Three years ago, I said to an American Professor from the US Army War College in Washington, in respect to the campaign to return American lost Blue Collar jobs to Asia, that these jobs would never return. They were gone for good.
He retorted that that was precisely so, but I was missing the point, he said. America did not expect, or want, the majority of those humdrum manufacturing jobs back.
They should stay in Asia.
The Élites, he said, wanted only the commanding heights of Tech. They wanted the intellectual property, the protocols, the metrics, the regulatory framework that would allow America to define and expand across the next two decades of global technological evolution.
The real dilemma however, he said was:
“What is to be done with the 20% of the American workforce that would be no longer needed: that was no longer necessary to the functioning of a tech-led US economy?”
In fact, what the Professor said was but one facet of a fundamental economic dilemma. From the seventies and eighties onwards, US corporations were busy offshoring their labour costs to Asia. Partly, this was to cut costs and increase profitability (which it did) — but it also represented something deeper.
From the outset, the US has been an expansionary empire ever digesting new lands, new peoples, and their human and material resources. Forward motion, the continuous military, commercial, and cultural expansion became the lifeblood of Wall Street and of its foreign polity. For, absent this relentless expansion, the civic bonds of American unity fall into question. An America not in motion is not America. This forms the very essence of US leitkultur.
Yet it only added further to the dilemma highlighted by my friend above. The expansion was accompanied by a flood of Wall Street credit expansion across the globe. The debt burden exploded, and has become top heavy, balancing unsteadily on a pinhead of genuine underlying collateral.
It is only now – for the first time since WW2 – that this relentless US strategic expansionary impulse has been challenged by the Russia-China axis. They have declared ‘enough’.
Yet, there was always another side to this dynamic of western structural transition. Its foundations, as the Professor suggested, no longer lay with the socially necessary labour contained in manufacturing drab products such as cars, telephones, or toothpaste. But rather, the core of it largely has come to reside in highly flammable debt-leveraged speculations on financial assets like stocks, bonds, futures, and especially derivatives, whose value is securitised indefinitely. In this context, the 20% (or more likely 40%) of the workforce, simply becomes redundant to this highly complex, hyper-financialised, networked economy.
So, here we have the second dilemma: Whilst the structural shrinking of the work-based economy inflates the financial sector, the latter’s complex volatility can only be contained through a logic of perpetual monetary doping (perpetual liquidity injections), justified by global emergencies, requiring ever greater stimulus.
How to face this dilemma? Well, there’s no going back. That’s not an option.
In this context, the Pandemic regimen becomes symptom of a world so far removed from any real economic self-sufficiency – adequate to sustain its existing workforce – that the dilemma may only be resolved (in the view of the élites) through facilitating the continuing attenuation of the old economy, whilst financial assets must be replenished with regular additions of liquidity.
How to manage it? With the gradual abolishing of the traditional labour content to commodities (either from automation, or off-shoring), corporations have used the woke ideology to reinvent themselves. No longer do they produce just ‘things’ – they manufacture social output. They are stakeholders in society, ‘manufacturing’ socially desirable outcomes: diversity, social inclusivity, gender balance and climate responsible governance. Already, this transition has produced a cornucopia of new ESG liquidity flowing through calcified economic arteries.
And the Pandemic, of course, justifies the monetary stimulus, whilst the follow-on climate ‘health’ emergency is prepared in order to legitimise further debt expansion, for the future.
Financial analyst Mauro Bottarelli summarised the logic of this as follows:
“A state of semi-permanent health emergency is preferable to a vertical market crash that would turn the memory of 2008 into a walk in the park.”
Professor of Critical Theory and Italian at Cardiff University, Fabio Vighi, has noted too the “Incurability” of what he calls “the Central Banker’s Long-Covid” condition” — that the injection of such a huge monetary stimulus as we have seen, was only possible by turning the engine of Main Street ‘off’, as such a cascade of liquidity ($6 Trillion) could not be allowed to flow willy-nilly into the Main Street economy (in the view of the Central Bankers), as this would cause an inflationary tsunami à la Weimar Republic. Rather, its’ main thrust has served to further inflate the virtual world of ever more complex financial instruments.
