Sive Morten
Special Consultant to the FPA
- Messages
- 18,655
Fundamentals
This week, personally for me, the most important was the price action of Gold. Fed results are important and we've considered it yesterday. But, recall gold price action. Despite rally on the US real interest rates, despite hawkish tone from the Fed - it was raising. Yes, it was a pullback by Friday, but in general, it is amazing resistance to headwind, when rate is around 5.5%, real rate is 2%. It can't be said for sure, but I do not exclude that it might be an anticipation by the market as inflation increasing as further deterioration of the US economy. Or, investors slowly start to understand what is going. Big banks, such as JP Morgan, HSBC and others repeat mantras on Fed pivot and 5.5% excellent yield, provided by US bonds. This is counted on public, households, to make them by more US debt. While Vanguard tells about three more rate hikes and hedge funds turns bullish on US Dollar. Gold starts getting support from multiple factors, starting from central banks demand and up to hedge funds and private investors. It means that market expects that things will be worse inflation will be higher, while real rate will turn down again. Keep it simple, as events are accelerating, it might be reversal to 2nd stage of long-term upside tendency on gold that we're waiting for.
Market overview
Gold markets haven’t been this calm since the onset of the Covid-19 pandemic, thanks to a deadlock between buyers and sellers that’s showing no signs of breaking.
Six-month historical gold volatility slumped to the lowest since February 2020 on Friday. The measure has plunged due to bullion largely staying confined to a range between $1,900 and $2,000 an ounce since mid-May.
That’s despite the dollar and inflation-adjusted Treasury yields surging over the same period, which would usually put bullion under major pressure. Gold buyers have supported the metal every time it slid to around $1,900, essentially putting a floor under the market.
Exchange-traded funds backed by the metal have seen their holdings shrink by 5% this year, according to an initial tally by Bloomberg, but that’s not been enough to drive prices lower. Meanwhile, buying by central banks has stayed robust after a record year in 2022, according to data from the World Gold Council.
On Friday two weeks ago, the precious metal gained the most in more than three weeks as traders weighed a slew of economic data. Now Gold pared gains after the Federal Reserve left its benchmark interest rate unchanged while signaling borrowing costs will likely stay higher for longer after one more hike this year. The US central bank’s policy-setting Federal Open Market Committee, in a post-meeting statement published Wednesday in Washington, repeated language saying officials will determine the “extent of additional policy firming that may be appropriate.”
The FOMC held its target range for the federal funds rate at 5.25% to 5.5%, while updated quarterly projections showed 12 of 19 officials favored another rate hike in 2023, underscoring a desire to ensure inflation continues to decelerate.Fed officials also see less easing next year, according to the new projections, reflecting renewed strength in the economy and labor market.
Still, bullion held ground in the face of surging bond yields, with Treasury two-year yields climbing to the highest level since 2006. Fed Chairman Jerome Powell said he would not call a so-called “soft landing” for the US economy his baseline expectation. “I would not do that,” Powell told reporters Wednesday in response to a question during a press conference following the central bank’s two-day policy meeting.
Chinese gold prices hit record highs last week, extending a months-long rally as consumers snap up the safe-haven asset to offset a depreciating yuan. Physical gold premiums also soared to new highs. "While the developments in China are worth watching, we currently do not believe that this will change the outlook for the gold market," said Julius Baer analyst Carsten Menke.
Swiss gold exports rose by 7.3% in August from July as higher deliveries to India and China offset lower supplies to Turkey, customs data showed on Tuesday.
Switzerland is the world's biggest bullion refining and transit hub, while China and India are the largest consumer markets with local demand sensitive to high prices and time of the season.
Supplies to India, where jewellers usually make purchases for the October-November festival season, jumped by almost threefold to their highest since May, while shipments to China rose 1%, the data showed. in general, gold imports by India, the world’s second-biggest consumer, surged about 40% in August on strong festive buying, a person familiar said, threatening to blow out the trade deficit that has already been high due to rising oil prices. The value of inbound gold shipments grew to $4.9 billion in August from $3.5 billion a year earlier, according to a person familiar with the matter.
Unstoppable Gold
What determines the price of gold? For much of the past decade the answer was easy: the price of money. The lower rates fell, the higher gold climbed, and vice versa.
Gold is the quintessential “anti-dollar” — a place to turn for those who distrust fiat currency — so it seemed natural that prices would rise in a world of low real interest rates and cheap dollars. Or when rates went up, gold, which pays no yield, naturally became less attractive, sending prices tumbling.
Well, not anymore.
As inflation-adjusted rates soared this year to the highest since the financial crisis, bullion has barely blinked. Real yields — measured by the 10-year Treasury inflation-protected securities, or TIPS, — jumped again on Thursday to the highest since 2009, while spot gold nudged down a mere 0.5% the same day. The last time real rates were this high, gold was about half the price.
The unraveling of the relationship between gold and real interest rates could be a paradigm shift for the precious metal, leaving investors struggling to calculate its “fair value” in a world where the old equations don’t seem to apply. It’s also raising questions about if and when the old dynamic might reassert itself – or whether it already has, just from a new base.
So what’s holding prices up? Analysts point to a combination of voracious central bank buying – led by China – and investors that are still betting a US economic slowdown will be good for gold, even when the regular playbook says it’s time to sell. Normally money managers would sell the haven metal as the dollar strengthens and the interest paid by other safe assets like bonds and cash rises.
But they haven’t done so on the scale that would be expected, creating the large “premium” to where the models say it should be trading.
The “premium” has endured for over a year, as a record gold-buying binge by central banks helped the metal withstand monetary policy tightening globally.
There are some initial signs that sovereign demand is starting to slow, making gold more vulnerable to downturns. Crucial to the outlook will be if institutional investors decide to sell up if prices test new lows.
However, some analysts argue that rather than breaking down entirely, gold’s relationship with its key drivers has simply been reset at a higher base.That could allow it to set a record if yields or the dollar drop again, according to Macquarie’s Marcus Garvey, who sees prices rising to $2,100 an ounce next year as the US economy slows.
Gold has shown solid rally in a moment of SVB crash and FTX turmoil, but investors are more skeptical of a repeat, particularly with the threat of a banking crisis having retreated and bonds offering meaningful yields for the first time in years. With gold looking relatively expensive, it might struggle to attract meaningful flows even in a US slowdown.
Nevertheless, Gold firmed on Friday despite pressure from a stronger U.S. dollar and bond yields, as investors assessed major central banks' decisions to stand pat on interest rates as a signal of imminent global economic pain.
This last comment perfectly explains why gold is raising on a background of higher real (not even nominal) rates and high Fed rate, which is going to be even higher. Because things are becoming hot and it starts to burn up. Despite all headwinds - market things that it is going to be worse and just ignores them, keeping stable demand. Gold is the only long-term topic that will actively develop.
Gold is an instrument without a coupon, but there is no systemic risk in it. And now, in the next decade, we are entering the global systemic risk of the Western economy. It simply will not cope, due to the fact that there are no internal development forces, the economy there can no longer develop at all. It is impossible to pay off this level of public debt. As soon as the Central Bank announces QE, it hits the national currency. And this is the problem of the next decade or even nearest few years, which seems probable because of Debt growth pace. Therefore, the only instrument with no systemic risk that allows you to save assets, but without a sovereign fund coupon, is gold.
And if there is also a devaluation of the main currencies in relation to assets, then if gold goes above 2100, then it will quickly reach 2800 per ounce with further prospects. Someone drew a good graph, there is a long trend since the 19th century and the conclusion is this: we are going to 10 thousand dollars per ounce. Well, 10,000 is an epic milestone, but realistically 2800-3300 is on the agenda. This is the goal for the next 2-3 years.
Things that remained aside
First is, the Fed grabs ~ 50 Bln out of the markets this week, which has become the largest weekly liquidity withdrawal for a long time. And some analysts think that massive collapse on market were not due hawkish Fed statement but mostly due liquidity outflow. The Ministry of Finance and the Federal Reserve increase money in Treasury accounts and reduce the Fed’s balance sheet. That is, part of the liquidity simply left the system, which moved the yields on the same treasuries upward. In fact, the Fed has achieved the jubilee - $1Trln out of the economy system in a year.
