Gold pushes higher in advance of this week’s inflation data
WGC says managed money futures positioning points to a positive outlook for gold
(USAGOLD – 8/8/2022) – Gold pushed higher this morning in advance of this week’s inflation data and is now nearing the $1800 level. It is up $7 at $1785. Silver, which has consistently outperformed gold in this break to the upside, is up 35¢ at $20.32. Both metals have been in steep uptrends in the follow-up to the Fed’s meeting and press conference at the end of July. Silver is up 8.2% from its pre-meeting lows, and gold 5.1%. The World Gold Council posted an analysis at Seeking Alpha over the weekend suggesting we may have reached a technical turning point in gold based on managed money futures market positioning.
“Our analysis suggests that when standardised managed future positioning is two standard deviations below its long-term average, forward gold returns are positive between 81% to 90% of the time across 3- to 12-month horizons, suggesting strong mean reversion in sentiment which can help drive gold higher. In addition, we might also get a steer from positioning in some of gold’s important drivers: the US dollar and 10-year Treasury futures. Positions in the US dollar and US 10-year Treasuries are close to net long and net short extremes, respectively. Historical analysis suggests that reversals from such extremes are common and they have overwhelmingly resulted in positive returns for gold in subsequent months.”
Gold Z-score positioning
Chart courtesy of World Gold Council/Seeking Alpha
Chart note: “A Z-score,” according to Investopedia, “is a numerical measurement that describes a value’s relationship to the mean of a group of values. Z-score is measured in terms of standard deviations from the mean. If a Z-score is 0, it indicates that the data point’s score is identical to the mean score. A Z-score of 1.0 would indicate a value that is one standard deviation from the mean. Z-scores may be positive or negative, with a positive value indicating the score is above the mean and a negative score indicating it is below the mean.” The World Gold Council cautions that “futures activity represents only a portion of total volume in the respective markets. As such these signals should be viewed in conjunction with other metrics.”
Russia halting natural gas flows would plunge Germany into 2009-style economic crisis, Commerzbank warns
MarketsInsider/Harry Robertson/8-4-2022
“Germany would likely tumble into a deep recession of the kind not seen since the financial crisis in 2009 if Russia decides to fully cut off natural gas supplies, one of the country’s biggest banks has warned.”
USAGOLD note: Such an event, i.e., a deep recession in Germany, the perennial engine for growth in Europe, would have global implications though it is difficult to know what form they would take at this juncture. The demand for gold has been running at very high levels over the past few years in Germany and it is unlikely to dissipate anytime soon simply because the citizenry does not know what to expect.
The Bank of Eeyore grumbles the truth. Who’s next?
Bloomberg/John Authers/8-4-2022
“CPI inflation is expected to rise more than forecast in the May Report, from 9.4% in June to just over 13% in 2022 Q4, and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead. GDP growth in the United Kingdom is slowing. The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.” – Bank of England, 8/4/2022
USAGOLD note: Authers says Bank of England governor Andrew Bailey missed his chance to channel his inner Eeyore by greeting journalists at his press conference Thursday with a cheery: “Good morning, if it is a good morning. Which I doubt.” Bailey didn’t, but he did get the message across that times are not good from an economic standpoint in the UK. His message, a part of which is posted above, is a far cry from the tempered approach the Fed has taken and the “nothing-to-worry-about” chorus being sung at the White House.
Notable Quotable
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“Gold is scarce. It’s independent. It’s not anybody’s obligation. It’s not anybody’s liability. It’s not drawn on anybody. It doesn’t require anybody’s imprimatur to say whether it’s good, bad, or indifferent, or to refuse to pay. It is what it is, and it’s in your hand.”
Simon Mikhailovich
Tocqueville Funds
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The end of contemporary history
The Kathmandu Post/Joschka Fischer/8-3-2022
“I cannot recall a time during the past 75 years when there has been such a massive accumulation of major and minor shocks. The world today is dealing with intensifying climate change, a pandemic, major wars, surging inflation, disruptions to international trade and supply chains, and acute food and energy shortages.”
USAGOLD note: Fischer goes on to say that the West did not anticipate the consequences of its “economic dependencies” on rivals China and Russia. “The bill for this naivete,” he says, “is now coming due and it will be large.” He concludes that we are in the final act of the 75-year Pax Americana that began after World War II. The 2024 election, he says, may be the first American election to have “direct civilizational and planetary consequences.” Echoes of The Fourth Turning …… Fischer was Germany’s foreign minister from 1998 to 2005.
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Sunday In-Depth
A general tendency towards more inflation
‘Ultimately, the power to create money is the power to destroy.’
WASHINGTON, DC – AUGUST 5, 1980: Federal Reserve Chairman Paul Volcker reads the financial page as he waits for a hearing.
(Photo by James K. W. Atherton/The Washington Post via Getty Images)
“They should have known inflation was broadening and becoming more entrenched,” LPL’s Quincy Krosby recently told CNBC. “Why haven’t you seen this coming? This shouldn’t have been a shock. That, I think, is a concern. I don’t know if it’s as stark a concern as ‘the emperor has no clothes.’ But it’s the man in the street vs. the PhDs.” What we find odd about all the complaints against the Fed and its tardiness in dealing with inflation (because an election happens to be around the corner) is that they ignore what might have happened had the Fed acted earlier. The same concerns about recession and unemployment would simply have surfaced then instead of now. If Washington is worried about inflation, wait for the public reaction when unemployment and bankruptcies begin to rise.
The Fed has a long history of papering over busts to create booms and stifling booms to create busts, never through it all managing the economy half as well as Adam Smith’s invisible hand. Right now, it’s in stifling mode, but that could change at the first signs of real economic distress. “The Fed,” says long-time gold market analyst John Hathaway in a Sprott Insights interview, ”doesn’t have a dial. It’s an either on or off switch. They’re either switching off the economy and crashing financial assets and the economy, or their crying uncle and caving in, which will likely open the door to more inflation. I think either outcome is positive for gold.”
Historically, the Fed has opted for monetary inflation as its baseline policy because the alternative – an economic depression – is something no central banker wants to add to their resume. That is why, despite seven recessions, the dollar has lost 86% of its purchasing power since the world went off the gold standard in 1971. We are reminded, in this context, of an observation from former Fed chair Paul Volcker, the central banker who broke the back of the last runaway inflation in the late 1970s-early 1980s:
“We sometimes forget that central banking, as we know it today, is, in fact, largely an invention of the past hundred years or so, even though a few central banks can trace their ancestry back to the early nineteenth century or before. It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.” (From Deane and Pringle’s The Central Banks, 1995)
Bloomberg’s John Authers sees central banks’ recent inflation blunder as more than just a gaffe likely to be quickly forgotten. Beginning in the early 1970s, “in place of gold, currency’s anchor,” he writes in a recent editorial, “became trust in the central banks that issue them. Now credibility appears to be at an end. With central banks desperately ripping up their playbooks to try to rein in inflation that’s veered far beyond target, they’re admitting they’ve been wrong, and giving up on trying to steer the markets on their plans for the future. That’s alarming, because the precedent of the 1970s is not encouraging.” He concludes that “the word of Powell or Lagarde is no longer as good as Volcker’s, and it’s certainly not as good as gold.”
Similarly, Stanford historian Niall Ferguson believes the monetary policy mistakes of 2021 were even more extensive than those made in the late 1960s and early 1970s, resulting from “blinking under political pressure.” “I never met Arthur Burns — Volcker’s predecessor, but one, as Federal Reserve chairman — who preferred puffing on a pipe to cigars,” he says in an in-depth Bloomberg opinion piece. “But I think I’ve read enough about Burns to suggest plausibly that the current Fed chair, Jay Powell, has more in common with him than with Volcker. This is unfortunate and potentially disastrous for the US economy.”
Cartoon courtesy of MichaelPRamirez.com
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Do Fed rate decisions affect the price patterns for gold? (Technical analysis)
Seeking Alpha/Chris Vermuelen/8-3-2022
Gold price, DJIA and Fed funds
(Annotations by TechnicalTraders.com, Chris Vermeulen)
“We have already experienced the early rally phase associated with the initial Fed rate increase. Now, we are in the contraction price phase where a bottom will set up – which may take many weeks or months still. We are waiting for the Fed to “flinch” and begin to decrease rates. 
That will start the new bullish price phase for gold and silver – and possibly send us into another parabolic price phase.”
USAGOLD note: Important analysis from Chris Vermeulen…… He makes some very logical arguments supported with data and charts like the one above.
The great unrest: How 2020 changed the economy in ways we can’t understand yet
“This is truly one of the most complex environments we’ve ever seen in our industry to operate in. Because we’re not just dealing with economic issues like inflation and lapping stimulus and things like that. But also the social issues of people returning to mobility after lockdown, working from home and just the change in consumer patterns.” – David Gibbs, CEO, Yum Brands (Taco Bell, KFC, Pizza Hut)
USAGOLD note: Rosoff asks “How will we will look back at the 2020s?” He then offers considerable food for thought on what the future might hold – much of it a continuation of societal trends already in place. He calls the new era the “great unrest.”
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It will turn out to be largely impossible to normalize interest rates without collapsing the economy
TheMarketNZZ/MarkDittli interview of Edward Chancellor/7-21-2022
“The system is very fragile. If my underlying thesis is correct, that the world can’t really cope with higher interest rates without falling to pieces, then central banks will have an extraordinarily tough time ahead of them. Many observers draw parallels to the 1970s today, but I would say things are even more challenging than back then: Compared to the seventies, we have much lower interest rates, much higher debt and much more inflated asset valuations today.”
USAGOLD note: Chancellor envisions a cure every bit as damaging as the disease, and acknowledges as much in this interview. In the interim, though, he foresees a ‘stop and go’ inflation much like the 1970s only worse – a period when the Fed occasionally slams on the brakes only to suddenly accelerate again. As of this past Wednesday, the Fed hinted at more of a tapping than slamming – a different matter altogether, and the markets, including gold, reacted accordingly. “Time is money,” he says. “And if you don’t place a proper price on time, then the world will turn upside down.” Chancellor is the author of a much-discussed new book, The Price of Time: The Real Story of Interest.
Gold price outlook turns bullish as July FOMC meeting marks peak Fed hawkishness
DailyFX/Diego Coleman/7-30-2022
“With the economy on the brink of recession by some metrics, Federal Reserve officials may pivot to a more dovish stance later this year. Softening incoming data in the macro front may prompt traders to start preparing for this scenario, reinforcing the yellow metal’s appeal in the near term.”
USAGOLD note: Coleman goes on to say a line-up of economic reports due this week are “likely to show a further slowdown in economic growth” – an environment in which “gold could thrive.”
From profits to pay, JPMorgan’s gold secrets spill out in court
Bloomberg/Eddie Spence and Jack Farchy/7-31-2022
“The trial of JPMorgan Chase & Co.’s former head of precious metals has offered unprecedented insights into the trading desk that dominates the global gold market.”
USAGOLD note: Inside the gold market……Much of long-term value to gold market participants is spelled out in this Bloomberg article, and the revelations from this trial will confirm the level of market concentration many have suspected for years. JP Morgan, it seems, has a deep financial interest in the shiny rock that just sits there and does nothing. It clears 40% of all transactions in the gold market and pulled in a cool $1 billion in profit from trading precious metals in 2020.
Short & Sweet
The Fed has lulled Wall Street into a false sense of security
But that complacency could turn quickly to alarm.
“The Fed has been reasonably successful in convincing markets that they have their eye on the ball,” says Plante Moran’s Jim Baird (CNBC – 4/10/2022), “and long-term inflation expectations have been held in check. As we look forward, that will continue to be the primary focus. It’s something that we’re watching very closely, to make sure that investors don’t lose faith in [the central bank’s] ability to keep a lid on long-term inflation.” At least for now, the Fed seems to have successfully lulled Wall Street into a false sense of security on what could become runaway inflation, but, as Baird suggests, that complacency could quickly turn to alarm. In fact, we may have seen the first signs of that change of heart late last week following the latest consumer price report. Wall Street may have suddenly awakened to the wolf in its midst.
“The Fed’s forecasts from March, saying that inflation would be coming down to the 2s by the end of the year was, frankly, delusional when issued, and looks even more ridiculous today.”
Larry Summers, former Secretary of the Treasury (6-10-2022)
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Henan bank crisis savers must ‘wait patiently’ for compensation amid systemic risk, social instability concerns
South China Morning Post/Amanda Lee/7-18-2022
“Customers caught up in one of China’s biggest banking scandals have been asked to ‘wait patiently’ to receive their compensation amid growing concerns over systemic risks and social instability.… Some savers with deposits of less than 50,000 yuan (US$7,400) received their money as promised on Friday, although others encountered a string of problems while trying to register for the repayment scheme due to an overloaded system.”
USAGOLD note: Situations like the one in Henan are not lost on or forgotten by China’s populace. The already strong demand for gold in China is likely to remain elevated as a result. When trouble is at hand, savers do not by and large wait patiently for things to return to normal. This article includes a photograph of a large crowd camped outside a Henan bank demanding return of their money.
Gold drifts lower to close out seesaw week
McGlone says the dollar price of gold will play catch up with other major currencies
(USAGOLD – 8/5/2-22) – Gold drifted lower this morning as it looks to close out a seesaw week featuring a great deal of uncertainty about where Fed policy and financial markets are headed next. It is down $4 on the day at $1790 but up over $100 (6.3%) from its pre-Fed meeting lows. Silver is down 8¢ at $20.18 but up $1.70 (8.7%) from its pre-meeting lows. Two days ago, we featured a quick comment on gold’s direction from Bloomberg Intelligence’s commodity analyst, Mike McGlone. Yesterday he elaborated more fully on that analysis on his Twitter feed:
“Gold appears more likely to resume its enduring upward trajectory and breach resistance at around $2,000 an ounce vs. sustaining below $1,700 support. Guidance may come from the metal denominated in the euro, which reached a new high in March. Typically, it’s a matter of time in dollar-based gold to follow new highs in other major currencies.… The most aggressive Fed tightening in 2022 since the 1980s has contained gold, and it’s a matter of time before rate hikes subside, letting the metal resume its path of least resistance upward.”
Gold price in euro, pound, yen, dollar
(%, one year)
Chart courtesy of TradingView.com • • • Click to enlarge
Who’s buying gold right now and why?
MoneyWeek/Dominic Frisby/8-2-2022
“Investment bankers’ buying of coins and bars has increased by a – quite astounding, in my view – 59% over the past four weeksI have to say, the implications of a 59% jump in investment bankers buying gold for their personal portfolios has some alarm bells ringing. What’s going on at the banks? Are there problems looming? What do they know that we don’t? Something similar was going in the lead up to the Lehman crisis.”
USAGOLD note: Dominic Frisby reports that over the past two weeks two professional groups in the United Kingdom have emerged as top buyers of gold and silver: doctors and investment bankers. The investment bankers, as indicated above, are worried about systemic risks – the sequel to the Great Financial Crisis. The doctors, he says, have seen the value of their retirement accounts “fall quite dramatically” in recent months and are turning to the metals as alternatives. His full account is highly recommended at the MoneyWeek link above.……
Charts suggest now is the perfect time to buy gold, Jim Cramer says
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“CNBC’s Jim Cramer on Wednesday told investors that gold is poised to rally, making now an optimal time for investors to pounce. ‘The charts, as interpreted by the legendary Larry Williams, suggest that the general public’s giving up on gold en masse and he thinks that that makes it the perfect entry time to do some buying,’ the ‘Mad Money’ host said.”
USAGOLD note: Cramer sees largely unrecognized speculative potential in the yellow metal based on futures market data and technical triggers on the charts.
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Photo attribution: Tulane Public Relations, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons