“‘Will that be successful? I tend to doubt it,’ the president told reporters during an appearance with NATO Secretary-General Jens Stoltenberg. ‘The reason I doubt it is because China has become very spoiled. The European Union has become very spoiled. Other countries have become very spoiled, because they always got 100 percent of whatever they wanted from the United States. . . . But we can’t allow that to happen anymore,’ Trump added.”
USAGOLD note: That comment comes as China and the United States sit down to the latest round of trade negotiations in Washington. Posturing or honest assessment? The media will be parsing that one for days if not weeks to come, but I chalk it up under the honest assessment column. Keep the bar low and any progress will be seen as remarkable. Meanwhile, China issued a statement overnight denying it had agreed to the $200 trade deficit reduction demanded by the Trump administration.
“Borrowing costs in Italy jumped in early Wednesday trade, pushing out the gap over benchmark German bond yields after a report that Italy’s 5-Star and League plan to ask the ECB to forgive 250 billion euros of Italian debt.”
USAGOLD note: There has not been further confirmation of this report since Reuters published on Wednesday, but it is interesting nevertheless. There is much going on behind the scenes in Italy on its future direction, and much has been said, but nothing as yet has surfaced on the actual 5-Star/League program with respect to its relationship with the rest of the European Union.
“Debt levels that quadrupled in a decade have made emerging markets vulnerable to tightening financial conditions in the era of rising U.S. interest rates, Fitch Ratings said.”
USAGOLD note: It is the equivalent of the individual who maxes out his or her credit cards then begins to suffer the effects of rising interest rates and payments. In the case of emerging countries income levels are likely to remain static or decline compounding the problem. Industrialized countries can be pulled into the emerging debt vortex via the contagion effect. In October, 1997 the U.S. stock market dropped 7.2% in a single day during the “Asian flu” debt crisis. In today’s terms that would equate to a drop in the DJIA of nearly 1800 points.
“China’s holdings of U.S. Treasuries grew for a second month in March to $1.188 trillion, its highest level since October, even as overall foreign purchases of Treasuries fell, data from the Treasury Department showed on Tuesday.”
MK note: It’s not China, but Japan, that is selling U.S. Treasuries. This Reuters report paints an interesting picture of recent international capital flows. Foreign investors, as the headline indicates, are dumping stocks.
Here’s the link to the Treasury Department’s full table on foreign holders of U.S. debt.
“Wall Street indexes fell on Tuesday as investors worried about a lack of progress in U.S.-China trade talks and Treasury yields rose after U.S. retail sales data indicated rising inflation.”
Bloomberg/Guy Johnson and James Hertling/5-14-2018
“With the Turkish lira at a record low against the dollar and down this year against all 17 major currencies tracked by Bloomberg, Erdogan told Bloomberg TV in London on Monday that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates. The central bank’s key rate is now 13.5 percent, compared with 10.9 percent consumer-price inflation.”
MK note: Such intentions are likely to send the Turkish lira into another tailspin. “When the people fall into difficulties because of monetary policies. They’ll hold the president accountable,” Erdogan told Bloomberg. The Trump administration might be taking notes . . . .
TRADE WARS UPDATE
“The United States wants China to give a timetable on how it will open up its markets to U.S. exports as the two countries are still ‘very far apart’ on resolving trade frictions, U.S. Ambassador to China Terry Branstad said on Tuesday.”
“America’s budget deficit and unemployment rate are heading in opposite directions — something that’s never happened during post-World War II peacetime and could cause a significant jump in interest rates. Goldman Sachs projects, for instance, that the 10-year Treasury note could be yielding 3.6 percent next year.”
MK note: We can add this to long and growing list of difficult-to-explain anomalies present in today’s economy.
Reuters/Henning Gloystein and Meng Meng/4-14-2018
“A U.S. decision to reimpose sanctions on Iran is supporting China’s newly established crude oil futures, and may spur efforts to start trading oil in yuan rather than dollars, traders and analysts said. . . . Traded daily volumes hit a record 250,000 lots last Wednesday, more than double the day before, spurred by news of the Iran sanctions.”
MK note: File this one under unintended consequences. Among the far-reaching consequences of the petroyuan is the indirect effect it will have on gold demand and prices.
“Disruption in Iran could force OPEC to adjust up production levels earlier than it had expected and could prompt U.S. shale drillers in West Texas to drill more. Despite these efforts to fill in for lost supply, analysts at Bank of America still expect oil to reach $100 per barrel in 2019.”
Related: DMR Chart of the Day/4-24-2018
“If the attack from Syria, which saw approximately 20 rockets fired at Israeli military positions in the occupied Golan Heights region, is confirmed as Iran’s doing, it would represent the first strike by Tehran directly onto Israeli soil. And Israel’s response was its largest military engagement in Syria in 45 years — since the Yom Kippur war of 1973.”
MK note: Global markets, except for oil, have acknowledged then moved on from the potential for war in the Middle East. In the meanwhile, reports like the one above hammer home a warning: The shackles to war are being thrown off and that we are a time of great uncertainty and danger in that part of the world.
“Oil prices steadied near 3-1/2 year highs on Friday as the prospect of new U.S. sanctions on Iran tightened the outlook for Middle East supply at a time when global crude production is only just keeping pace with rising demand. . . .’The up-trend remains strong and intact,’ said Robin Bieber, technical chart analyst at London brokerage PVM Oil Associates.”
“China is positioned to be a chief beneficiary of the U.S. decision to withdraw from the Iran nuclear deal as it would give China leverage to demand oil imports be priced in yuan, several currency experts said on Thursday.”
MK note: Comments posted 3/29/2018 – I am trying to think of a reason why China would not move quickly to encourage any potential sellers of crude oil to take yuan in settlement. Russia and Angola, two of three top suppliers of oil to China, have already expressed an interest in breaking the petrodollar’s dominance. When you stop to think about the petroyuan introduction, it is in China’s interest to maintain a strong yuan against the dollar for obvious reasons – the end seller will end up with the stronger of the two currencies in terms of global purchasing power. Such a development would be an economic game-changer the parameters of which are yet to be defined and likely a boost to gold as a hedge against dollar weakness.
“Argentina’s government said on Wednesday it was requesting a ‘high access stand-by’ financing arrangement from the IMF.”
MK note: It’s been a few days since we checked in on the problems in Argentina. It looks like it will take the IMF route to buy time, but it may also be buying into a stringent repayment program likely to include restrictions on government spending, additional borrowing, etc. It is likely to be another long road for Argentina with many bumps along the way. Given the scope of the emerging nation debt problem, as it has been outlined at top financial publications, one hopes that the IMF has a large budget these days. It looks like it may need it.
Related: Argentina on brink of economic meltdown as inflation soars and peso plummets/Daily Express/Paul Withers/5-9-2018
“‘What’s going to happen initially, people will try to convert whatever they have into dollars or gold or whatever is of value that’s not going to depreciate,’ Cagdas Kucukemiroglu, an analyst at London-based Metals Focus, said Wednesday by phone. ‘Then next year the demand will gradually start to go down but it’s not going to be drastic. The base is already very low.’”
MK note: The better strategy no matter where you call home is to make gold a permanent part of your portfolio so that you are prepared no matter what comes down the road. Having been a gold broker most of my adult life, I can tell you with some certainty that it is much better to buy gold before a crisis than to pay the price rendered once it sets in.
Value Walk/Frank Holmes/5-10-2018
“In China, the world’s largest importer of gold, jewelry demand rose 7 percent in the first quarter to 187.7 metric tons, a three-year high. According to the WGC, Chinese retailers are working on improving the customer experience, providing consumers with a more holistic retail solution.’ The industry is expecting a strong 2018 after a relatively subdued 2017.”
MK note: You have to wonder what Chinese retailers mean by a more “holistic” solution . . . .
“Saudi Arabia said it will help meet world oil demand if President Donald Trump’s Iran sanctions create shortfalls, but analysts say it will do so only in conjunction with Russia, and the world may have to get used to higher prices as a result.”
MK note: We must keep in mind that OPEC’s mission is not to keep oil prices down but to make sure it preserves the markets it has already established while increasing prices. As pointed out in yesterday’s DMR, from the Western standpoint it is not so much the sanctions themselves that are a concern with respect to the flow of oil, but the possibility of military action affecting Middle East production as a whole.
“‘When I left, which was only six or seven months ago [in October 2017], all the concerns were we’re not seeing any inflation,’ said told CNBC’s Leslie Picker during an interview on the sidelines of the Context Leadership Summit in Las Vegas. ‘I don’t think we’re seeing a whole lot more inflation than we saw at that time.'”
MK note: As mentioned briefly in our DMR this morning the low producer price index number is likely to figure into future Fed interest rate deliberations. Also, as we noted last week, the Fed statement following last week’s interest rate meeting carried a distinctly dovish tone – at least enough of a divergence from the past to warrant consideration.
“The U.S. Treasury Department on Wednesday sold $25 billion in 10-year notes at a yield of 2.995 percent, which was the highest yield at auction of this debt maturity since January 2014, Treasury data showed.”
Related:TREASURIES-Supply glut pushes 10-year yield back above 3 percent
World Gold Council/5-9-2018
“Global gold-backed ETFs holdings added 72.2 tonnes(t) to 2,481t in April. This is the strongest month of net inflows in more than a year. Growth in global holdings was led by significant North American and European inflows and supported by a small increase in Asia. ETF inflows were steady throughout the month even though the gold price retraced early gains, finishing April 1% down, after reaching an intra-day high of approximately US$1,360/oz mid-month.”
MK note: ETF demand is led by hedge funds and institutions. As we have reported consistently, that sector has been a major contributor to physical demand over the past few years and it likes to buy into price weakness.
Reuters/Steven Holland and John Irish/5-8-2018
MK note: Gold jumps almost $10 at $1315. DJIA drops over 100. Dollar index reverses course . . . .Trump announcement forthcoming.
“Plunging Venezuelan crude production; sanctions disrupting Iranian oil exports; Saudi Arabia pushing for even higher prices; North Korea peace talks — the coming weeks bring an abundance of risks for the oil market.”