Was Powell's speech directly responsible for the decline in markets? Investors suggest it was. His main message was the same "higher for longer" with a clearly defined desire to keep the real positive rate above 1.5% for the next year and a half, which means those who listened concluded that until something breaks, there will be no rate reduction.
Moreover, so far no one is seriously considering the risk that the nominal rate will have to be raised even higher during this time, as inflation will rise. The nuance is that this will most likely not happen suddenly, but gradually, over the next 2-3 quarters.
Against this background, all other problems remain as they were - bank balance sheets suffer from rising yields, refinancing of business debt at higher rates continues, the credit quality of borrowers is falling, delinquencies and defaults are growing, yields on 10-year Japanese government bonds continue to rise. In general, normal human life is going downhill.
In just a week, everyone will begin to feel the return of payments on student debts, and this is neither more nor less, more than 40 million people. Student loan has an average payment of more than $400/month. or more than 200 billion dollars/year. In general, about 1% of final demand will leave the market. Or maybe it won’t go away, but then either lending at rather high rates will increase (despite the fact that overdue loans on credit cards have already increased significantly), or savings will continue to decline.
It may seem like $400/month. on average it's nothing, but it's not true. Because that's the average. There are pensioners over 60 years old, with a payment of three cents, and young people, who will have to pay 1500-2000 dollars per month. So there will be different impacts on different sectors of the economy. It will be more difficult for those whose clients are millennials or so (25-40 years old). Most likely, the service sector, all kinds of restaurants, cafes, air travel, etc. will feel this decrease to the maximum.
Well, in fact, another important factor is that “excess” savings continue to dry out. If the stock market slowly goes down, consumer behavior may change towards saving due to the fact that the perceived personal well-being will worsen. Here thanks to Powell, the Fed as a whole and the Ministry of Finance.
A separate question is why no one explains why Yellen is accumulating such a lot of money in her accounts (already $660 billion)?
But if you look at the dynamics of balances in treasury accounts, you can see that this happens at such a speed when money is about to be spent to plug some holes. What kind of holes does the Ministry of Finance plan to close? According to Yellen, none. She does not expect a soft or any other kind of economic landing. America strong. But it’s obviously better to have a little piggy bank.
This is especially interesting because tax revenues are not going to grow; on the contrary, they are falling. This is understandable. There are a huge number of factors, but one of them is worth noting - there is no resale of housing, because there are no fools who want to exchange a mortgage at 3% for a mortgage at 8%, which means there are no taxes associated with the sale of the increase in value.
In short, everything goes on as before, but no one still wants to notice where it all goes. Business publications don't really embellish the picture. They write everything more or less objectively, but the market doesn’t care about objectivity. Here AI should soon push the world economy up, and here is you, with your problems, really. Although the topic about AI is somehow already fading .
In short, there is no reason for everything to fall into the abyss right now. But the situation is precarious, so a reason may quickly appear.
Separately, it is worth noting the situation with the suspension of government work on October 1. No one here knows whether a circus similar to the circus with the debt ceiling will take place or not, but if it was at least possible to say “this has never happened” about the US default, then a government shutdown has happened before. Therefore, maybe it makes sense not to underestimate the likelihood and how it could affect the markets in the current situation.
For example some analysts think that massive liquidity withdrawal right at the even of the 1st of October is not an occasion. Yes, it smells like another conspiracy theory but, it has logic. In particular, people appeal to 2019 year and liquidity crisis on overnight banking market. Besides, Repo now is also start drying out.
Thus, all that have been said above seems to confirm our suggestion that gold should sooner turn to rally rather than later. At least, "irrational" market reaction on Fed statement and unexplainable demand for gold indirectly suggest that market either do not believe in long-term hawkish policy and prepares to recession or expect uncontrolled inflation spiral. Buy physical gold. Keep it in safe place.
This week, personally for me, the most important was the price action of Gold. Fed results are important and we've considered it yesterday. But, recall gold price action. Despite rally on the US real interest rates, despite hawkish tone from the Fed - it was raising. Yes, it was a pullback by Friday, but in general, it is amazing resistance to headwind, when rate is around 5.5%, real rate is 2%. It can't be said for sure, but I do not exclude that it might be an anticipation by the market as inflation increasing as further deterioration of the US economy. Or, investors slowly start to understand what is going. Big banks, such as JP Morgan, HSBC and others repeat mantras on Fed pivot and 5.5% excellent yield, provided by US bonds. This is counted on public, households, to make them by more US debt. While Vanguard tells about three more rate hikes and hedge funds turns bullish on US Dollar. Gold starts getting support from multiple factors, starting from central banks demand and up to hedge funds and private investors. It means that market expects that things will be worse inflation will be higher, while real rate will turn down again. Keep it simple, as events are accelerating, it might be reversal to 2nd stage of long-term upside tendency on gold that we're waiting for.
Market overview
Gold markets haven’t been this calm since the onset of the Covid-19 pandemic, thanks to a deadlock between buyers and sellers that’s showing no signs of breaking.
Six-month historical gold volatility slumped to the lowest since February 2020 on Friday. The measure has plunged due to bullion largely staying confined to a range between $1,900 and $2,000 an ounce since mid-May.
That’s despite the dollar and inflation-adjusted Treasury yields surging over the same period, which would usually put bullion under major pressure. Gold buyers have supported the metal every time it slid to around $1,900, essentially putting a floor under the market.
Exchange-traded funds backed by the metal have seen their holdings shrink by 5% this year, according to an initial tally by Bloomberg, but that’s not been enough to drive prices lower. Meanwhile, buying by central banks has stayed robust after a record year in 2022, according to data from the World Gold Council.
On Friday two weeks ago, the precious metal gained the most in more than three weeks as traders weighed a slew of economic data. Now Gold pared gains after the Federal Reserve left its benchmark interest rate unchanged while signaling borrowing costs will likely stay higher for longer after one more hike this year. The US central bank’s policy-setting Federal Open Market Committee, in a post-meeting statement published Wednesday in Washington, repeated language saying officials will determine the “extent of additional policy firming that may be appropriate.”
The FOMC held its target range for the federal funds rate at 5.25% to 5.5%, while updated quarterly projections showed 12 of 19 officials favored another rate hike in 2023, underscoring a desire to ensure inflation continues to decelerate.Fed officials also see less easing next year, according to the new projections, reflecting renewed strength in the economy and labor market.
Still, bullion held ground in the face of surging bond yields, with Treasury two-year yields climbing to the highest level since 2006. Fed Chairman Jerome Powell said he would not call a so-called “soft landing” for the US economy his baseline expectation. “I would not do that,” Powell told reporters Wednesday in response to a question during a press conference following the central bank’s two-day policy meeting.
Chinese gold prices hit record highs last week, extending a months-long rally as consumers snap up the safe-haven asset to offset a depreciating yuan. Physical gold premiums also soared to new highs. "While the developments in China are worth watching, we currently do not believe that this will change the outlook for the gold market," said Julius Baer analyst Carsten Menke.
Swiss gold exports rose by 7.3% in August from July as higher deliveries to India and China offset lower supplies to Turkey, customs data showed on Tuesday.
Switzerland is the world's biggest bullion refining and transit hub, while China and India are the largest consumer markets with local demand sensitive to high prices and time of the season.
Supplies to India, where jewellers usually make purchases for the October-November festival season, jumped by almost threefold to their highest since May, while shipments to China rose 1%, the data showed. in general, gold imports by India, the world’s second-biggest consumer, surged about 40% in August on strong festive buying, a person familiar said, threatening to blow out the trade deficit that has already been high due to rising oil prices. The value of inbound gold shipments grew to $4.9 billion in August from $3.5 billion a year earlier, according to a person familiar with the matter.
Unstoppable Gold
What determines the price of gold? For much of the past decade the answer was easy: the price of money. The lower rates fell, the higher gold climbed, and vice versa.
Gold is the quintessential “anti-dollar” — a place to turn for those who distrust fiat currency — so it seemed natural that prices would rise in a world of low real interest rates and cheap dollars. Or when rates went up, gold, which pays no yield, naturally became less attractive, sending prices tumbling.
Well, not anymore.
As inflation-adjusted rates soared this year to the highest since the financial crisis, bullion has barely blinked. Real yields — measured by the 10-year Treasury inflation-protected securities, or TIPS, — jumped again on Thursday to the highest since 2009, while spot gold nudged down a mere 0.5% the same day. The last time real rates were this high, gold was about half the price.
The unraveling of the relationship between gold and real interest rates could be a paradigm shift for the precious metal, leaving investors struggling to calculate its “fair value” in a world where the old equations don’t seem to apply. It’s also raising questions about if and when the old dynamic might reassert itself – or whether it already has, just from a new base.
So what’s holding prices up? Analysts point to a combination of voracious central bank buying – led by China – and investors that are still betting a US economic slowdown will be good for gold, even when the regular playbook says it’s time to sell. Normally money managers would sell the haven metal as the dollar strengthens and the interest paid by other safe assets like bonds and cash rises.
But they haven’t done so on the scale that would be expected, creating the large “premium” to where the models say it should be trading.
The “premium” has endured for over a year, as a record gold-buying binge by central banks helped the metal withstand monetary policy tightening globally.
There are some initial signs that sovereign demand is starting to slow, making gold more vulnerable to downturns. Crucial to the outlook will be if institutional investors decide to sell up if prices test new lows.
However, some analysts argue that rather than breaking down entirely, gold’s relationship with its key drivers has simply been reset at a higher base.That could allow it to set a record if yields or the dollar drop again, according to Macquarie’s Marcus Garvey, who sees prices rising to $2,100 an ounce next year as the US economy slows.
Gold has shown solid rally in a moment of SVB crash and FTX turmoil, but investors are more skeptical of a repeat, particularly with the threat of a banking crisis having retreated and bonds offering meaningful yields for the first time in years. With gold looking relatively expensive, it might struggle to attract meaningful flows even in a US slowdown.
Nevertheless, Gold firmed on Friday despite pressure from a stronger U.S. dollar and bond yields, as investors assessed major central banks' decisions to stand pat on interest rates as a signal of imminent global economic pain.
This last comment perfectly explains why gold is raising on a background of higher real (not even nominal) rates and high Fed rate, which is going to be even higher. Because things are becoming hot and it starts to burn up. Despite all headwinds - market things that it is going to be worse and just ignores them, keeping stable demand. Gold is the only long-term topic that will actively develop.
Gold is an instrument without a coupon, but there is no systemic risk in it. And now, in the next decade, we are entering the global systemic risk of the Western economy. It simply will not cope, due to the fact that there are no internal development forces, the economy there can no longer develop at all. It is impossible to pay off this level of public debt. As soon as the Central Bank announces QE, it hits the national currency. And this is the problem of the next decade or even nearest few years, which seems probable because of Debt growth pace. Therefore, the only instrument with no systemic risk that allows you to save assets, but without a sovereign fund coupon, is gold.
And if there is also a devaluation of the main currencies in relation to assets, then if gold goes above 2100, then it will quickly reach 2800 per ounce with further prospects. Someone drew a good graph, there is a long trend since the 19th century and the conclusion is this: we are going to 10 thousand dollars per ounce. Well, 10,000 is an epic milestone, but realistically 2800-3300 is on the agenda. This is the goal for the next 2-3 years.
Things that remained aside
First is, the Fed grabs ~ 50 Bln out of the markets this week, which has become the largest weekly liquidity withdrawal for a long time. And some analysts think that massive collapse on market were not due hawkish Fed statement but mostly due liquidity outflow. The Ministry of Finance and the Federal Reserve increase money in Treasury accounts and reduce the Fed’s balance sheet. That is, part of the liquidity simply left the system, which moved the yields on the same treasuries upward. In fact, the Fed has achieved the jubilee - $1Trln out of the economy system in a year.
Was Powell's speech directly responsible for the decline in markets? Investors suggest it was. His main message was the same "higher for longer" with a clearly defined desire to keep the real positive rate above 1.5% for the next year and a half, which means those who listened concluded that until something breaks, there will be no rate reduction.
Moreover, so far no one is seriously considering the risk that the nominal rate will have to be raised even higher during this time, as inflation will rise. The nuance is that this will most likely not happen suddenly, but gradually, over the next 2-3 quarters.
Against this background, all other problems remain as they were - bank balance sheets suffer from rising yields, refinancing of business debt at higher rates continues, the credit quality of borrowers is falling, delinquencies and defaults are growing, yields on 10-year Japanese government bonds continue to rise. In general, normal human life is going downhill.
In just a week, everyone will begin to feel the return of payments on student debts, and this is neither more nor less, more than 40 million people. Student loan has an average payment of more than $400/month. or more than 200 billion dollars/year. In general, about 1% of final demand will leave the market. Or maybe it won’t go away, but then either lending at rather high rates will increase (despite the fact that overdue loans on credit cards have already increased significantly), or savings will continue to decline.
It may seem like $400/month. on average it's nothing, but it's not true. Because that's the average. There are pensioners over 60 years old, with a payment of three cents, and young people, who will have to pay 1500-2000 dollars per month. So there will be different impacts on different sectors of the economy. It will be more difficult for those whose clients are millennials or so (25-40 years old). Most likely, the service sector, all kinds of restaurants, cafes, air travel, etc. will feel this decrease to the maximum.
Well, in fact, another important factor is that “excess” savings continue to dry out. If the stock market slowly goes down, consumer behavior may change towards saving due to the fact that the perceived personal well-being will worsen. Here thanks to Powell, the Fed as a whole and the Ministry of Finance.
A separate question is why no one explains why Yellen is accumulating such a lot of money in her accounts (already $660 billion)?
But if you look at the dynamics of balances in treasury accounts, you can see that this happens at such a speed when money is about to be spent to plug some holes. What kind of holes does the Ministry of Finance plan to close? According to Yellen, none. She does not expect a soft or any other kind of economic landing. America strong. But it’s obviously better to have a little piggy bank.
This is especially interesting because tax revenues are not going to grow; on the contrary, they are falling. This is understandable. There are a huge number of factors, but one of them is worth noting - there is no resale of housing, because there are no fools who want to exchange a mortgage at 3% for a mortgage at 8%, which means there are no taxes associated with the sale of the increase in value.
In short, everything goes on as before, but no one still wants to notice where it all goes. Business publications don't really embellish the picture. They write everything more or less objectively, but the market doesn’t care about objectivity. Here AI should soon push the world economy up, and here is you, with your problems, really. Although the topic about AI is somehow already fading .
In short, there is no reason for everything to fall into the abyss right now. But the situation is precarious, so a reason may quickly appear.
Separately, it is worth noting the situation with the suspension of government work on October 1. No one here knows whether a circus similar to the circus with the debt ceiling will take place or not, but if it was at least possible to say “this has never happened” about the US default, then a government shutdown has happened before. Therefore, maybe it makes sense not to underestimate the likelihood and how it could affect the markets in the current situation.
For example some analysts think that massive liquidity withdrawal right at the even of the 1st of October is not an occasion. Yes, it smells like another conspiracy theory but, it has logic. In particular, people appeal to 2019 year and liquidity crisis on overnight banking market. Besides, Repo now is also start drying out.
Thus, all that have been said above seems to confirm our suggestion that gold should sooner turn to rally rather than later. At least, "irrational" market reaction on Fed statement and unexplainable demand for gold indirectly suggest that market either do not believe in long-term hawkish policy and prepares to recession or expect uncontrolled inflation spiral. Buy physical gold. Keep it in safe place.
Last edited:
