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Physical gold demand surges as financial assets bleed out

The confluence of several less-than-once-in-a-generation factors has dragged financial markets down throughout 2022. For those still weighing whether we…

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The confluence of several less-than-once-in-a-generation factors has dragged financial markets down throughout 2022.

For those still weighing whether we are in a bear market or not, Vijay L Bhambwani, a currencies and commodities expert, points out that for traders, “long positions have been bleeding” and “resulting in margin calls week-on-week for months”.

The coronavirus, prolonged lockdowns, supply chain upheaval, the Russia-Ukraine war, and the Fed’s new-found decisive hawkishness, have left households more vulnerable than ever and animal spirits languishing.

Nearly every asset owned by the ‘general public’ has eroded deeply this year, including the fresh and exotic faces of the store of value – cryptocurrencies.

With a record high retail inflation in the US last week, hopes of easing inflationary pressures were dashed, resulting in a historic rate hike of 75 bps by the Federal Reserve.

Markets rallied on the Fed’s re-established credibility, but it was to be short-lived. At the start of the business day, US markets returned a chunk of yesterday’s gains as fears of a recession took center stage again, blunting the Fed’s most powerful move in nearly three decades.

In the CPI data, essentials including food, fuel, and rent were at multi-decade highs, crushing household budgets. With OPEC+ members failing to meet their quotas and refining capacities being in short supply, gasoline prices in the US have spiked too, reminiscent of the early 1970s.

Food-at-home costs increased to 11.9% year-on-year, the highest since April of 1979.

In the seventies and eighties, US consumer price inflation breached 8% on two separate occasions. First, from 1973 to 1975, retail inflation stayed above 8% for 23 consecutive months. In the second case, between 1978 and 1982, this lasted a mammoth 41 consecutive months.

With no sign of inflationary pressures easing, households may have to accept the possibility of an extended period of financial hardship and steep declines in purchasing power.

Source: MarketWatch, FRED (As of 16th June 2022)

Every leading asset class has lost significant value, devastating financial portfolios, household wealth, and retirement savings.

The DXY is primarily composed of the EURUSD and signals the favorability of the dollar against other currencies in the international forex market. Although the dollar has strengthened in this respect, at home, inflation is raging, and purchasing power of households continues to erode.

Despite claims of the demise of gold and no shortage of bad press received this year, the yellow metal has preserved its value year-to-date (YTD). It has significantly outperformed the basket of assets in the above graph on this basis.

It should be noted that this is the paper price of gold, in the highly liquid futures contracts market and not that of the physical market.

Source: LBMA, US BLS

In the above graph, by and large, gold derivatives have seen a rise in price during periods of increasing inflation.

Paper prices

Paper gold and physical gold are separate markets. The paper gold market is a futures market, where participants trade a paper contract to deliver gold at some pre-determined date. However, according to a 2013 report by the London Bullion Market Association (LBMA) and the London Platinum and Palladium Market (LPPM), in 95% of transactions, contracts are rolled over and no physical delivery takes place. Physical metals are thus not exchanged at the metals exchange.

Paper metals, being representations of the real thing, can be orders of magnitude greater than the actual physical supply. As a result, these markets can be very volatile, and their liquidity is often used to cover margins during losses in the broader financial markets.

Thus, the supply and demand fundamentals of the physical substance do not determine the price of paper gold. The paper market follows its own heavily-financialized logic and is divorced from physical fundamentals.

Instead, the paper price acts as a beacon, on which all physical prices are locally determined.

Real effects

With financial portfolios having been decimated, new headwinds are gathering in the real economy.

For US households, the single biggest asset is usually home equity. The latest CPI figures show that shelter costs were up 5.5% annually, while new home sales fell to their lowest since April 2020, and 19% of owners reportedly cut prices over the past month.

Mark Zandi, Chief Economist at Moody’s Analytics believes that the US economy is now in a “housing correction.” At the same time, mortgage applications are anemic as rates have spiked.

Although the US May jobs report showed an uptick, marquee companies have been laying off workers in a hurry, amid tightening economic conditions, supply disruptions, and gloom demand projections.

With financial portfolios losing value fast, real home equity losses mounting, and now, jobs being threatened, where is the average householder to turn?

Let’s get physical

Physical gold is a unique albeit often overlooked animal.

What is perhaps most startling is the surging demand for physical, and not paper gold, at a time when financial assets are bleeding. One reason this trend may have gone largely undetected is that physical gold is a price taker of paper gold.

Crucially, gold has been money for thousands of years. Due to its permanence, and inability to simply be created by an act of will of monetary authorities, the yellow metal has maintained a lasting and universal appeal as a currency of exchange and store of value.

Unlike assets in the financial system, gold does not incur a counter-party risk. That means unlike capital appreciation of equities, dividend returns, or bond pay-outs, there is no risk of expected financial returns not materializing or remaining unpaid. Its value does not depend on a future stream of cash flows.

In 1971, President Nixon took the dollar off the gold standard. Professor Harold James of Stanford University described this as having “severed the millennia-long link between money and precious metals”.

Despite the Nixon Shock of five decades ago, the graph below documents the surge in total sales of American Buffaloes, a popular 24-karat gold coin sold by the US Mint. The full-year data for 2022 is a projection based on the sales of 238,000 ounces from January to May.

Source: US Mint

In today’s tumultuous times, with economic growth waning and grave market uncertainties, there seems to be an ongoing reversion in the demand for gold as a store of value.

Gold demand and rising inflation

Although the paper price of gold may have performed better this year than other financial assets, the price movements have been very volatile. This has often been used as a rationale to discount gold as a reliable inflation hedge.

However, the graph below suggests that the physical market is another matter altogether. The average consumer seems to still have faith in the store-of-value properties of physical gold, as purchases have picked up considerably in the last 3 years, especially in line with rising inflation.

Source: US Mint, BLS, LBMA

Since the outbreak of coronavirus and the extraordinary economic policies that have been enacted around the world, the average annual price of paper gold has remained relatively stable. However, the CPI in the US has reached historic highs and so have purchases of American Buffaloes.

Source: BLS, LBMA, US Mint

This suggests that there is a clear preference for physical gold over paper gold in times of market uncertainty and high inflation.

The risks to physical gold prices

The key risk to physical gold prices is from rising interest rates. Since gold does not provide a return, it is less attractive compared to interest-bearing products. As rates continue to rise, we may see a slowdown in physical demand due to this reason.

However, continued quantitative easing is likely to affect all financial assets as well.

There are at least four considerations to take note of here. Firstly, the Fed’s track record, and especially its reversal in 2019, may imply that the pain of policy normalization is too much for the economy to bear. Markets have already sold off twice in as many weeks, and debt burdens are rising.

With a debt to GDP ratio of 130%, it may be challenging for the Fed to stay its stated course.

With inflation at four-decade highs, the anguish of the average consumer is palpable and rate hikes may lead to more harm and a social backlash.

Danielle DiMartino Booth, CEO of Quill Intelligence, and an advisor to the Dallas Fed from 2006 to 2015 believes that a Q2 contraction in US GDP is a very real possibility. The Atlanta Fed had forecast Q2 growth at a subdued 0.9% last week, but this collapsed to 0% yesterday, leading to fears of a recession or even a full-blown economic downturn.

In the early days of a fresh rate hike cycle, announcements of a possible Fed Pause have only fuelled doubts about the Fed’s willingness to tackle high inflation.

Secondly, due to the presence of supply disruptions, it is unclear how quickly or effectively demand-side rates will ease inflationary pressures, threatening a stagflationary scenario. According to Greg McBride, Chief Financial Analyst at Bankrate, the Fed’s “job is going to get tougher…especially if inflation stays stubbornly high.”

Thirdly, amid quantitative tightening in a bear market, if financial portfolios (and savings) continue to erode, by virtue of being outside the mainstream financial system, physical gold may provide a source of rare comfort to householders.

Lastly, under current conditions, the projected sales of gold in 2022 are nearly 10 times that of 2019. This is a substantial increase not reflected in the paper price. Ongoing supply disruptions and rising demand may force local dealers to raise their own prices in the future.

The way ahead

The Fed’s 75 bps hike should be highly negative for gold, at least in theory. However, today paper gold is actually trading 0.6% up.

This may signal that with heavy market uncertainty, and the reversal of the Fed hike relief rally, market demand for physical gold may maintain a strong uptrend, especially as an instrument of wealth insurance.

Given the historic rate hike, metal investors will be keeping a close eye on physical sales data from the US Mint.

The post Physical gold demand surges as financial assets bleed out appeared first on Invezz.

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Economics

Here’s Why Royal Caribbean, Carnival Stock Are Good Buys

Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it’s the destination not the journey for the cruise lines.

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Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it's the destination not the journey for the cruise lines.

For the past two years, since the covid pandemic hit in late-February 2020, the cruise industry has taken one punch after another. And, while the situation has improved from the extended period when cruises were not allowed to sail from United States ports, that does not mean that it's back to 2019 for Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Line (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report.

The industry has done a remarkable job bringing operations back to near-normal. All three cruise lines not only have put all their ships back in service, they're also still moving forward with plans for new ships and other investments including improvements to private islands, and developing new ports.

That being said, Carnival just reported its second-quarter earnings and the market did not like the numbers at all. Shares of all three cruise lines were down double digits on Sept. 30, but traders clearly missed that aside from rising costs and a loss (both of which were expected) the cruise line largely delivered good news.

Image source: Shutterstock

Carnival Did Well in Areas it Controls  

Carnival reported a GAAP net loss of $770 million for the quarter. That was driven by higher costs with the company specifically citing advertising expenses and having some of its fleet unavailable to produce revenue.

While the company's year-to-date adjusted cruise costs excluding fuel per ALBD during 2022 has benefited from the sale of smaller-less efficient ships and the delivery of larger-more efficient ships, this benefit is offset by a portion of its fleet being in pause status for part of the year, restart related expenses, an increase in the number of dry dock days, the cost of maintaining enhanced health and safety protocols, inflation and supply chain disruptions. The company anticipates that many of these costs and expenses will end in 2022.

If you're investing in any cruise line you have to do so on a very long-term basis. That makes profitability less of a concern than the company building back its business and Carnival showed some very positive signs in that direction.

  • Revenue increased by nearly 80% in the third quarter of 2022 compared to second quarter 2022, reflecting continued sequential improvement.
  • Onboard and other revenue per PCD for the third quarter of 2022 increased significantly compared to a strong 2019
  • Total customer deposits were $4.8 billion as of August 31, 2022, approaching the $4.9 billion as of August 31, 2019, which was a record third quarter.

  • New bookings during the third quarter of 2022 primarily offset the historical third quarter seasonal decline in customer deposits ($0.3 billion decline in the third quarter of 2022 compared to $1.1 billion decline for the same period in 2019).

Carnival (and likely all the cruise lines) is being hurt by prices generally being depressed and some passengers paying for their trips using future cruise credits from cruises canceled during the pandemic. That's not really what matters though. Carnival has been increasing passenger loads and getting people back on its ships.

"Since announcing the relaxation of our protocols last month, we have seen a meaningful improvement in booking volumes and are now running considerably ahead of strong 2019 levels," Carnival CEO Josh Weinstein said. "We expect to further capitalize on this momentum with renewed efforts to generate demand. We are focused on delivering significant revenue growth over the long-term while taking advantage of near-term tactics to quickly capture price and bookings in the interim."

Basically, cruise prices are cheap right now because it's more important to get customers back on board than it is to maintain pricing integrity. That's a tactic that could hurt long-term pricing, but the cruise industry is less vulnerable than other vacation options because there have always been large pricing variations based on the calendar and the age of the ship being booked.

It's a Long Voyage for Cruise Lines

Carnival was trading at its 52-week low after it reported. That's a pretty major overreaction given that the cruise industry was barely operating in the fall of 2021.

Yes, the industry has a long way to go. All three major cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in an environment with higher interest rates is a challenge, but it's one Carnival (and its rivals) have been meeting.

That has come with some shareholder dilution. Carnival sold $1.15 billion in new stock during the quarter, but the company has over $7.4 billion in liquidity. Weinstein is optimistic (he has to be, that's part of his job) about the future.

"During our third quarter, our business continued its positive trajectory, achieving over $300 million of adjusted EBITDA and reaching nearly 90% occupancy on our August sailings. We are continuing to close the gap to 2019 as we progress through the year, building occupancy on higher capacity and lower unit costs," he said.

Usually it's easy to dismiss a CEO making upbeat comments after posting a loss, but in this case, Carnival has basically followed the recovery path it laid out once it returned to sailing. Both Royal Caribbean and Norwegian have followed similar paths and while meaningful shareholder returns may take time, these are strong companies built for the long-term that made a lot of money before the pandemic and should do so again. 

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Spread & Containment

Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.

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Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Economics

Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…

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Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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