Inevitably however, coupled with supply-chain bottlenecks, the gush of liquidity has caused Main Street inflation to rise, and hence imposed further hurt on the ground. The aim of managing the manufacturing attenuation on the one hand (small business ‘lockdown’), whilst liquidity flowed freely to the financialised sphere (to postpone a market crash) has failed. Inflation is accelerating, interest rates will rise, and this will bring adverse social and political consequences in its wake: i.e. anger, rather than compliance.
At the heart of the predicament for those who run the system is that, should they to lose control of liquidity creation – either as a result of interest rate rises, or from increasing political dissent – the ensuing recession would take-down the entire socio-economic fabric below.
And any severe recession would likely wreak havoc on the western political leadership, too.
They have opted therefore instead, to sacrifice the democratic framework, in order to roll out a monetary regime rooted in a cult of corporate-owned science & technology, media propaganda, and disaster narratives – as the means to progress towards a technocratic ‘aristocratic’ takeover over the heads of the people. (Yes, in certain ‘circles’, it is thought of as a newly rising aristocracy of money).
Professor Vighi again:
“The consequences of emergency capitalism are emphatically biopolitical. They concern the administration of a human surplus that is growing superfluous for a largely automated, highly financialised, and implosive reproductive model. This is why Virus, Vaccine and Covid Pass are the Holy Trinity of social engineering.
‘Virus passports’ are meant to train the multitudes in the use of electronic wallets controlling access to public services and personal livelihood. The dispossessed and redundant masses, together with the non-compliant, are the first in line to be disciplined by digitalised poverty management systems directly overseen by monopoly capital. The plan is to tokenise human behaviour and place it on blockchain ledgers run by algorithms. And the spreading of global fear is the perfect ideological stick to herd us toward this outcome”.
Professor Vighi’s point is clear. The vaccine campaign and the Green Pass system are no stand-alone health disciplines. They are not about ‘the Science’, nor are they intended to make sense. They are primordially connected to the élites’ economic dilemma, and serve as a political tool too, by which a new monetary dispensation can displace democracy. President Macron spoke the unstated out loud, when he said: “As for the non-vaccinated, I really want to piss them off. And we will continue to do this, to the end. This is the strategy”.
Italian PM Draghi similarly has escalated attacks on the unvaxxed, making vaccines mandatory for all the over 50s, and imposing significant restrictions on anyone over 12. Again, though ‘following the science’ is the mantra, these measures make no sense: the Omicron variant predominantly infects the double vaxxed, not the unvaxxed.
Two days ago, a leading Nobel Prize winning Virologist, Dr Montagnier and a colleague, confirmed this “obsolete” aspect of vaccine mandates. Writing in the Wall Street Journal, they write:
” … mandating a vaccine to stop the spread of a disease requires evidence that the vaccines will prevent infection or transmission (rather than efficacy against severe outcomes like hospitalization or death). As the World Health Organization puts it, “if mandatory vaccination is considered necessary to interrupt transmission chains and prevent harm to others, there should be sufficient evidence that the vaccine is efficacious in preventing serious infection and/or transmission.” For Omicron, there is as yet no such evidence.
The little data we have suggest the opposite. One preprint study found that after 30 days the Moderna and Pfizer vaccines no longer had any statistically significant positive effect against Omicron infection, and after 90 days, their effect went negative—i.e., vaccinated people were more susceptible to Omicron infection. Confirming this negative efficacy finding, data from Denmark and the Canadian province of Ontario indicate that vaccinated people have higher rates of Omicron infection than unvaccinated people”.
This is rarely, if ever, admitted. Both Macron and Draghi are desperate: They need to ‘liquify’ their economies – and soon.