“Intervening by buying and selling currencies has been the default policy option since the 1997/98 financial crisis for Asia’s governments. Even now, rather than raise interest rates in lockstep with the Federal Reserve, they are selling dollars and supplanting the easy money that global central banks are slowly removing from the world economy. A big part of the reason has been the historic and high dependence on foreign portfolio flows, often referred to as the ‘original sin’ in the markets.”
The Gold Telegraph/Lawrence Thomas/5-6-2018
“The demand for gold is increasing, yet new discoveries of the precious metal have not kept pace with the demand. Funds for exploration are historically high, $54.3 billion, up 60 percent over the past 18 years. . . Gold discoveries have followed a predictable pattern. 263 major gold discoveries have been made in the past 28 years, but half of those discoveries happened in the 1990s. This boom lasted until the turn of the century when the rate of discovery began to decline. Only 16 discoveries were reported from 2000 to 2002, which produced 108.3 [million] ounces of gold. That amount was below the average finds of the 1990s. This decline has continued, with both new discoveries and the amount of gold mined decreasing steadily. By 2010, only 18.6 million ounces of gold was discovered, a severe drop from the 61.5 ounces found in 2009.”
“The fact that Federal Reserve policy statements are pored over by investors was driven home once again when the removal of two words from the prior statement set off an intense debate over the central bank’s view of risks to the economy. When the U.S. central bank issued its statement Wednesday, eagle-eyed Fed watchers noticed the central bank had removed ‘near-term’ from in front of roughly balanced risks.”
MK note: You have to kidding me. . . . .
Bloomberg/Dani Burger and Sid Verma/5-4-2018
“Automated trend-followers, known as commodity trading advisers, have flipped to neutral from a big short position on the greenback in recent weeks, a shift that helped accelerate the currency’s surprise advance. Now they’ve blown through all their stop-losses, and it could spell bad news for bulls from here.”
MK note: Though the dollar’s advance has been drummed up as formidable, it doesn’t add up to much in terms of price movement. Since the beginning of April the dollar’s “surprise advance” weighs in at just under 3% while gold dropped about 2%.
Financial Times/Cat Rutter Pooley, Adam Samson and Roger Blitz/5-5-2018
“Guy LeBas, chief fixed-income strategist at Janney Capital Management, said: ‘Any time you are hiking interest rates 12 per cent in a week to defend your currency it is past the point of crisis.’ The dollar rally has tracked signs of faltering economic growth outside the US and focused attention on a rapid rise of debt across developing world economies in recent years. That leaves EM as an asset class looking vulnerable to a broader reappraisal by investors who have flocked to the sector in recent years, attracted by higher yields.”
MK note: Some will dismiss Argentina’s problems as something happening in a backwater country unlikely to affect global markets, but there is more to the latest crisis in Argentina than meets the eye. The strong dollar is creating serious problems worldwide among emerging countries with Argentina – now shouldering a 40% interest rate, a runaway inflation rate (26%) and the first stages of an attack on its foreign exchange reserves – quickly emerging as a poster child in a broader emerging markets crisis likely, as time passes, to raise broader concerns. The chart below shows the Argentina peso/dollar exchange rate and interest rates. Note that the chart shows the number of pesos to purchase a U.S. dollar.
Financial Times/Shawn Donnan/5-5-201
“Just days ago the hope was that if Washington and Beijing would just start talking then a trade war between the world’s two largest economies could be averted. But this week’s discussions in Beijing between the Trump administration and Xi Jinping’s economic team have only shown that a trade war may be inevitable. ‘These meetings could end up going into the books as a formalisation of hostilities rather than as the basis for a negotiated settlement,’ said Eswar Prasad, a US-based China expert with close ties to Chinese economic policymakers.”
MK note: The message that the Beijing negotiations more or less formalized hostilities rather than opening channels for agreement is likely to send a chill through markets. Things happened so quickly at the end of the week that the markets barely had time to react, but by the end of the day on Friday, a subtle shift was discernible. By Friday mid-day both the dollar and gold had reversed course. It will be interesting to see how all of this plays out when markets open Monday after participants have had a weekend to process the information.
“Two days of U.S.-China trade discussions ended in Beijing with an agreement to keep on talking, and little else. China’s official Xinhua News Agency reported Friday afternoon that both sides reached a consensus on some trade issues while acknowledging major disagreements on some matters. It said they would continue discussions, without providing specifics for when they would start again. Neither side briefed the media, and the U.S. delegation led by Treasury Secretary Steven Mnuchin departed Beijing in the evening. While a cure-all deal was always a long shot, the discord between the world’s two biggest economies means skittish global markets will continue to face ongoing trade tensions.”
MK note: The stalemate probably means an escalation from the American side. Reading through the details, it looks like the two sides are miles apart. A wall of resistance and a lack of anything to talk about does not bode well for either side. The question needs to be asked: So where do we go from here?
Fox News interview with Maria Bartiromo/NewsMax
“We are moving toward stagflation,” Greenspan, who served as chairman from 1987 through 2006, told Fox Business’ Maria Bartiromo on ‘Mornings with Maria.’ “In the process of moving in that direction, it feels good, but it’s a false dawn.”