Sive Morten
Special Consultant to the FPA
- Messages
- 22,078
FUNDAMENTALS
Impact on gold market this week was a bit different, compares to FX and other assets, just because gold is not interest-bearing asset and has more sensitivity to interest rates that jumped strongly. Impact from coming Fed meeting also will be more powerful probably. Yesterday we considered possible changes in ECB and the Fed policy and how could it impact on dollar and EUR. But for gold market there are other factors are important as well.
MARKET OVERVIEW
Gold rose along with US stocks and bonds, despite hotter-than-expected inflation data that prompted traders to sharply increase bets on a Federal Reserve rate hike next week. A gauge of the dollar and two-year Treasury yield similarly whipsawed as traders rapidly reassessed the implications of the print. Swaps traders upped their bets on the chance of a rate hike at the Fed’s Sept. 15-16 gathering to around 90% amid elevated inflation data, up from a roughly two-in-three chance earlier Friday.
The gold market has been under pressure this week as rising oil prices re-stoked wider inflation concerns and kept rate hike bets alive. Some traders had built bearish positions ahead of the data release in anticipation of the start of a monetary tightening cycle, only to buy them back after concluding the hotter-than-expected reading was likely to prompt a one-off rate hike rather than a sustained tightening cycle.
LSEG Lipper data showed that in commodity funds, gold and precious metals funds recorded net sales of $537 million after eight consecutive weeks of inflows.
Prices fell nearly 2% on Thursday after the U.S. Producer Price Index data showed prices increased in line with expectations in August. PPI for final demand rose 0.4% last month after an upwardly revised 0.1% gain in July, the Labor Department's Bureau of Labor Statistics said on Thursday. The Consumer Price Index rose 0.4% last month after edging up 0.1% in July, the labor department's Bureau of Labor Statistics said on Friday. Oil prices fell, but remained on course for a weekly gain.
Higher oil prices stoke inflation fears, strengthening rate-hike bets.
Analysts at Standard Chartered Plc analysts see gold prices recovering in the coming months as the focus shifts to potential de-dollarization and government interventions in the bond market. The perception that efforts to constrain US borrowing costs in the face of swollen deficits and debt levels would gradually erode the value of the dollar was a key driver of gold’s roughly 10% gain in August, in a revival of the so-called “debasement trade.” On Wednesday, the Treasury underwhelmed markets with a plan to buy up to $6 billion of longer-dated debt, which failed to halt a sell-off in long-dated bonds.
A majority of economists polled by Reuters expect the Fed to hold rates steady at its September 15-16 meeting and for the rest of the year. Economists' conviction around their forecasts more broadly has waned considerably since Fed Chairman Kevin Warsh adopted a policy of providing little or no guidance on what is coming next from the world's most powerful central bank. Given that there are generally more forecasters now expecting higher rates this year than in the previous poll, there is a risk that a consensus for no change in rates flips to a hike, based on conversations with several contributors.
About 70% of economists, 65 of 93, in the September 4-9 Reuters poll expect the federal funds rate to remain in the 3.50%-3.75% range next week. That reading is down from 90% in August. The rest expect a quarter-percentage-point increase, which would be the first since July 2023.
About 56% of economists, 52 of 93, predict rates will remain on hold for the whole year, down from 80% in recent months. The rest expect at least one hike, more than double the share last month. Among primary dealers, the split is a bit closer on whether or not the Fed will raise rates this year. Half of those polled, 11, expect rates to remain on hold this year, while 10 expect at least one hike and one contributor, Jefferies, expects the U.S. central bank to cut rates.
Yields on the interest-rate-sensitive two-year Treasury notes have surged around 20 basis points since Warsh's Jackson Hole speech, while the yield on the 10-year Treasury note is trading close to 5%. Trump administration officials have made it clear that 5% is a line they do not want crossed. September has been an important month for the Fed in recent years. It launched its latest easing cycle in September 2024 and resumed cutting rates last September after a roughly eight-month pause.
Trump, who has one of the lowest approval ratings on record in presidential opinion polls, recently threatened wide-reaching trade restrictions unless the Fed cuts rates. Economists now forecast annual PCE inflation at 3.5% this year and 2.4% in 2027, unchanged from last month's estimates, with inflation unlikely to return to the Fed's 2% target before 2028. Unemployment is expected to remain near the 4.1% level.
MARKET COMMENTS
It seems that buyers of U.S. bonds are not simply moving to risk-free assets like Treasury bonds, but are also demanding compensation for inflation by accepting lower yields. What scoundrels! As we've been saying for three years, and will continue to say, money invested in Treasury bonds is losing and will continue to lose its purchasing power. There's no escaping that. Therefore, gold should become an increasingly obvious asset that can fulfill this function.
Dated Brent quotes reached $120.1 per barrel on Thursday. Expensive diesel will contribute to inflation through logistics and agriculture. We will continue to observe... but inflationary risks in the world are still only going up. Previously, everyone feared a rise in the Fed's interest rate. In this way, the US (and, in fact, the global) central bank cooled demand and, at the same time, sucked up all the world's capital. But now the situation has changed dramatically, because the core of the world's problems lies in the dollar. Debt has grown to such a level that the US can't even service it.
And if, almost 50 years ago, it was possible to fight dollar inflation by raising interest rates to 20% (as Volcker did in 1981), then now the volume of debt is so large that even raising interest rates to 5% (as holders of two-year treasuries are demanding now) would be a catastrophe for the US. And raising them (even if it's 2-3 times in a row) by 0.25 percentage points is like a poultice on a corpse. It's of little use, and this decision will only provoke speculators.
And so, the market is not just confident, it is literally waiting for the Fed to start monetizing the debt (by launching a mega-QE), because the Fed simply has no other way out. And what is better to hold in your hands in this situation? Anything, really, for now, at least, except for the debt securities of a potential bankrupt. It's clear that the US will not declare a formal default. But the only relatively reasonable way out remains the devaluation of the fiat currency. In this case, the dollar itself.
That's why the S&P 500 index isn't falling, despite the obvious AI bubble. It's holding on for dear life. It's waiting. However, I think that after the actual start of the mega-QE, everything will rise and commodities, first and foremost. Not every Cinderella was waiting for the prince like we are for the commodity super cycle. It's generally already underway, but somewhat sluggishly and with ups and downs. However, both Iran and the Houthis are doing everything they can to straighten out those fluctuations.
Rising oil prices are fueling inflation and... in theory, should lead to an increase in the Fed's interest rates. Although, they absolutely should not raise them, because that would be suicidal. What's interesting is that in this case, it's always the people themselves who are the ones getting hurt. Even now, they can't bring down the US and EU economies if those countries simply ignore inflation and immediately turn on the printing presses. But it seems they won't ignore it and won't turn it on right away. Because you have to try out all the wrong solutions first. And the market didn't appreciate it again. And there's a feeling that Scott Bessent even scared the market. if the outcome is inevitable, the actual process of bankruptcy needs to be led and managed.
But timing is crucial: if you make a wrong decision, but quickly realize it and reverse it/replace it with another, you have a chance of survival. If you persist and drag things out, the chances are almost zero. And bureaucracy and politics will always drag their feet until the very end. Old Donny, by the way, tried to explore as many options as possible to find a solution, but he started a little late: if it weren't for the storming of the Capitol in January 2021, he might have succeeded. But alas, now all that's left is TACO, Bessentment, and Elon Musk's revelations, which are born immediately after consuming prohibited substances.
Meantime, Central banks continue to exchange part of their foreign exchange reserves for gold. However, they are doing so in very different ways. In July, central banks net purchased another 23 tons. To be frank, this is all a drop in the ocean of their reserves. Even Poland, with its 90 tons, represents approximately $13 billion. Therefore, it currently looks more like diversification than a shift of reserves into gold. However, it is important to note that this only refers to central banks and their reserves. BUT...
If we look not only at the purchases by central banks, but at the entire flow of gold (ingots, raw and semi-processed gold, but not finished jewelry) across borders, the picture regarding net gold imports is completely different:
China - $76.9 billion
United Kingdom - $70.7 billion
India - $58.4 billion
Hong Kong - $21.4 billion
Turkey - $20.1 billion
Switzerland - $11.5 billion
Thailand - $8.0 billion
Saudi Arabia - $6.8 billion
Qatar - $6.5 billion
Azerbaijan - $5.9 billion
South Korea - $5.0 billion
These 11 countries alone account for $291 billion in net gold imports. For example, in China, the central bank purchased for $9 billion, while the net import was $77 billion. This indicates that the private sector is accumulating gold reserves more actively than the government.
But even more interesting is the trend: last year, from January to June, China's net gold imports were 321 tons, while in the first half of this year, they were as high as 764 tons. For reference, the U.S. government's gold reserves are 8,100 tons, and here, in just six months, they imported almost 1/10 of that amount. And, I repeat, the central bank's purchases are just a small fraction of the total. This is already more like a trend towards shifting savings and reserves into gold.
Americans are waiting for gasoline prices to drop. But they might be waiting for something else entirely: a situation where they no longer need to commute to work. Because there may be less work available. This also applies to our situation with the economic slowdown, because essentially the same thing is happening.
The crux of the matter is that expensive energy, combined with expensive credit, can lead not to an endless inflationary spiral, but to a reduction in purchases, orders, and employment. This is the favorite scare tactic of central banks. The scenario goes like this: fuel prices rise, businesses raise prices, workers demand raises, they get them, and continue to buy. The next round. A wage-price spiral. But there's a small gap between "demanding a raise" and "getting it." That gap is called real life.
If wages don't keep pace with essential expenses, the extra money needed for gasoline will have to come from other purchases. Postpone repairs. Cancel a trip. Go to cafes less often. Expensive gasoline doesn't bring extra income to the family. It simply takes more away from what they already have. This leads to cost-cutting in other sectors. Cafes are losing customers. Stores are not selling furniture. Contractors are losing orders. At the same time, their own costs for delivery and energy are increasing. They want to raise prices, but the customer is already leaving. Then they cut back on hiring, working hours, and investments. Later, they cut back on employees themselves. A person who has lost income reduces their purchases even further.
In the August survey by the Federal Reserve Bank of New York, expectations of rising unemployment reached their highest level since April 2020. These are fears, not actual layoffs that have already happened, but the fear of losing a job does not encourage large purchases.
And the central bank can add expensive credit to the mix. Businesses are already losing customers, but now it is even more expensive for them to weather a cash flow crisis. You can't get oil with interest rates. It is quite possible to finish off a company that is short on working capital. Oil may eventually become cheaper. The question is how many companies and jobs will not survive until that relief arrives. It is technically possible to defeat inflation by making purchases unaffordable. But citizens would be better off not celebrating such a victory.
Regarding the gold market, real interest rates are currently too high (about 2%). Last year's hype is over, but it left its mark: the market has learned that the path is not one-way, and it can be plunged by 20% without any problems. And back then, interest rates were lower than they are now. Therefore, gold is likely accumulating strength before its next surge. High real interest rates are hindering inflows into ETFs, and there is no incentive for physical buyers. Speculators built up long positions during the correction at the beginning of the year, and the situation has now stabilized.
There is no strong accumulation of long positions by hedge funds like there was before the surge in 2024. If net long futures position on COMEX reaches 0.15 Mln, and ideally closer to 200 Mln contracts, that would be a signal that the market believes in a dovish change in the Fed's stance. And they will have to change. Even if they raise interest rates one or two times this year or in the beginning of next year, a recession, a huge national debt, and problems associated with it will force the Fed to return to QE. Trump will create a recession to justify printing several trillion dollars. He already start testing ground with his 5K payment plan.
CONCLUSION:
As I said yesterday, I'm not taking off the table scenario of the flat rate decision by the Fed. Why... because the core of inflation that the US meets is structural, it based on expenses that are migrating into prices and households' spending, but not fiscal, when you have too much money supply. Correspondingly, by raising rates you will not extract more oil and can't make it cheaper, but you could make overall financial policy tighter, raising the cost of money, which will even more increase expenses. Besides, from political point of view - this is not popular decision, because it immediately lead to raising all type of credit expenses for population.
Second is - raising interest rates on the US debt. They are raising because of deteriorating of the credit quality of the US debt. So investors demand more premium for holding long-term US debt, which calls as "Credit Default Spread". If you raise the rate - wether they will demand more? No, bonds just will fall for additional 0.25%. This also will not resolve the problem of the raising yield.
Finally, the lag. If the Fed will hike the rate in September or October, they will get the result only in 6-8 months (if it will at all because of a structural nature of the inflation), but Republicans immediately will get a households' anger because of more expensive money and the credit. Right at the eve of elections. Besides, data mostly remains the same - big swings in NFP and stable CPI. Just take a look at CPI release reaction - gold immediately goes up after initial drop. Reuters poll above also shows that money managers are not sure with the rate hike. With almost 1 Trln on TGA account they easily could keep liquidity in a good shape until the New Year.
The risk is the Fed prefer to not upset investors. If expectations are above 60% they almost always follow it. But, here we have K. Warsh who denied on any guidance in terms of the rate. So, he easily could send markets the lesson that their expectations are now not a major driver for Fed's decisions.
So, this leads me to idea that rate hike is overpriced now, and bears could be punished next week. If you plan to trade it, be aware of flat decision. Longer term outlook, as it is shown here and yesterday looks positive to the gold. And steps that now are taken by Bessent and Trump just confirm it.
Impact on gold market this week was a bit different, compares to FX and other assets, just because gold is not interest-bearing asset and has more sensitivity to interest rates that jumped strongly. Impact from coming Fed meeting also will be more powerful probably. Yesterday we considered possible changes in ECB and the Fed policy and how could it impact on dollar and EUR. But for gold market there are other factors are important as well.
MARKET OVERVIEW
Gold rose along with US stocks and bonds, despite hotter-than-expected inflation data that prompted traders to sharply increase bets on a Federal Reserve rate hike next week. A gauge of the dollar and two-year Treasury yield similarly whipsawed as traders rapidly reassessed the implications of the print. Swaps traders upped their bets on the chance of a rate hike at the Fed’s Sept. 15-16 gathering to around 90% amid elevated inflation data, up from a roughly two-in-three chance earlier Friday.
The gold market has been under pressure this week as rising oil prices re-stoked wider inflation concerns and kept rate hike bets alive. Some traders had built bearish positions ahead of the data release in anticipation of the start of a monetary tightening cycle, only to buy them back after concluding the hotter-than-expected reading was likely to prompt a one-off rate hike rather than a sustained tightening cycle.
LSEG Lipper data showed that in commodity funds, gold and precious metals funds recorded net sales of $537 million after eight consecutive weeks of inflows.
Prices fell nearly 2% on Thursday after the U.S. Producer Price Index data showed prices increased in line with expectations in August. PPI for final demand rose 0.4% last month after an upwardly revised 0.1% gain in July, the Labor Department's Bureau of Labor Statistics said on Thursday. The Consumer Price Index rose 0.4% last month after edging up 0.1% in July, the labor department's Bureau of Labor Statistics said on Friday. Oil prices fell, but remained on course for a weekly gain.
Higher oil prices stoke inflation fears, strengthening rate-hike bets.
Analysts at Standard Chartered Plc analysts see gold prices recovering in the coming months as the focus shifts to potential de-dollarization and government interventions in the bond market. The perception that efforts to constrain US borrowing costs in the face of swollen deficits and debt levels would gradually erode the value of the dollar was a key driver of gold’s roughly 10% gain in August, in a revival of the so-called “debasement trade.” On Wednesday, the Treasury underwhelmed markets with a plan to buy up to $6 billion of longer-dated debt, which failed to halt a sell-off in long-dated bonds.
A majority of economists polled by Reuters expect the Fed to hold rates steady at its September 15-16 meeting and for the rest of the year. Economists' conviction around their forecasts more broadly has waned considerably since Fed Chairman Kevin Warsh adopted a policy of providing little or no guidance on what is coming next from the world's most powerful central bank. Given that there are generally more forecasters now expecting higher rates this year than in the previous poll, there is a risk that a consensus for no change in rates flips to a hike, based on conversations with several contributors.
About 70% of economists, 65 of 93, in the September 4-9 Reuters poll expect the federal funds rate to remain in the 3.50%-3.75% range next week. That reading is down from 90% in August. The rest expect a quarter-percentage-point increase, which would be the first since July 2023.
About 56% of economists, 52 of 93, predict rates will remain on hold for the whole year, down from 80% in recent months. The rest expect at least one hike, more than double the share last month. Among primary dealers, the split is a bit closer on whether or not the Fed will raise rates this year. Half of those polled, 11, expect rates to remain on hold this year, while 10 expect at least one hike and one contributor, Jefferies, expects the U.S. central bank to cut rates.
Yields on the interest-rate-sensitive two-year Treasury notes have surged around 20 basis points since Warsh's Jackson Hole speech, while the yield on the 10-year Treasury note is trading close to 5%. Trump administration officials have made it clear that 5% is a line they do not want crossed. September has been an important month for the Fed in recent years. It launched its latest easing cycle in September 2024 and resumed cutting rates last September after a roughly eight-month pause.
Trump, who has one of the lowest approval ratings on record in presidential opinion polls, recently threatened wide-reaching trade restrictions unless the Fed cuts rates. Economists now forecast annual PCE inflation at 3.5% this year and 2.4% in 2027, unchanged from last month's estimates, with inflation unlikely to return to the Fed's 2% target before 2028. Unemployment is expected to remain near the 4.1% level.
MARKET COMMENTS
It seems that buyers of U.S. bonds are not simply moving to risk-free assets like Treasury bonds, but are also demanding compensation for inflation by accepting lower yields. What scoundrels! As we've been saying for three years, and will continue to say, money invested in Treasury bonds is losing and will continue to lose its purchasing power. There's no escaping that. Therefore, gold should become an increasingly obvious asset that can fulfill this function.
Dated Brent quotes reached $120.1 per barrel on Thursday. Expensive diesel will contribute to inflation through logistics and agriculture. We will continue to observe... but inflationary risks in the world are still only going up. Previously, everyone feared a rise in the Fed's interest rate. In this way, the US (and, in fact, the global) central bank cooled demand and, at the same time, sucked up all the world's capital. But now the situation has changed dramatically, because the core of the world's problems lies in the dollar. Debt has grown to such a level that the US can't even service it.
And if, almost 50 years ago, it was possible to fight dollar inflation by raising interest rates to 20% (as Volcker did in 1981), then now the volume of debt is so large that even raising interest rates to 5% (as holders of two-year treasuries are demanding now) would be a catastrophe for the US. And raising them (even if it's 2-3 times in a row) by 0.25 percentage points is like a poultice on a corpse. It's of little use, and this decision will only provoke speculators.
And so, the market is not just confident, it is literally waiting for the Fed to start monetizing the debt (by launching a mega-QE), because the Fed simply has no other way out. And what is better to hold in your hands in this situation? Anything, really, for now, at least, except for the debt securities of a potential bankrupt. It's clear that the US will not declare a formal default. But the only relatively reasonable way out remains the devaluation of the fiat currency. In this case, the dollar itself.
