There are a lot of talks right now about geopolitics, safe haven assets and other stuff. Though it is very difficult to find economical factors in a bulk of geopolitics. But we will try. Recent action is very typical. It shows that when the World enters in a stripe of instability, you never know where the next "boom" happens. From that stand point it was seemed that gold is not needed yet and a lot of other assets around that are much more attractive. And this is fair conclusion when everything is OK. But when it is already "not OK", suddenly could happen situations like this. And this is valuable argument why we recommend to buy physical gold. No doubts, we probably will see few more drawdown on gold on a background of US Dollar rush, but it will be temporal and could even be negated by supportive factors of other sort, that we see now. Despite high rates, despite growth of real rate - gold is raising due tough geopolitical situation.
Market overview
This week, once again gold in China jumped to trade at the second-highest premium on record against the international benchmark, as mainland markets reopened following the Golden Week holiday. The Shanghai spot price was more than $112 an ounce higher than levels seen in London on Monday, according to Bloomberg calculations based on exchange data. The gap between the two markets has only been wider one other time, when Chinese prices last month blew out to trade at a premium of more than $120 over London as Beijing restricted shipments in a move that squeezed the market.
Yet the precious metal on Monday rose as high as 2.7% on the Shanghai Gold Exchange — the biggest jump in almost seven weeks — in a signal of still persistent appetite. That compared to a gain of as much as 1.2% for the international benchmark due to haven buying in the wake of the Hamas attack on Israel. Many Chinese buyers are flocking to gold as a refuge from the impacts of a weakening currency and an increasingly uncertain economic outlook, Bloomberg economists David Qu and Chang Shu wrote in a report last month.
The precious metal gained as much as 1.7% on Monday as financial markets braced for headwinds and volatility from the shock attack by Gaza militants. Bullion was caught in a period of low volatility for much of this year despite surging bond yields, which would usually put the precious metal under major pressure.
The precious metal has seen support in recent days from a shift in mindset over the rate outlook. US policymakers are coalescing around the idea that the recent surge in US Treasury yields — which reversed on Tuesday — may substitute for additional increases in their benchmark interest rate. Higher rates are generally negative for non-interest bearing gold.
The metal’s longer-term performance will depend on whether there is deeper economic and financial fallout from the Middle East crisis, RBC Capital Markets LLC strategist Christopher Louney said in a note. The bank in September raised its base-case outlook for gold on a view that monetary policy will eventually turn as economic growth slows.
A sharper escalation of the conflict in the Middle East could bring Israel into a direct clash with Iran, a supplier of arms and money to Hamas, which the US and the European Union have designated a terrorist group. In that scenario, Bloomberg Economics estimates oil prices could soar to $150 and global growth drop to 1.7% — a recession that takes about $1 trillion off world output.
Jamie Dimon warned of serious geopolitical risks as Israel prepared for a ground assault on Gaza.
Analysts were focused on the impact on energy prices as they tried to assess the ripple effects. Oil prices jumped more than $4 a barrel in early Asian trade on Monday.
David Kotok, chair and chief investment officer at Cumberland Advisors in Sarasota, Florida, said that the situation was concerning as the United States is weakened by dysfunction in Washington. Republicans are looking for a successor to ousted Speaker Kevin McCarthy of the House of Representatives, and a budget showdown looms.
US consumers’ year-ahead inflation expectations rose sharply in early October, driving a steep deterioration in Americans’ views of their finances as well as sentiment. Former Federal Reserve Bank of St. Louis President James Bullard said investors were too complacent on inflation and the central bank might have to increase interest rates as high as 6.5% if it starts to rise again.
Gold prices jumped more than 3% on Friday and were poised for their best week in seven months as the intensifying conflict in the Middle East sent investors scurrying for safe-haven assets. Zero-yield bullion got an additional fillip from expectations that the U.S. interest rates may have peaked. This fuelled inflows into assets considered to be safe havens such as gold.
U.S. consumer prices increased in September amid higher costs for rent and gasoline, but underlying inflation is slowing, data showed on Thursday.
Traders currently see around a 69% chance of the Fed leaving interest rates unchanged this year, according to the CME Fedwatch tool.
ASKING RIGHT QUESTIONS
There were a lot of comments on the topic of conflict been made already, as well as the reasons for the events - so we do not want to re-tell the same things that you could read in media. But there is no doubt that the financial, logistical, and geopolitical consequences will be enormous. It became clear, in particular, that there is no hope for restoring stability in the global economy.
Today it is obvious that the confrontation in the world is only intensifying. The key question is where the US strike will be directed. There are several options, the main one is China's interests in Southeast Asia. But there are many who want to redirect the American armed forces to Iran. But the events of the last week have shown that the United States understands the real state of affairs and attempts to direct them to Iran do not work.
Another very important topic is the contradiction of the interests of the United States and Great Britain in the Middle East. Roughly speaking, the US wants to preserve Israel and weaken Turkey, the UK — on the contrary. And this contradiction has come to the surface and it is no longer possible to reconcile the opposing positions. Events may develop either way, or even together (the destruction of both Israel and Turkey), but it is no longer possible to restore the situation of recent years. Just a brief example - Turkey officially supports HAMAS,while HAMAS released official video where they told that part of armor has come from Ukraine, but the only way how it could happen - by sea under cover of "grain trade" which hints on UK and Turkey participation:
We will not elaborate on this topic, it clearly does not relate to macroeconomics, but since it has a tremendous impact on the development of the economic situation, it was impossible to remain silent. It will be possible to talk about more or less distinct consequences only two weeks later, and certainly after the start of the Israeli ground operation in Gaza and the actions of other potential participants in the conflict. Now we need to keep an eye on the steps of major players in region - Israel (+US), Iran, S. Arabia and Turkey. For now any efforts of T. Blinken of negotiations with major payers, such as S. Arabia has failed.
In general the White House has developed a creative exit strategy from the Middle East:
Meantime, despite the “sweet” yields on European and American bonds, the world’s central banks have been buying gold all year. Summer net sales do not count - it was the Turkish Central Bank that struggled with the falling lira. The Bank of China is leading the purchase of gold:
the Central Banks of Poland, Uzbekistan, and India are actively buying. At the same time, it is clear to the naked eye that the trend of purchasing gold from the Central Bank is growing, even though bond yields are also growing, offering profitable investments.
Central banks, as professional players, understand that the next (exhausted after 2008) economic cycle is coming to an end. Ahead, the collapse of the debt pyramids of developing countries will obviously greatly affect Europe (Italy and Greece). Against this background, bond yields that seem quite good today will appear in a few months to be completely inadequate to the new crisis situation. Gold, as an eternal value, if it is stored in the holdings of national central banks (and not in London), cannot be seized, is easily sold and converted into any currency.
Recent reaction on crude oil could explain by possible reduction in oil supplies from Iran and, in general, a mess in the Persian Gulf. But Americans will now have to borrow even more money to support two hot conflicts. Current rate of increase in government debt: trillion per month. With a total debt of $33.5 trillion. At the same time, payments for the same oil are rapidly moving away from the dollar. In such conditions, oil simply cannot become cheaper. The petrodollar is shaking. Moreover, as it eventually turned out, the entire collapse in oil prices in recent weeks was based solely on faith in the J. Biden's deal with the Saudis that eventually failed.
Traders start asking proper questions. As we've mentioned yesterday - Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds. Investors long shrugged off U.S. deficits, but a torrent of Treasury's is testing the bond market. It sounds like invitation to pay out some accounts that bonds supply is becoming too much. US bonds auction yield has jumped 10% up to 4.83%.
Gold is now the only asset in our world where there is no systemic risk. Therefore, even despite such a rapid increase in profitability, gold quotes are close to the level of $1900, which is very unconventional for this market. That is, the growth of real yields has always killed gold, just to the floor. Now it has barely pressed down from 1930 to 100 dollars, it is already rebounding.
And as soon as the Fed pauses, there will immediately be the next step in the growth of gold. There it goes to 2800 - 3200. Silver will follow gold. So I would wait for this moment. It's already on its way, from my point of view. The Fed started talking about how rising real yields reduce the likelihood of a rate hike— these are the first signs that they are starting to get sick.
BlackRock has warned that the worst bond crash in history is still to come:
Chances that current reversal on gold market could become the major one are raising. Even massive headwinds from financial factors, such as a high interest rates, might be limited because the geopolitical situation stands in a road to escalation. Besides, it is more and more concern raising among investors around the US debt. Investors start suspect that jump in the yield might be not the result of the Fed policy only. Raising debt supply and concern of its credit quality and ability of the government to manage it might be and probably are among the other reasons of explosive rates jump. Taking it all together, now any deep on gold market becomes even more attractive for accumulation of physical gold. As many analysts suggest, including BlackRock, the major events are stand ahead. And it is difficult to argue with this.
Gold once again is becoming absolutely unique asset that totally ignores all economical drivers. There are a lot of talks right now about geopolitics, safe haven assets and other stuff. Though it is very difficult to find economical factors in a bulk of geopolitics. But we will try. Recent action is very typical. It shows that when the World enters in a stripe of instability, you never know where the next "boom" happens. From that stand point it was seemed that gold is not needed yet and a lot of other assets around that are much more attractive. And this is fair conclusion when everything is OK. But when it is already "not OK", suddenly could happen situations like this. And this is valuable argument why we recommend to buy physical gold. No doubts, we probably will see few more drawdown on gold on a background of US Dollar rush, but it will be temporal and could even be negated by supportive factors of other sort, that we see now. Despite high rates, despite growth of real rate - gold is raising due tough geopolitical situation.
Market overview
This week, once again gold in China jumped to trade at the second-highest premium on record against the international benchmark, as mainland markets reopened following the Golden Week holiday. The Shanghai spot price was more than $112 an ounce higher than levels seen in London on Monday, according to Bloomberg calculations based on exchange data. The gap between the two markets has only been wider one other time, when Chinese prices last month blew out to trade at a premium of more than $120 over London as Beijing restricted shipments in a move that squeezed the market.
Yet the precious metal on Monday rose as high as 2.7% on the Shanghai Gold Exchange — the biggest jump in almost seven weeks — in a signal of still persistent appetite. That compared to a gain of as much as 1.2% for the international benchmark due to haven buying in the wake of the Hamas attack on Israel. Many Chinese buyers are flocking to gold as a refuge from the impacts of a weakening currency and an increasingly uncertain economic outlook, Bloomberg economists David Qu and Chang Shu wrote in a report last month.
The precious metal gained as much as 1.7% on Monday as financial markets braced for headwinds and volatility from the shock attack by Gaza militants. Bullion was caught in a period of low volatility for much of this year despite surging bond yields, which would usually put the precious metal under major pressure.
The precious metal has seen support in recent days from a shift in mindset over the rate outlook. US policymakers are coalescing around the idea that the recent surge in US Treasury yields — which reversed on Tuesday — may substitute for additional increases in their benchmark interest rate. Higher rates are generally negative for non-interest bearing gold.
The metal’s longer-term performance will depend on whether there is deeper economic and financial fallout from the Middle East crisis, RBC Capital Markets LLC strategist Christopher Louney said in a note. The bank in September raised its base-case outlook for gold on a view that monetary policy will eventually turn as economic growth slows.
A sharper escalation of the conflict in the Middle East could bring Israel into a direct clash with Iran, a supplier of arms and money to Hamas, which the US and the European Union have designated a terrorist group. In that scenario, Bloomberg Economics estimates oil prices could soar to $150 and global growth drop to 1.7% — a recession that takes about $1 trillion off world output.
Jamie Dimon warned of serious geopolitical risks as Israel prepared for a ground assault on Gaza.
Analysts were focused on the impact on energy prices as they tried to assess the ripple effects. Oil prices jumped more than $4 a barrel in early Asian trade on Monday.
The Hamas attack was openly praised by Iran and by Hezbollah, Iran's Lebanese allies.
David Kotok, chair and chief investment officer at Cumberland Advisors in Sarasota, Florida, said that the situation was concerning as the United States is weakened by dysfunction in Washington. Republicans are looking for a successor to ousted Speaker Kevin McCarthy of the House of Representatives, and a budget showdown looms.
US consumers’ year-ahead inflation expectations rose sharply in early October, driving a steep deterioration in Americans’ views of their finances as well as sentiment. Former Federal Reserve Bank of St. Louis President James Bullard said investors were too complacent on inflation and the central bank might have to increase interest rates as high as 6.5% if it starts to rise again.
Gold prices jumped more than 3% on Friday and were poised for their best week in seven months as the intensifying conflict in the Middle East sent investors scurrying for safe-haven assets. Zero-yield bullion got an additional fillip from expectations that the U.S. interest rates may have peaked. This fuelled inflows into assets considered to be safe havens such as gold.
U.S. consumer prices increased in September amid higher costs for rent and gasoline, but underlying inflation is slowing, data showed on Thursday.
Traders currently see around a 69% chance of the Fed leaving interest rates unchanged this year, according to the CME Fedwatch tool.
ASKING RIGHT QUESTIONS
There were a lot of comments on the topic of conflict been made already, as well as the reasons for the events - so we do not want to re-tell the same things that you could read in media. But there is no doubt that the financial, logistical, and geopolitical consequences will be enormous. It became clear, in particular, that there is no hope for restoring stability in the global economy.
Today it is obvious that the confrontation in the world is only intensifying. The key question is where the US strike will be directed. There are several options, the main one is China's interests in Southeast Asia. But there are many who want to redirect the American armed forces to Iran. But the events of the last week have shown that the United States understands the real state of affairs and attempts to direct them to Iran do not work.
Another very important topic is the contradiction of the interests of the United States and Great Britain in the Middle East. Roughly speaking, the US wants to preserve Israel and weaken Turkey, the UK — on the contrary. And this contradiction has come to the surface and it is no longer possible to reconcile the opposing positions. Events may develop either way, or even together (the destruction of both Israel and Turkey), but it is no longer possible to restore the situation of recent years. Just a brief example - Turkey officially supports HAMAS,while HAMAS released official video where they told that part of armor has come from Ukraine, but the only way how it could happen - by sea under cover of "grain trade" which hints on UK and Turkey participation:
We will not elaborate on this topic, it clearly does not relate to macroeconomics, but since it has a tremendous impact on the development of the economic situation, it was impossible to remain silent. It will be possible to talk about more or less distinct consequences only two weeks later, and certainly after the start of the Israeli ground operation in Gaza and the actions of other potential participants in the conflict. Now we need to keep an eye on the steps of major players in region - Israel (+US), Iran, S. Arabia and Turkey. For now any efforts of T. Blinken of negotiations with major payers, such as S. Arabia has failed.
In general the White House has developed a creative exit strategy from the Middle East:
- normalize relations between Israel and Saudi Arabia, two of the United States’ most important partners in the region
- turn them against Iran
- keep Saudi Arabia out of China's orbit
Meantime, despite the “sweet” yields on European and American bonds, the world’s central banks have been buying gold all year. Summer net sales do not count - it was the Turkish Central Bank that struggled with the falling lira. The Bank of China is leading the purchase of gold:
the Central Banks of Poland, Uzbekistan, and India are actively buying. At the same time, it is clear to the naked eye that the trend of purchasing gold from the Central Bank is growing, even though bond yields are also growing, offering profitable investments.
Central banks, as professional players, understand that the next (exhausted after 2008) economic cycle is coming to an end. Ahead, the collapse of the debt pyramids of developing countries will obviously greatly affect Europe (Italy and Greece). Against this background, bond yields that seem quite good today will appear in a few months to be completely inadequate to the new crisis situation. Gold, as an eternal value, if it is stored in the holdings of national central banks (and not in London), cannot be seized, is easily sold and converted into any currency.
Recent reaction on crude oil could explain by possible reduction in oil supplies from Iran and, in general, a mess in the Persian Gulf. But Americans will now have to borrow even more money to support two hot conflicts. Current rate of increase in government debt: trillion per month. With a total debt of $33.5 trillion. At the same time, payments for the same oil are rapidly moving away from the dollar. In such conditions, oil simply cannot become cheaper. The petrodollar is shaking. Moreover, as it eventually turned out, the entire collapse in oil prices in recent weeks was based solely on faith in the J. Biden's deal with the Saudis that eventually failed.
Traders start asking proper questions. As we've mentioned yesterday - Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds. Investors long shrugged off U.S. deficits, but a torrent of Treasury's is testing the bond market. It sounds like invitation to pay out some accounts that bonds supply is becoming too much. US bonds auction yield has jumped 10% up to 4.83%.
Gold is now the only asset in our world where there is no systemic risk. Therefore, even despite such a rapid increase in profitability, gold quotes are close to the level of $1900, which is very unconventional for this market. That is, the growth of real yields has always killed gold, just to the floor. Now it has barely pressed down from 1930 to 100 dollars, it is already rebounding.
And as soon as the Fed pauses, there will immediately be the next step in the growth of gold. There it goes to 2800 - 3200. Silver will follow gold. So I would wait for this moment. It's already on its way, from my point of view. The Fed started talking about how rising real yields reduce the likelihood of a rate hike— these are the first signs that they are starting to get sick.
BlackRock has warned that the worst bond crash in history is still to come:
- The US bond market suffered its biggest sell-off, with benchmark bond yields rising 5x for the first time since late 2020, but it's not over yet and further turmoil awaits the market, according to BlackRock, writes Business Insider.
- The reasons for this are inflation, the Fed’s long-term interest rate policy and the growing debt burden in the United States. The world's largest asset manager said the US bond market is in the midst of an unprecedented three-year collapse with no end in sight.
- The rise in Treasury yields has accelerated in recent weeks, spooking traders across all asset classes. The concerns come as the central bank has raised its key rate by more than 500 basis points since the start of 2022 to curb pressure on consumer prices and has no plans to lower it yet.
- BlackRock itself said that it avoids investing in long-term US bonds. To recap: Yields rise when bond prices fall.
- “We continue to avoid long-term US bonds even after their sharp rise. Why? "We think the term premium - the compensation investors demand for the risk of holding long-term bonds - will continue to rise, pushing yields higher as inflation rises, interest rates rise and debt loads are high."
- A unique situation has arisen - a global fund of funds publicly expresses concerns about the safety of investing in US government securities. A very interesting intelligence sign.
Chances that current reversal on gold market could become the major one are raising. Even massive headwinds from financial factors, such as a high interest rates, might be limited because the geopolitical situation stands in a road to escalation. Besides, it is more and more concern raising among investors around the US debt. Investors start suspect that jump in the yield might be not the result of the Fed policy only. Raising debt supply and concern of its credit quality and ability of the government to manage it might be and probably are among the other reasons of explosive rates jump. Taking it all together, now any deep on gold market becomes even more attractive for accumulation of physical gold. As many analysts suggest, including BlackRock, the major events are stand ahead. And it is difficult to argue with this.
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