Indeed, Dr Malone, the father of the mRNA vaccines, wrote of those who point out such inconsistencies and illogicalities – just two months before his Twitter account was suspended – in a rather prophetic Twitter post:
“I am going to speak bluntly,” he wrote.
“Physicians who speak out are being actively hunted via medical boards and the press. They are trying to delegitimize us and pick us off, one by one.”
He finished by warning that this is “not a conspiracy theory” but “a fact.” He urged us all to “wake up.”
As the Telegraph has noted, British Scientists on a committee that encouraged the use of fear to control people’s behaviour during the Covid pandemic have admitted its work was “unethical” and “totalitarian”. The scientists warned in March 2021 that ministers in the UK needed to increase “the perceived level of personal threat” from Covid-19, because “a substantial number of people still do not feel sufficiently personally threatened”. Gavin Morgan, a psychologist on the team, said: “Clearly, using fear as a means of control is not ethical. Using fear smacks of totalitarianism”.
Another SPI-B member said:
“You could call [it] psychology ‘mind control’. That’s what we do … clearly we try and go about it in a positive way, but it has been used nefariously in the past”. Another colleague cautioned that “people use the pandemic to grab power, and drive through things that wouldn’t happen otherwise … We have to be very careful about the authoritarianism that is creeping in”.
The problem goes deeper than a little ‘nudge psychology’ however. In 2019, the BBC established the Trusted News Initiative (TNI), a partnership that now includes many main-stream media. TNI was ostensibly designed to counter foreign narrative influence during election times, but it has expanded to synchronise all elements of messaging, and to eliminate deviation across the broad realm of media and tech platforms.
These synchronised ‘talking-points’ are more powerful (and insidious) than any ideology, as it functions not as a belief system or ethos, but rather, as objective ‘science’. You cannot argue with, or oppose, Science (with a capital ‘S’). Science has no political opponents. Those who challenge it are labelled “conspiracy theorists,” “anti-vaxxers,” “Covid deniers,” “extremists,” etc. And, thus the pathologized New Normal narrative also pathologizes its political opponents: stripping them of all political legitimacy. The aim obviously, is their forced compliance. Macron made that plain.
Separating the population on the basis of vaccination status is an epoch-making event. If resistance is quashed, a compulsory digital ID can be introduced to record the ‘correctness’ of our behaviour and regulate access to society. Covid was the ideal Trojan horse for this breakthrough. A global system of digital identification based on blockchain technology has long been planned by the ID2020 Alliance, backed by such giants as Accenture, Microsoft, the Rockefeller Foundation, MasterCard, IBM, Facebook, and Bill Gates’ ubiquitous GAVI. From here, the transition to monetary control is likely to be relatively smooth. CBDCs would allow central bankers not only to track every transaction, but especially to turn off access to liquidity, for any reason deemed legitimate.
The Achilles’ heel to all this however, is the evidence of genuine popular resistance to the suppression by the tech platforms of all dissenting opinion (however well-qualified its source); by the refusal to allow people informed choice about their medical treatment; and by arbitrary restrictions that may involve loss of livelihood being imposed by decree, and underpinned by emergency laws, restricting popular protest.
But more significantly and paradoxically, the Omricon variant may cut the legs from under those political leaders intent on doubling-down. It is quite possible that this mild (barely lethal), yet highly contagious variant, may prove to be Nature’s ‘vaccine’, giving us a wide measure of immunity – ostensibly better than that offered by the ‘vaccines’ from Science!
Already, we observe European states are confused and at odds with each other – taking diametrically opposed policy lines: some ending restrictions, and some decreeing more and more. Other countries, like Israel, are reducing restrictions and shifting to a herd immunity policy.
Of course, the corollary to the collapse of the technocratic initiative to liquify the over-leveraged economy might well be recession. That unfortunately, is the logic of the situation.
HW+ Member Spotlight: Ben Bernstein
This week’s HW+ member spotlight features Ben Bernstein as he shares why it’s an interesting time to be tracking the housing market and all of the…
This week’s HW+ member spotlight features Ben Bernstein, director at Axonic Capital, an investment firm with a deep focus on the structured credit sector of the financial markets. Prior to that, Bernstein held leadership roles in Odeon Capital Group and JPMorgan Chase.
Below, Bernstein answers questions about the housing industry:
HousingWire: What is your current favorite HW+ article and why?
Ben Bernstein: Logan and Sarah’s Monday podcast is my go to. Logan cuts through all the noise and delivers clear concise opinions rooted in the data. So not only do I get updates on what is going on in the housing market but I learn which data points are relevant and how to analyze them. And Sarah always asks insightful questions. On top of that, it is super entertaining!
HousingWire: What has been your biggest learning opportunity?
Ben Bernstein: My biggest learning opportunity (and weirdest job I ever had) was every job I ever had. I started my career at Bear Stearns on February 23 2008. To say that was an interesting time and place to start a career would be an understatement. Two weeks later I was working for JPMorgan and eventually made it to a desk whose focus was working out of the assets that brought Bear down in the first place.
Think funky bonds linked to housing like subprime RMBS and CDOs. Getting to dig deep into what these bonds were and how the underlying mortgages impacted them was priceless. I started at Axonic, a credit fund focused on investments linked to residential and commercial real estate, in November of 2019.
Another interesting time to join an investment firm! Three months later, I was working remotely and figuring out how to be productive from home. Fourteen years into my career and my biggest learning opportunity is right now.
I’m learning new stuff every single day whether it be about the bond market, housing, trading, macro economics, etc. All I need to do is turn around and ask a question out loud and I’ll learn something new.
HousingWire: What is the best piece of advice you’ve ever received?
Ben Bernstein: The best piece of advice I’ve ever received was what is important is what you do when no one is looking. Your reputation, work ethic, success, productivity and integrity are all linked to what you do because you know you need to do it as opposed to what you think other people want you to do.
HousingWire: What’s 2-3 trends that you’re closely following?
Ben Bernstein: I don’t think anyone will be surprised by the trends I’m following these days: Inflation, credit spreads, housing prices and how they are all intertwined. Fortunately I have smart people around me (including HousingWire) to give me their opinions on where we are headed. It’s my job to put it all together. The past two years have been some of the most interesting times in markets and from where I sit I don’t think that will change any time soon.
HousingWire: What keeps you up at night and why?
Ben Bernstein: What keeps me up at night is the state of the housing market. 35+% home price appreciation since COVID-19 began. Two months supply of housing. Mortgage rates going up faster than they ever have. There’s a lot going on!
One thing as bond traders that we do is we look down before we look up. In other words we look at risk before we look at upside. An overheated housing market is something we pay close attention to because we don’t want prices to go down precipitously but we don’t want inflation to run away either. So it’s really an interesting time to be tracking the housing market and all of the ancillary markets that are impacted by it.
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Risk Appetites Improve Ahead of the Weekend
Overview: Equities are higher and bonds lower as the week’s activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong…
Overview: Equities are higher and bonds lower as the week's activity winds down. Asia Pacific markets rallied, paced by more than 2% gains in Hong Kong and South Korea. Japan's Nikkei rallied more than 1%, as did China's CSI 300. Most of the large markets but South Korea and Taiwan advanced this week, though only China and Hong Kong are up for the month. Europe's Stoxx 600 is up 1.3% through the European morning, its biggest advance of the week and what looks like the first weekly gain in four weeks. US futures are trading around 0.6%-0.8% higher. The NASDAQ is 4% higher and the S&P 500 is 3.3% stronger on the week coming into today. The US 10-year yield is virtually unchanged today and around 3.08%, is off about 14 bp this week. European bonds are mostly 2-4 bp firmer, and peripheral premiums over Germany have edged up. The US dollar is sporting a softer profile against the major currencies but the Japanese yen. Emerging market currencies are also mostly higher. The notable exception is the Philippine peso, off about 0.6% on the day and 2.2% for the week. Gold fell to a five-day low yesterday near $1822 and is trading quietly today and is firmer near $1830. August WTI is consolidating and remains inside Wednesday’s range (~$101.50-$109.70). It settled at almost $108 last week and assuming it does not rise above there today, it will be the first back-to-back weekly loss since March. US natgas is stabilizing after yesterday’s 9% drop. On the week, it is off about 10% after plummeting 21.5% last week. Europe is not as fortunate. Its benchmark is up for the 10th consecutive session. It soared almost 48% last week and rose another 7.7% this week. Iron ore’s 2% loss today brings the weekly hit to 5.1% after last week’s 14% drop. Copper is trying to stabilize after falling 7.5% in the past two sessions. It is at its lowest level since Q1 21. September wheat is up about 1.5% today to pare this week’s decline to around 8%.
Japan's May CPI was spot on expectations, unchanged from April. That keeps the headline at 2.5% and the core rate, which excludes fresh food, at 2.1%, slightly above the 2% target. However, the bulk of that 2.1% rise is attributable to energy prices. Without fresh food and energy, Japan's inflation remains at a lowly 0.8%.
The BOJ says that Japanese inflation is not sustainable, which is another way to say transitory. In turn, that means no change in policy. The fallout though is increasing disruptive. The yield curve control defense roiled the cash-futures basis and the uncertainty about hedging may have contributed to the soft demand at this week's auction. In addition, interest rates swap rates have risen as if the market is seeking compensation for the added uncertainty. Meanwhile, for the fourth session there were no takers of the BOJ's offer to buy bonds at a fixed rate.
The approaching month-end pressures saw the PBOC step up its liquidity provisions and injected the most in three months today. Still, the seven-day repo rate rose 16 bp to 1.17%. In Hong Kong, three-month HIBIOR rose to 1.68%, the highest since April 2020. Australian rates moved in the opposite direct. Australia's three-year yield fell 14 bp today after falling 10 bp in each of the past two sessions. It has fallen every day this week for a cumulative 43 bp drop to 3.20%. It had risen by slightly more than 50 bp the previous week. There was a dramatic shift in expectations for the year-end policy rate. The bill futures imply a year-end rate of 3.17%, which is about 68 bp lower than a week ago. It had risen by a little more than 150 bp in the previous two weeks.
The dollar traded in a two-yen range yesterday, but today is consolidating in a one-yen range above yesterday's low near JPY134.25. The pullback in US yields has been the key development and the dollar is lower for the third consecutive day. If sustained, this would be the longest losing streak for the greenback in three months. The Australian dollar is straddling the $0.6900 level, where options for A$1 bln expire today. It is mired near this week's low, set yesterday near $0.6870. Australia's two-year yield swung back to a discount to the US this week after trading at a premium for most of last week and the start of this week. The greenback was confined to a tight range against the Chinese yuan below CNY6.70 today but holding above CNY6.6920. The greenback traded with a heavier bias this week and snapped a two-week advance with a loss of around 0.3% this week. The PBOC set the dollar's reference rate at CNY6.7000, a little below the median forecast (Bloomberg survey) of CNY6.7008. It was the fourth time this week that the fix was for as weaker dollar/stronger yuan.
The week that marked the sixth anniversary of the UK referendum to leave the EU could have hardly gone worse. Consider: The May budget report showed a 20% increase in interest rate servicing costs. Inflation edged higher. The flash June composite PMI remained pinned at its lowest level since February 2021. The GfK consumer confidence fell to -41, a new record low. Retail sales slumped by 0.5% in May and excluding gasoline were off 0.7%. Separately, as the polls had warned, the Tories lost both byelection contests held yesterday. And perhaps not totally unrelated, the Cabinet Secretary revealed that at the Prime Minister's request a position his wife in the royal charity was discussed. This continues a pattern that had included trying to appoint her as Johnson's chief of staff when he was the foreign minister and plays on the image of crass favoritism.
The risk of a new crisis in Europe is under-appreciated. In retaliation for Europe's actions, which in earlier periods, would have been regarded as acts of war, Russia has dramatically reduced its gas shipments to Europe. Many Americans and European who scoff at Russia's "special military operation" may be too young to recall that America's more than 10-year war in Vietnam was a police action and never officially a war. Now, the critics are incensed that Moscow has weaponized gas, while overlook the extreme weaponizing of finance. Aren't US and European sanctions a bit like weaponizing the dollar and euro? In any event, Putin has ended the European illusion that it would determine the pace of the decoupling from Russia's energy. Germany's Economic Minister and Vice-Chancellor heralds from the Green Party. The gas "embargo" has forced him to swallow principles and allow an increased use of coal. Habeck increased the gas emergency warning system and drew parallels with the Lehman crisis for the energy sector.
It is with this backdrop that the Swiss National Bank felt obligated to hike its deposit rate by 50 bp last Thursday (June 17). The euro had been trading comfortable in a CHF1.02 to CHF1.05 trading range since mid-April. Judging from the increase in Swiss sight deposits, the SNB may have intervened in late April and early May. However, in recent weeks there was no "need" to intervene and sight deposits fell for four consecutive weeks through June 17. The euro traded at three-and-a-half week lows against the franc yesterday, trading to CHF1.0070 for the first time since March 8. In fact, the Swiss franc is the strongest of the major currencies this week, rising about 1.15% against the dollar and about 0.75% against the euro.
The German IFO survey of investor confidence weakened again but did not seem to impact the euro. The assessment of the business climate slipped (92.3 from 93.0). This reflected the mild downgrade of existing conditions (99.3 from 99.6) and the sharper drop in expectations (85.8 vs. 86.9). This is the most pessimistic outlook since March, which itself was the poorest since May 2020. The euro remains within the range seen Wednesday (~$1.0470-$1.0605). It closed near $1.05 last week. There are options for almost 1.2 bln euros that expire there today but have likely been neutralized. Assuming the euro holds above there, it will be the first weekly gain since the end of May. Par for the course today, sterling is also trading quietly in a narrow half-cent range above $1.2240. If it closes above there, it too will be the first weekly gain in four weeks. Sterling's range this week has been roughly $1.2160 to $1.2325. The US two-year premium over the UK has risen for the Monday and is now around 110 bp, up from about 88 bp in the first part of the week.
Bloomberg's survey of 58 economists produced a median forecast of 3.0% for Q2 US GDP. Only five of them see growth lower than 2%. The median has it remaining above 2% in H2 before slowing to what the Fed sees as long-term non-inflationary growth of 1.8% throughout next year. The market does not share this optimism. The shape of the Fed funds and Eurodollar futures curve suggests investors sees the Fed breaking something sooner. Given where inflation is, it is hard to take seriously talk about the Fed front-loading tightening, what it is doing is catching up. But monetary policy impacts with notorious lag, and as several Fed officials have acknowledged, financial conditions began tightening six months before the first hike was delivered. The Fed funds futures strip has terminal rate around 3.5% by late Q1 23. The first cut priced in for Q4 23.
The US reports May new home sales. There are supply issues that are important here, but it will likely be the fifth consecutive monthly decline. Through April, they were off 30% so far this year. New home sales stood at 591k (saar) in April. At the worst of the pandemic, they were at 582k in April 2020. The University of Michigan survey was specifically mentioned by Fed Chair Powell at his press conference following the FOMC's decision to hike by 75 bp. The final report is rarely significantly different than the preliminary report, but it cannot help by draw attention.
Mexico's central bank unanimously delivered the widely expected 75 bp hike in its overnight rate to take it to 7.75%. It was the ninth hike in the cycle that began last June for a cumulative 375 bp. The move followed slightly firmer than expected inflation in the first half of this month (7.88%) and stronger than expected April retail sales. The key is that it matched the Fed's move. It indicated that it will likely move just as "forcefully" at its next meeting in August. The swaps market has almost another 200 bp more of tightening this year. Banxico also revised its inflation forecast. Previously, it saw inflation peaking in Q2 22 at 7.6% and now it says the peak will be 8.1% in Q3. It has inflation finishing the year at 7.5%, up from 6.4%. Separately, reports suggest the US is escalating complaints that President AMLO's energy policies, favoring the state companies, violates the free-trade agreement.
The US dollar rose a little more than 3.5% against the Canadian dollar in the past two weeks as the S&P 500 tumbled nearly 11%. With today's roughly 0.25% pullback, the greenback doubled its loss to 0.50% this week, and the S&P 500 is up about 3.3% this week coming into today. The macro backdrop for the Canadian dollar looks constructive: strong jobs market, better than expected April retail sales reported this week and firmer May price pressures. The market 70 bp hike priced in for the July 13 Bank of Canada meeting. The year-end rate is off four basis points this week to 3.41%. In comparison, the US year-end rate is off about 13 bp this week to about 3.44%. The US dollar is off for the sixth consecutive session against the Mexican peso. The peso is the strongest currency in the world this week, leaving aside the machinations of the Russian rouble, with a 1.8% gain, including today's 0.2% advance through the European morning. The greenback frayed support around MXN20.00 yesterday for the first time in nearly two weeks. It is spending more time below there today with a move to MXN19.96. A convincing break of the MXN19.94 area could signal a move toward MXN19.80. There is a $1 bln option expiring at MXN20.00 today, and the related hedging may have weighed on the dollar.
Disclaimerbonds yield curve pandemic sp 500 nasdaq equities monetary policy fomc fed home sales currencies us dollar canadian dollar euro yuan gdp interest rates gold south korea mexico japan hong kong canada european europe uk germany russia eu china
Will the price of gold rise? Why One Of The World’s Most Successful Hedge Fund Managers Is Sure It Will
Historically seen as a safe have asset, the gold price typically rises sharply during periods of economic stress and geopolitical uncertainty. It also…
Historically seen as a safe have asset, the gold price typically rises sharply during periods of economic stress and geopolitical uncertainty. It also tends to do especially well over periods of high inflation and bearish stock market conditions, acting as an inflation-hedged alternative to cash or bonds when holding either means losing purchasing power.
But since big gains between October 2018 and August 2020 when the gold price rose from $1187.2oz to $2032.16oz, a gain of a little over 70%, the precious metal has disappointed.
The gold price has traded up and down around $1800oz-$2000oz since, occasionally breaking above or below but resisting any significant bull run. It briefly spiked above $2052 in early March but has since fallen back below $1832 despite inflation rates around the world continuing to tick up, interest rate rises, a stock market slump and crystalising fears over a recession.
The gold price should have, according to historical market logic, seen some significant gains over the past three months. But it hasn’t. The question becomes, why not? And will that change? Many analysts believe it will and the gold price will rise in coming months.
But let’s look at the factors that have kept gold trading in a range over the past 2-3 years and why it could be about to break out in an upwards trajectory.
Why has the price of gold recently dropped despite surging inflation, global economic weakness and geopolitical instability?
Over the latter part of 2020 and throughout 2021, gold’s upwards price momentum of the previous two years was halted by booming stock markets. Riskier, high growth companies were having capital flung at them as markets went into melt-up after putting the Covid-19 pandemic sell-off of February to March behind them. When market sentiment is risk-on, gold loses its lustre.
However, since the beginning of this year, market sentiment has become decidedly more risk averse. The high-growth tech-centric Nasdaq 100 index has lost around 30% and the kind of low revenue/no profit tech start-ups recently valued in the billions have seen their 2021 valuations devastated. British online-only second-hand-cars dealer Cazoo, which listed on the NYSE at a $7 billion valuation last August is now worth $705.55 million after losing over 90% of its market capitalisation.
Russia also invaded Ukraine in late February, sparking fears war could spill further into Europe and sending the prices of energy and core food commodities rocketing. That’s an ongoing situation that could still very conceivably get worse again in terms of its threat to European security.
Even at current levels, with the active war relatively contained to the Donbas region, it continues to wreak havoc on the global economy through a combination of disruption to supply lines, Russia’s Black Sea blockade preventing the export of millions of tonnes of grain from Ukraine’s remaining ports, and Western sanctions against Russia. And inflation levels which continue to climb have hit forty-year highs.
But despite the host of factors that would be expected to be in favour of a climbing gold price, it has fallen over 10% in the past three months. Why’s that and can we expect it to change?
The biggest factor behind gold’s recent price decline, and generally sluggish performance over the first quarter of 2022, has been a surging dollar index, which hit a multi-decade peak on June 14. Investors are favouring the U.S. dollar over gold as a safe haven and that’s a trend that many expect to continue with the Fed tightening monetary policy aggressively in an attempt to put a lid on inflation.
Rising U.S. Treasury yields as interest rates rise are another factor against a new bull run for gold in the near future. Analysts bearish on gold believe its price could decline over the long term with brokers Capital quoting a forecast from the Australian Bank ANZ that the price per oz could drop to $1600 by 2023.
“Aggressive monetary tightening, rising yields and a stronger dollar are key drags for the gold prices. Rising inflation failed to impress the market, instead raising fears of a more hawkish stance by the central banks. That said, the spread between the fed funds rate and CPI is at its widest, suggesting the Fed is struggling to contain inflation,” analysts at ANZ wrote in their latest gold forecast.”
“Concerns about global economic growth, fuelled by sustained inflation and heightened geopolitical risks, should protect the gold price somewhat. We expect gold to remain supported at USD1,850/oz, with upside potential of USD1,950/oz.”
Could gold prices rise significantly? The bull case
There are also plenty of analysts who paint a positive picture and still expect a bull market for gold to return over the months and years ahead. In the shorter to medium term, The Telegraph’s Richard Evans expects demand from central banks to drive prices back up. He quotes James de Uphaugh of Edinburgh investment trusts, which has a stake in the American gold miner Newmont:
“Simply put, supply is all but certain to fall and demand is likely to rise. The extra demand will come from the central banks of certain countries around the world that have seen how Russia’s dollar holdings have been subject to sanctions and decide to invest instead in an asset that they can keep in their own vaults and has no ‘counterparty’.”
He expects supply to come under pressure over the next ten years because existing mines are running out of economically feasible gold to be mined and there is a lack of enthusiasm and capital for new projects.
“…gold is getting harder to find. If you want to develop a new gold mine it’s not obvious where to go.”
“All the places where gold can be taken from the ground easily have long been exhausted. Whereas once it could be found on the surface, now ever deeper mines are required. Mining companies have also lost their appetite for “prospecting” – searching for entirely new sources – and instead now concentrate on getting all the gold they can out of existing mines.”
“Searching for new mines is the glamorous side of the business and the previous generation of mining executives, their heads no doubt full of images from cowboy films, did just that. They sought to make their company the biggest by spending fortunes on seeking new sources or by buying rivals. This, of course, came at the expense of profitability.”
“Gold miners are now run by people with discipline, who are not gung ho but run their business in a systematised way. They have stricter financial criteria for going ahead with new projects.”
The result is that gold miners are becoming more profitable but fewer new sources of supply are coming online. As a result, production from existing mines is forecast to halve over the next decade and by a third according to the most optimistic estimates.
The Gold price could remain soft medium term but rise longer term
The upshot of the bear and bull cases for gold is that the precious metal’s price may well either hold roughly where it is in the short to near term, continuing the rangebound trend of the past couple of years. A recession could give it a boost.
But unless significant new deposits are discovered and mines invested in, the longer term outlook could favour gold. However, as a short-term safe haven investment amid currently turbulent conditions, the arguments in favour of gold are dubious against the backdrop of such a strong dollar and rising Treasury yields.
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