That's why the S&P 500 index isn't falling, despite the obvious AI bubble. It's holding on for dear life. It's waiting. However, I think that after the actual start of the mega-QE, everything will rise and commodities, first and foremost. Not every Cinderella was waiting for the prince like we are for the commodity super cycle. It's generally already underway, but somewhat sluggishly and with ups and downs. However, both Iran and the Houthis are doing everything they can to straighten out those fluctuations.
Rising oil prices are fueling inflation and... in theory, should lead to an increase in the Fed's interest rates. Although, they absolutely should not raise them, because that would be suicidal. What's interesting is that in this case, it's always the people themselves who are the ones getting hurt. Even now, they can't bring down the US and EU economies if those countries simply ignore inflation and immediately turn on the printing presses. But it seems they won't ignore it and won't turn it on right away. Because you have to try out all the wrong solutions first. And the market didn't appreciate it again. And there's a feeling that Scott Bessent even scared the market. if the outcome is inevitable, the actual process of bankruptcy needs to be led and managed.
But timing is crucial: if you make a wrong decision, but quickly realize it and reverse it/replace it with another, you have a chance of survival. If you persist and drag things out, the chances are almost zero. And bureaucracy and politics will always drag their feet until the very end. Old Donny, by the way, tried to explore as many options as possible to find a solution, but he started a little late: if it weren't for the storming of the Capitol in January 2021, he might have succeeded. But alas, now all that's left is TACO, Bessentment, and Elon Musk's revelations, which are born immediately after consuming prohibited substances.
Meantime, Central banks continue to exchange part of their foreign exchange reserves for gold. However, they are doing so in very different ways. In July, central banks net purchased another 23 tons. To be frank, this is all a drop in the ocean of their reserves. Even Poland, with its 90 tons, represents approximately $13 billion. Therefore, it currently looks more like diversification than a shift of reserves into gold. However, it is important to note that this only refers to central banks and their reserves. BUT...
If we look not only at the purchases by central banks, but at the entire flow of gold (ingots, raw and semi-processed gold, but not finished jewelry) across borders, the picture regarding net gold imports is completely different:
China - $76.9 billion
United Kingdom - $70.7 billion
India - $58.4 billion
Hong Kong - $21.4 billion
Turkey - $20.1 billion
Switzerland - $11.5 billion
Thailand - $8.0 billion
Saudi Arabia - $6.8 billion
Qatar - $6.5 billion
Azerbaijan - $5.9 billion
South Korea - $5.0 billion
These 11 countries alone account for $291 billion in net gold imports. For example, in China, the central bank purchased for $9 billion, while the net import was $77 billion. This indicates that the private sector is accumulating gold reserves more actively than the government.
But even more interesting is the trend: last year, from January to June, China's net gold imports were 321 tons, while in the first half of this year, they were as high as 764 tons. For reference, the U.S. government's gold reserves are 8,100 tons, and here, in just six months, they imported almost 1/10 of that amount. And, I repeat, the central bank's purchases are just a small fraction of the total. This is already more like a trend towards shifting savings and reserves into gold.
Americans are waiting for gasoline prices to drop. But they might be waiting for something else entirely: a situation where they no longer need to commute to work. Because there may be less work available. This also applies to our situation with the economic slowdown, because essentially the same thing is happening.
The crux of the matter is that expensive energy, combined with expensive credit, can lead not to an endless inflationary spiral, but to a reduction in purchases, orders, and employment. This is the favorite scare tactic of central banks. The scenario goes like this: fuel prices rise, businesses raise prices, workers demand raises, they get them, and continue to buy. The next round. A wage-price spiral. But there's a small gap between "demanding a raise" and "getting it." That gap is called real life.
If wages don't keep pace with essential expenses, the extra money needed for gasoline will have to come from other purchases. Postpone repairs. Cancel a trip. Go to cafes less often. Expensive gasoline doesn't bring extra income to the family. It simply takes more away from what they already have. This leads to cost-cutting in other sectors. Cafes are losing customers. Stores are not selling furniture. Contractors are losing orders. At the same time, their own costs for delivery and energy are increasing. They want to raise prices, but the customer is already leaving. Then they cut back on hiring, working hours, and investments. Later, they cut back on employees themselves. A person who has lost income reduces their purchases even further.
In the August survey by the Federal Reserve Bank of New York, expectations of rising unemployment reached their highest level since April 2020. These are fears, not actual layoffs that have already happened, but the fear of losing a job does not encourage large purchases.
And the central bank can add expensive credit to the mix. Businesses are already losing customers, but now it is even more expensive for them to weather a cash flow crisis. You can't get oil with interest rates. It is quite possible to finish off a company that is short on working capital. Oil may eventually become cheaper. The question is how many companies and jobs will not survive until that relief arrives. It is technically possible to defeat inflation by making purchases unaffordable. But citizens would be better off not celebrating such a victory.
Regarding the gold market, real interest rates are currently too high (about 2%). Last year's hype is over, but it left its mark: the market has learned that the path is not one-way, and it can be plunged by 20% without any problems. And back then, interest rates were lower than they are now. Therefore, gold is likely accumulating strength before its next surge. High real interest rates are hindering inflows into ETFs, and there is no incentive for physical buyers. Speculators built up long positions during the correction at the beginning of the year, and the situation has now stabilized.
There is no strong accumulation of long positions by hedge funds like there was before the surge in 2024. If net long futures position on COMEX reaches 0.15 Mln, and ideally closer to 200 Mln contracts, that would be a signal that the market believes in a dovish change in the Fed's stance. And they will have to change. Even if they raise interest rates one or two times this year or in the beginning of next year, a recession, a huge national debt, and problems associated with it will force the Fed to return to QE. Trump will create a recession to justify printing several trillion dollars. He already start testing ground with his 5K payment plan.
CONCLUSION:
As I said yesterday, I'm not taking off the table scenario of the flat rate decision by the Fed. Why... because the core of inflation that the US meets is structural, it based on expenses that are migrating into prices and households' spending, but not fiscal, when you have too much money supply. Correspondingly, by raising rates you will not extract more oil and can't make it cheaper, but you could make overall financial policy tighter, raising the cost of money, which will even more increase expenses. Besides, from political point of view - this is not popular decision, because it immediately lead to raising all type of credit expenses for population.
Second is - raising interest rates on the US debt. They are raising because of deteriorating of the credit quality of the US debt. So investors demand more premium for holding long-term US debt, which calls as "Credit Default Spread". If you raise the rate - wether they will demand more? No, bonds just will fall for additional 0.25%. This also will not resolve the problem of the raising yield.
Finally, the lag. If the Fed will hike the rate in September or October, they will get the result only in 6-8 months (if it will at all because of a structural nature of the inflation), but Republicans immediately will get a households' anger because of more expensive money and the credit. Right at the eve of elections. Besides, data mostly remains the same - big swings in NFP and stable CPI. Just take a look at CPI release reaction - gold immediately goes up after initial drop. Reuters poll above also shows that money managers are not sure with the rate hike. With almost 1 Trln on TGA account they easily could keep liquidity in a good shape until the New Year.
The risk is the Fed prefer to not upset investors. If expectations are above 60% they almost always follow it. But, here we have K. Warsh who denied on any guidance in terms of the rate. So, he easily could send markets the lesson that their expectations are now not a major driver for Fed's decisions.
So, this leads me to idea that rate hike is overpriced now, and bears could be punished next week. If you plan to trade it, be aware of flat decision. Longer term outlook, as it is shown here and yesterday looks positive to the gold. And steps that now are taken by Bessent and Trump just confirm it.
Last edited:
