Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
Gold market was showing clear action until Thursday-Friday. Sharp reversal was a bit surprising, because technically, gold has no reasons for upside reactions. Inflation data hardly was supportive to gold reversal. News explained this by better than expected Chinese data, but I have doubts on this. Because I do not remember when Chinese data has made any impact on gold performance. Second is, if even this is true, why China recovery is positive for the gold performance? Logically, it should be vice versa. Besides, it was no dollar weakness or bond yields drop. Thus, we suspect that reasons are different. Although we haven't got any direct statistics that we could rely to gold reversal, but we suspect that this was just another wave of activity on gold demand due to deterioration in the US and EU economy. It is even more surprising that gold reversal has happened during high US yields and when real 10-year yield has hit 2% level again. Gold should drop and only external support could break normal relation of technical factors. Also we should not forget about big political events that have happened last week.
Market overview
Gold jumped 1% on Friday, helped by a weaker dollar and safe-haven buying after United Auto Workers union kicked of strikes at three automakers in Detroit, while hopes around a likely pause in U.S. interest-rate hikes lent further support. United Auto Workers union launched simultaneous strikes at three factories owned by the "Detroit Three", including Chrysler-owner Stellantis, marking the most ambitious U.S. industrial labor action in decades.
Market participants now look forward to more clarity on interest rate outlook from the U.S. Federal Reserve at their policy meeting next week, in which the central bank is widely expected to leave interest rates unchanged. Meanwhile, China's physical gold premiums soared to a new high this week, amid strong demand to shore up a depreciating yuan and a lack of fresh import quotas.
US DEBT
Although a lot have been said about raising Debt, US Budget deficit and asked many questions on how they intend to deal with all this stuff - in recent week some interesting analysts have appeared. First is, New York Fed study reveals sharp deterioration in household financial sentiment. ️Long-term inflation expectations rose to 15-month high. The most worrying observations were that the five-year inflation forecast reached its highest level since March 2022, and households became even less optimistic about their financial situation.
At the same moment, US 10-year real yield has returned back to 2% level and big banks have changed rhetoric. BlackRock said that the likelihood of a recession is high, and consumers have run out of money and can no longer support the economy. Goldman Sachs is running into cash, telling that bank have taken a neutral position on all asset classes, except for cash, in which we are overweight.
We have talked a lot in previous few weeks about diesel shortage and raising gasoline prices, but this week confirmation comes from unexpected side. US airlines talk about two interesting factors:
1. They cannot shift the growing fuel costs and the increase in employee salaries to customers.
2. They see the current slowdown in demand for flights compared to the 3rd quarter of last year.
The extra money is starting to run out, which means a recession is just around the corner - this is was BlackRock said. A recession will begin, a financial crisis will follow the recession, and another direct issue of the dollar will follow the financial crisis. The only problem is new QE will be aimed at saving drowning ones and at least maintaining some kind of demand, but it will not be enough for the subsequent recovery and growth. But there will excellent prerequisites for inflation.
The point at which everything starts to converge is the second quarter of next year. The most interesting thing that for new QE they do not need to cut the rate. In fact, the rate level will matter nothing. Bloomberg said that American consumers can no longer support the economy; there will be a collapse in 2024. Since the Fed will have to print money immediately and a lot - to close the budget deficit, then the rate may not be cut. It's just that the rate as a tool from a certain point will no longer matter, they will switch entirely to the printing press.
Therefore, the option of a sharp transition from QT to QE without lowering the rate, or even a further hike one looks quite realistic. Stock markets will remain under pressure and those who sit in the US debt will not go anywhere - perfect storm. Another alarming signal that indirectly supports our suggestion is volatility of US debt market. This is really bad signal for the American market is the situation around treasury bonds. For the first time in 45 years, US Treasury volatility is higher than gold:
All these processes already start making impact on primary US debt market where yield is constantly raising, and now hits 4.29% level from 3.99% last month.
But only "special ones" understand what is going on. Because people almost do not pay attention to what big people talk. Jamie Daemon recently spoke about 10-year treasuries. He doesn't want to buy them. Interestingly, he said the same thing in August 2017 before the yields jumped (and the price fell) and in December 2020 before the yields went up as well. The problem is the inversion of the yield curve. Everybody knows about this phenomenon, and I will not explain this once again. In two words, inversion means that the market believes that short-term inflation risks are higher (that is, it is necessary to compensate for inflation and earn a premium for 6 months) than long-term ones and 10-years with a yield of 4.3% can beat off all possible inflation risks. Both current and future... so far, it thinks....
As we remember, the banking crisis basically arose due to the fact that prices for long-term bonds fell (yields rose) and banks had unrealized losses. The BTFP program me appeared. But problem is banks could get money at current high rate, using existed bonds in their portfolio as collateral. Other words speaking - BTFP aims to support liquidity but not to resolve problems with unrealized loss. This problems still exists, as well as banking corporate loans that were provided at low rates in previous two decades.
A further decline in long-term bond prices under certain conditions will not only increase banks' unrealized losses, but will also begin to create real losses. Let's try to make it clear. Most likely, J. Daemon means that the market perception of the inflation problem will soon change. We see how oil prices are rising and how CPI is rising again. De-globalization is underway and a labor shortage is emerging. There just aren't enough people. Neither skilled nor unskilled. Companies, in addition, do not have enough resources - production, logistics, etc. for this restructuring and costs are rising (we have discussed this yesterday in FX report). That is, so far everything speaks in favor of rising inflation in the USA and low unemployment (until a recession hits) and... high unemployment and deflation in China (because they have lower demand and the impossibility of quickly restructuring the economic model from an export/state on the consumer side there is a decrease in the use of labor resources).
So, when investors finally understand that inflation is not a temporary problem, then the yield curve will begin to reverse back to normal position. This usually happens because the Fed cuts rates and short-term bond yields fall below long-term bond yields. But this time, most likely, it will not be so. First, investors will realize that inflation is here to stay and will want higher yields on long bonds. Then the unrealized losses of banks holding long-term securities will increase (and they cannot do anything about it, because, as we saw back in the spring, these losses are almost equal to the capital of the entire banking system and if they sell them now, they will simply go bankrupt, and It is impossible to insure such a gigantic multi-trillion-dollar risk of rising yields).
In parallel with this, credit conditions for business and households will begin to become even more tightened, which will further cool demand. The financial performance of companies will begin to decline due to falling demand and the number of corporate defaults will increase. We already see this clearly and have shown you many times in our reports.
But the most important thing is that bank depositors, and these are not only people, but also companies, will understand that keeping funds on deposits is definitely not an option, because another 3-4-5 years of high inflation will gobble them up and begin to transfer them to money market funds, which will create liquidity problems for banks and they will either continue to borrow expensive money through BTFP (which, by the way, is still valid until the end of March 2024 and may cease to operate) and will unsuccessfully try to shift costs to borrowers until the borrowers default , or they will start selling bonds, which, again, will lead to bank defaults.
The nuance is that this can happen quite smoothly, but on all fronts. That is, we end up with some kind of combination of severe imbalance in the system. So far it is supported by inflation expectations, but it may stop. Until the stock market falls, demand is high and the recession sets in gradually and slowly as savings are spent.
While there is no recession, unemployment is not growing and demand from the population and business remains. While inflation is not growing much, liquidity in the banking system is more or less good. In fact, everything depends on inflation. And the demand for financial assets, including shares, and the demand for raw materials as such, despite the fact that there is an obvious shortage of oil.
Most likely, these triggers will start to work all together, but gradually. The indicator and first important step will be the transition of the yield curve from an inverted state to a normal one, and Dimon’s words confirm this. Signs are coming from everywhere - U.S. retailers will hire the lowest number of seasonal workers for this holiday season since 2008, due to increased labor costs and shaky consumer confidence, according to a report by Challenger, Gray & Christmas provided exclusively to Reuters.
In recent few months we have a lot of reasons to suggest another spiral in inflation. Here is another one - Electricity, which is the second, after fuel, most important factor accelerating inflation in the United States. For urban residents, kWh rose in price by 20% last year, and unlike fuel or gas prices, there was no correction in the electricity market.
So, as you could see, overall situation is much more interesting than just talks about Budget deficit, US Treasury debt issue programme, government lockdown and so on.
BACK to GOLD
Ok, all this stuff sounds intriguing but why gold is not raising? But who has said that? It is raising, at least on Chinese and Japanese markets. We have few exchanges where price on gold is set. While we do not have any rally on COMEX, we have strong demand on Chinese market. Spot trading of Chinese gold (SGE) ~120 pips (+6%) premium to the liquid COMEX contract.The premium offer has been available for 3 months already, which is a record. Risk of rising prices for Western futures:
Demand for physical gold remains very strong in China, with supply premiums rising for three months in a row. the higher the commodity volumes in the calculations for yuan, the stronger the physical demand for gold supplied from the Shanghai stock exchange. So let's write it down: China sells American assets and grabs the physical gold. By the way, gold has become indecently cheaper in relation to oil: at the moment there are only 20 barrels per ounce. And it was 25. It should catch up, because oil will not become cheaper.
It is an easy explanation, why western "paper" gold is not growing, while the premium for deliveries of physical gold continues to grow. Two JP Morgan employees were put under criminal charges for allegedly manipulating the price of gold. They just found the extreme ones. Otherwise It is difficult to find another explanation for why someone could short gold when demand for it has skyrocketed. Western price for the gold is highly manipulated and artificially holds low by using derivative market. We already have shown you this:
As you understand, this "price control" can't last too long because China demands delivery and shortage of the physical gold very soon could become public. Otherwise, amount of arbitrage traders between these two exchanges will increase, pushing COMEX prices higher. Meantime, western bankers try to make verbal interventions, trying to reverse this process back. Thus, Creating a BRICS currency backed by gold makes no sense, says a former top Bank of America strategist.
But hardly this helps much as everybody already understands where the process is going to.
The Saudis have offloaded 40% of their US government debt on their balance sheet:
Unfortunately, due to their secret cooperation pact, we do not know the real numbers. The bulk of the ownership was wrapped up in offshore companies. This was confirmed by both the Saudis and the Americans in 2022. According to various estimates, the size there is comparable to the Chinese trillion.
If this is true and the dynamics there are similar, then the actions of the Arabs may be the main reason why the Fed is raising rates so unrestrainedly. The two main trading partners on which the petro- and consumer goods dollars were built are actively returning dollars back to the United States. As in 1973-74 during the first oil shock, when the Saudi grade was the main market benchmark, central banks need to monitor the price of Arab Light to judge the inflation outlook. As it stands, the picture is not very pleasant - and it’s getting worse.
... and politics a bit
Here, guys, I put just few headlines to show you that it seems we're correct in assessment of political situation. We've discussed all tricks of current politics last time, so now it is not needed to place long text here. First of all - all these headlines concerning US debt, budget deficit, crude oil, gasoline prices, diesel fuel point only on one thing. This is geopolitical tool to make the US weaker on a way of long-term confrontation. Raising of crude oil price by OPEC+ efforts makes US economy weaker, and directly or indirectly hurts its ability for hot stage of confrontation.
For the second time since the Second World War (the establishment of dollar hegemony), the cost of servicing the US debt was equal to the defense budget. However, if we adhere to a realistic assessment, in contrast to the late 90s, the state of the US economy is much worse. At this level of debt and its value, the United States will not be able to afford another war. The country’s budget is already at a record deficit and will not support new trillions of spending on military needs.
Meantime, the US is trying to make weaker its opponents. It is more or less clear about Russia, and now major efforts are aiming on china. "Big divorce" is speeding up. Even headlines are enough to understands what is going on:
A $188 Billion Exodus Shows China’s Heft Fading in World Markets
China's property slump worsens, clouding recovery prospects
House Republican lawmakers urge US crackdown on Huawei, SMIC
China responses:
China boosts liquidity with medium-term policy tool
China asks big banks to stagger and adjust dollar purchases, sources say
China sanctions Northrop Grumman, Lockheed Martin for arms sales to Taiwan
PBOC cuts RRR by 25 bps, with effect from 15 September
Yes, we saw uptick in Chinese statistics last week, but this was just an episode with the long story of deterioration numbers. In current conditions it is very difficult to suggest stable and long lasting improvement. Despite recent positive data, China has met record capital outflows:
So, both counterparties are trying to weaken each other before the hot stage. And the cherry on the pie is recent US Army War College research, where it suddenly publishes a rather interesting article analyzing the US Army. One of the conclusions been made is the US has to leave all other regions and close military bases across the Globe to focus on confrontation with China. Otherwise it just fall in short of resources and can't hold confrontation with China. Mostly because of unprecedented casualties for the US history:
For us, the major conclusion that recent events and publications confirm our long-term view that situation is not becoming easier. De-globalization leads to bad consequences. In EU government scares of possible political radicalization, while faith in UN is vapouring out. As we've suggested, Turkey now is under strong pressure from western allies. And all these processes will just spinning up... Now the behavior of counterparties remains children, who kicking up each other under the table before the fight.
Conclusion:
For us it is most difficult moment, guys. Because our long-term view is bullish - all these events just can't not lead to gold rally. But in short-term we consider a lot of headwinds for the gold. And our task is to not miss the transition point from one stage to another. Recent gold rally on Friday and Thursday could be explained only by two things. First is, indeed, maybe this is reaction on the US automakers workers strike or it was some crack in efforts to control "paper gold" price and demand just is coming on surface. As you understand, the 2nd factor is much more important. Whatever it was, it breaks short-term context and turns it bullish. All economical environment doesn't support it - real rates (and nominal ) at the top, inflation is raising, other statistics more or less positive, supportive aggressive Fed policy for some more time, and even possible another rate hikes. If it because of strikes - it should exhaust soon, so we will see. For long-term perspective our conclusion remains the same - accumulate physical gold, hold it in different places (and countries, if possible) and buy it, while you could.
Gold market was showing clear action until Thursday-Friday. Sharp reversal was a bit surprising, because technically, gold has no reasons for upside reactions. Inflation data hardly was supportive to gold reversal. News explained this by better than expected Chinese data, but I have doubts on this. Because I do not remember when Chinese data has made any impact on gold performance. Second is, if even this is true, why China recovery is positive for the gold performance? Logically, it should be vice versa. Besides, it was no dollar weakness or bond yields drop. Thus, we suspect that reasons are different. Although we haven't got any direct statistics that we could rely to gold reversal, but we suspect that this was just another wave of activity on gold demand due to deterioration in the US and EU economy. It is even more surprising that gold reversal has happened during high US yields and when real 10-year yield has hit 2% level again. Gold should drop and only external support could break normal relation of technical factors. Also we should not forget about big political events that have happened last week.
Market overview
Gold jumped 1% on Friday, helped by a weaker dollar and safe-haven buying after United Auto Workers union kicked of strikes at three automakers in Detroit, while hopes around a likely pause in U.S. interest-rate hikes lent further support. United Auto Workers union launched simultaneous strikes at three factories owned by the "Detroit Three", including Chrysler-owner Stellantis, marking the most ambitious U.S. industrial labor action in decades.
Market participants now look forward to more clarity on interest rate outlook from the U.S. Federal Reserve at their policy meeting next week, in which the central bank is widely expected to leave interest rates unchanged. Meanwhile, China's physical gold premiums soared to a new high this week, amid strong demand to shore up a depreciating yuan and a lack of fresh import quotas.
US DEBT
Although a lot have been said about raising Debt, US Budget deficit and asked many questions on how they intend to deal with all this stuff - in recent week some interesting analysts have appeared. First is, New York Fed study reveals sharp deterioration in household financial sentiment. ️Long-term inflation expectations rose to 15-month high. The most worrying observations were that the five-year inflation forecast reached its highest level since March 2022, and households became even less optimistic about their financial situation.
At the same moment, US 10-year real yield has returned back to 2% level and big banks have changed rhetoric. BlackRock said that the likelihood of a recession is high, and consumers have run out of money and can no longer support the economy. Goldman Sachs is running into cash, telling that bank have taken a neutral position on all asset classes, except for cash, in which we are overweight.
We have talked a lot in previous few weeks about diesel shortage and raising gasoline prices, but this week confirmation comes from unexpected side. US airlines talk about two interesting factors:
1. They cannot shift the growing fuel costs and the increase in employee salaries to customers.
2. They see the current slowdown in demand for flights compared to the 3rd quarter of last year.
The extra money is starting to run out, which means a recession is just around the corner - this is was BlackRock said. A recession will begin, a financial crisis will follow the recession, and another direct issue of the dollar will follow the financial crisis. The only problem is new QE will be aimed at saving drowning ones and at least maintaining some kind of demand, but it will not be enough for the subsequent recovery and growth. But there will excellent prerequisites for inflation.
The point at which everything starts to converge is the second quarter of next year. The most interesting thing that for new QE they do not need to cut the rate. In fact, the rate level will matter nothing. Bloomberg said that American consumers can no longer support the economy; there will be a collapse in 2024. Since the Fed will have to print money immediately and a lot - to close the budget deficit, then the rate may not be cut. It's just that the rate as a tool from a certain point will no longer matter, they will switch entirely to the printing press.
Therefore, the option of a sharp transition from QT to QE without lowering the rate, or even a further hike one looks quite realistic. Stock markets will remain under pressure and those who sit in the US debt will not go anywhere - perfect storm. Another alarming signal that indirectly supports our suggestion is volatility of US debt market. This is really bad signal for the American market is the situation around treasury bonds. For the first time in 45 years, US Treasury volatility is higher than gold:
All these processes already start making impact on primary US debt market where yield is constantly raising, and now hits 4.29% level from 3.99% last month.
But only "special ones" understand what is going on. Because people almost do not pay attention to what big people talk. Jamie Daemon recently spoke about 10-year treasuries. He doesn't want to buy them. Interestingly, he said the same thing in August 2017 before the yields jumped (and the price fell) and in December 2020 before the yields went up as well. The problem is the inversion of the yield curve. Everybody knows about this phenomenon, and I will not explain this once again. In two words, inversion means that the market believes that short-term inflation risks are higher (that is, it is necessary to compensate for inflation and earn a premium for 6 months) than long-term ones and 10-years with a yield of 4.3% can beat off all possible inflation risks. Both current and future... so far, it thinks....
As we remember, the banking crisis basically arose due to the fact that prices for long-term bonds fell (yields rose) and banks had unrealized losses. The BTFP program me appeared. But problem is banks could get money at current high rate, using existed bonds in their portfolio as collateral. Other words speaking - BTFP aims to support liquidity but not to resolve problems with unrealized loss. This problems still exists, as well as banking corporate loans that were provided at low rates in previous two decades.
A further decline in long-term bond prices under certain conditions will not only increase banks' unrealized losses, but will also begin to create real losses. Let's try to make it clear. Most likely, J. Daemon means that the market perception of the inflation problem will soon change. We see how oil prices are rising and how CPI is rising again. De-globalization is underway and a labor shortage is emerging. There just aren't enough people. Neither skilled nor unskilled. Companies, in addition, do not have enough resources - production, logistics, etc. for this restructuring and costs are rising (we have discussed this yesterday in FX report). That is, so far everything speaks in favor of rising inflation in the USA and low unemployment (until a recession hits) and... high unemployment and deflation in China (because they have lower demand and the impossibility of quickly restructuring the economic model from an export/state on the consumer side there is a decrease in the use of labor resources).
So, when investors finally understand that inflation is not a temporary problem, then the yield curve will begin to reverse back to normal position. This usually happens because the Fed cuts rates and short-term bond yields fall below long-term bond yields. But this time, most likely, it will not be so. First, investors will realize that inflation is here to stay and will want higher yields on long bonds. Then the unrealized losses of banks holding long-term securities will increase (and they cannot do anything about it, because, as we saw back in the spring, these losses are almost equal to the capital of the entire banking system and if they sell them now, they will simply go bankrupt, and It is impossible to insure such a gigantic multi-trillion-dollar risk of rising yields).
In parallel with this, credit conditions for business and households will begin to become even more tightened, which will further cool demand. The financial performance of companies will begin to decline due to falling demand and the number of corporate defaults will increase. We already see this clearly and have shown you many times in our reports.
But the most important thing is that bank depositors, and these are not only people, but also companies, will understand that keeping funds on deposits is definitely not an option, because another 3-4-5 years of high inflation will gobble them up and begin to transfer them to money market funds, which will create liquidity problems for banks and they will either continue to borrow expensive money through BTFP (which, by the way, is still valid until the end of March 2024 and may cease to operate) and will unsuccessfully try to shift costs to borrowers until the borrowers default , or they will start selling bonds, which, again, will lead to bank defaults.
The nuance is that this can happen quite smoothly, but on all fronts. That is, we end up with some kind of combination of severe imbalance in the system. So far it is supported by inflation expectations, but it may stop. Until the stock market falls, demand is high and the recession sets in gradually and slowly as savings are spent.
While there is no recession, unemployment is not growing and demand from the population and business remains. While inflation is not growing much, liquidity in the banking system is more or less good. In fact, everything depends on inflation. And the demand for financial assets, including shares, and the demand for raw materials as such, despite the fact that there is an obvious shortage of oil.
Most likely, these triggers will start to work all together, but gradually. The indicator and first important step will be the transition of the yield curve from an inverted state to a normal one, and Dimon’s words confirm this. Signs are coming from everywhere - U.S. retailers will hire the lowest number of seasonal workers for this holiday season since 2008, due to increased labor costs and shaky consumer confidence, according to a report by Challenger, Gray & Christmas provided exclusively to Reuters.
In recent few months we have a lot of reasons to suggest another spiral in inflation. Here is another one - Electricity, which is the second, after fuel, most important factor accelerating inflation in the United States. For urban residents, kWh rose in price by 20% last year, and unlike fuel or gas prices, there was no correction in the electricity market.
So, as you could see, overall situation is much more interesting than just talks about Budget deficit, US Treasury debt issue programme, government lockdown and so on.
BACK to GOLD
Ok, all this stuff sounds intriguing but why gold is not raising? But who has said that? It is raising, at least on Chinese and Japanese markets. We have few exchanges where price on gold is set. While we do not have any rally on COMEX, we have strong demand on Chinese market. Spot trading of Chinese gold (SGE) ~120 pips (+6%) premium to the liquid COMEX contract.The premium offer has been available for 3 months already, which is a record. Risk of rising prices for Western futures:
Demand for physical gold remains very strong in China, with supply premiums rising for three months in a row. the higher the commodity volumes in the calculations for yuan, the stronger the physical demand for gold supplied from the Shanghai stock exchange. So let's write it down: China sells American assets and grabs the physical gold. By the way, gold has become indecently cheaper in relation to oil: at the moment there are only 20 barrels per ounce. And it was 25. It should catch up, because oil will not become cheaper.
It is an easy explanation, why western "paper" gold is not growing, while the premium for deliveries of physical gold continues to grow. Two JP Morgan employees were put under criminal charges for allegedly manipulating the price of gold. They just found the extreme ones. Otherwise It is difficult to find another explanation for why someone could short gold when demand for it has skyrocketed. Western price for the gold is highly manipulated and artificially holds low by using derivative market. We already have shown you this:
As you understand, this "price control" can't last too long because China demands delivery and shortage of the physical gold very soon could become public. Otherwise, amount of arbitrage traders between these two exchanges will increase, pushing COMEX prices higher. Meantime, western bankers try to make verbal interventions, trying to reverse this process back. Thus, Creating a BRICS currency backed by gold makes no sense, says a former top Bank of America strategist.
But hardly this helps much as everybody already understands where the process is going to.
The Saudis have offloaded 40% of their US government debt on their balance sheet:
Unfortunately, due to their secret cooperation pact, we do not know the real numbers. The bulk of the ownership was wrapped up in offshore companies. This was confirmed by both the Saudis and the Americans in 2022. According to various estimates, the size there is comparable to the Chinese trillion.
If this is true and the dynamics there are similar, then the actions of the Arabs may be the main reason why the Fed is raising rates so unrestrainedly. The two main trading partners on which the petro- and consumer goods dollars were built are actively returning dollars back to the United States. As in 1973-74 during the first oil shock, when the Saudi grade was the main market benchmark, central banks need to monitor the price of Arab Light to judge the inflation outlook. As it stands, the picture is not very pleasant - and it’s getting worse.
... and politics a bit
Here, guys, I put just few headlines to show you that it seems we're correct in assessment of political situation. We've discussed all tricks of current politics last time, so now it is not needed to place long text here. First of all - all these headlines concerning US debt, budget deficit, crude oil, gasoline prices, diesel fuel point only on one thing. This is geopolitical tool to make the US weaker on a way of long-term confrontation. Raising of crude oil price by OPEC+ efforts makes US economy weaker, and directly or indirectly hurts its ability for hot stage of confrontation.
For the second time since the Second World War (the establishment of dollar hegemony), the cost of servicing the US debt was equal to the defense budget. However, if we adhere to a realistic assessment, in contrast to the late 90s, the state of the US economy is much worse. At this level of debt and its value, the United States will not be able to afford another war. The country’s budget is already at a record deficit and will not support new trillions of spending on military needs.
Meantime, the US is trying to make weaker its opponents. It is more or less clear about Russia, and now major efforts are aiming on china. "Big divorce" is speeding up. Even headlines are enough to understands what is going on:
A $188 Billion Exodus Shows China’s Heft Fading in World Markets
China's property slump worsens, clouding recovery prospects
House Republican lawmakers urge US crackdown on Huawei, SMIC
China responses:
China boosts liquidity with medium-term policy tool
China asks big banks to stagger and adjust dollar purchases, sources say
China sanctions Northrop Grumman, Lockheed Martin for arms sales to Taiwan
PBOC cuts RRR by 25 bps, with effect from 15 September
Yes, we saw uptick in Chinese statistics last week, but this was just an episode with the long story of deterioration numbers. In current conditions it is very difficult to suggest stable and long lasting improvement. Despite recent positive data, China has met record capital outflows:
So, both counterparties are trying to weaken each other before the hot stage. And the cherry on the pie is recent US Army War College research, where it suddenly publishes a rather interesting article analyzing the US Army. One of the conclusions been made is the US has to leave all other regions and close military bases across the Globe to focus on confrontation with China. Otherwise it just fall in short of resources and can't hold confrontation with China. Mostly because of unprecedented casualties for the US history:
For us, the major conclusion that recent events and publications confirm our long-term view that situation is not becoming easier. De-globalization leads to bad consequences. In EU government scares of possible political radicalization, while faith in UN is vapouring out. As we've suggested, Turkey now is under strong pressure from western allies. And all these processes will just spinning up... Now the behavior of counterparties remains children, who kicking up each other under the table before the fight.
Conclusion:
For us it is most difficult moment, guys. Because our long-term view is bullish - all these events just can't not lead to gold rally. But in short-term we consider a lot of headwinds for the gold. And our task is to not miss the transition point from one stage to another. Recent gold rally on Friday and Thursday could be explained only by two things. First is, indeed, maybe this is reaction on the US automakers workers strike or it was some crack in efforts to control "paper gold" price and demand just is coming on surface. As you understand, the 2nd factor is much more important. Whatever it was, it breaks short-term context and turns it bullish. All economical environment doesn't support it - real rates (and nominal ) at the top, inflation is raising, other statistics more or less positive, supportive aggressive Fed policy for some more time, and even possible another rate hikes. If it because of strikes - it should exhaust soon, so we will see. For long-term perspective our conclusion remains the same - accumulate physical gold, hold it in different places (and countries, if possible) and buy it, while you could.
But this time, as it has some more significant background, chances on failure seem smaller...