idle and fond bondage

Gold trades a big Fed week as envisaged (from IKN682)

Admittedly not the most original of titles and, at the time of publication Sunday evening, the “50 or 75?” debate hadn’t reached the point where the Fed tipped off reporters it was going to be 75 (that came Monday afternoon). Aside from those, the intro note from IKN682 last weekend on why gold wasn’t about to wilt and die has held up to the rigors of Fedweek fairly well. Here you go:

That 70s Show

On Friday, Peru’s Central Bank under the auspices of the only adult in Peru’s room, Julio Velarde, added another of its regular half-point-per-month hikes to its base interest rates- Peru’s base rate now stand at +5.5%, but trail those of Chile which saw a hike to +9% just two days earlier. Meanwhile in Colombia, all eyes are on the tight Presidential election run-off, but its next Central Bank policy meeting is also set for the end of this month, at which the Central Bank is widely expected to hike rates from +6.0% to +7.5% in one fell swoop.

And that’s just the serious South American countries (financially speaking). Start straying into the heterodox economies and data get wilder, for example #1 Basket Case Argentina, which is now on course for a +72% inflation rate for 2022 (no decimal points missing). In response its government has gone full Keynes, e.g. the law project presented Monday to charge a heavy windfall tax on businesses “benefiting from The Ukraine War” (they are talking about the grain/soybean producers, not gun or missile makers). Over in Brazil, a small ray of hope last week saw its headline inflation CPI reading come in at +0.47% for May, implying a 12 month rolling rate of +11.73%. That compared with analysts expectations of +0.6% and +11.84% and is a Pyrrhic victory if ever there were one. In order to begin to get a handle on its galloping inflation, Brazil has had to move base rates from +2.0% in March 2021 to today’s 12.75% and slam the brakes on its GDP growth, something US macro watchers may want to reflect upon.

That quick waltz around the relevant economies of South America is done to give context to the numbers we saw out of The USA on Friday and how they affected our sector’s focus metal, gold. First the CPI number of +8.6% (+6.0% core, sans food and energy) went a long way to confirm the negative sentiment going into Friday and gold reacted accordingly, the market now debating as to whether Jay Powell and Co raise by “only 50bps” next week or whether 75bpd is on the table. Then came the reversal and I’ll leave it to a wire report and one of the talking heads on the journalist’s Rolodex (or speed-dial/WhatsApp/Twitter DM, it’s 2022 after all). Here’s CNBC, giving us the mainstream narrative (1):

But the safe-haven asset soon erased losses as investors assessed the economic repercussions, with bullion getting a further fillip after the University of Michigan’s survey showed U.S. consumer sentiment plunged to a record low in early June amid soaring gasoline prices.

“Gold has had a manic roller coaster ride, dropping to lows of the month before rallying sharply on the CPI report and bouncing back again on the worst consumer sentiment report on record,” said Tai Wong, an independent metals trader in New York.

It occurred to the market that the US Dollar may not be the safe haven that they assumed, not with a US economy threatening to stagnate while inflation remains stubbornly high. The portmanteau is well known to this esteemed audience.

However, Friday was not a case of the classic “dollar down, gold up” and the most interesting part of gold’s move was that it came in the face of renewed USD strength. The DXY index had peaked at just under 105 in early May and was under 102 at the start of the week, so the pop on Friday to close at 104.19 catches the eye.

It also allows a second look at the stagflation talk, as this chart taking in the period since Russia invaded Ukraine shows how the war and its direct effects on the world news cycle was the driver for financial moves. Then The Fed and its policy signalling took over and the market reacted accordingly to Jay Powell and his “we’ll be aggressive against inflation” language. We know sharper hikes got baked in, we know “the fight against inflation” took over the narrative, we know gold sold off as the market assumed The Fed would get in front of the problem. As seen in the “Flation” segment of this chart, we saw the classic waltz between Dollar and the monetary metal doing its AntiDollar thing. But the last three weeks or so have seen “surprising resilience in gold”, to quote that same CNBC report and its down-the-line narrative once again:

Gold prices have been “remarkably resilient given (rate) hiking expectations, and a softening physical market” on concerns that inflation may outpace rate hikes, said Standard Chartered analyst Suki Cooper.

Suki Cooper may be surprised, but that chart indicates that there were enough people ready to bet on gold ignoring any further strength in the USD and the future may surprise the analysts at TD Sec, too. A final quote from that CNBC piece:

“However, gold will likely give up all these gains and trend lower toward below $1,800/oz, as policy rates rise sharply,” analysts at TD Securities said in a note.

And that’s enough mainstream blather. There’s good reason for Friday’s gold price rally, don’t fall for the talk about surprising anomalies or temporary, illogical blips. Financial reporters and Wall St. brokers would do well to check Google and any definition of negative real interest rates and how they correlate with the price of gold. We know rising real rates adversely impact gold, but if The Fed starts its catch-up from its current Fed funds rate (0.75%-1%) and US CPI core inflation is at 6.0% (let alone fuel and food), that’s 500 points of catch-up to make at 50 (or 75?) a shot and allows plenty of time to decide whether inflation is going to keep galloping onward, or get reeled in.

Therefore gold’s move on Friday was wholly logical, as not only are we in deep negative real interest rates (and gold’s neutrality is therefore attractive), but we’re at the behest of a Fed that doesn’t know whether its hardline policies will cause a hard landing (i.e. recession) and what’s more, doesn’t seem to care. After unleashing the genie from the bottle by going too loose for too long and getting that “it’s only a transitory blip” call 100% wrong, the Fed’s lost credibility is also a factor playing against the US economy and, as Goldman Sachs warned only last month, nobody thinks the U.S Dollar will remain highly priced if recession or stagflation comes to town. That may suit other safe havens such as the Japanese Yen first, but it’s also the classic fear trade set-up that suits gold bullion to a tee. And with that, I leave this weekend’s rambling opener with the usual GLD tracking charts to remind readers that there’s plenty of width for more, in fact a lot more, gold ownership among the big-hitting financial institutions.


    A highly attuned and informative article. Generously published. Thanks Otto.

    Jerry Los Angeles 17/06/22 8:27 am


    Wow! Fancy.


    Hey, how’s $Copper doing?


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