As gold regains $2000/oz for the third time over the past three years, it's important to distinguish the fundamental and intermarket dynamics for each of these three occasions ($2000/oz) before assessing the road ahead. There are endless combinations of metrics to be used in comparing August 2020, March 2022 and today. I will use the DXY, gold/silver ratio, Fed Funds rate and the Fed's Balance Sheet.

AUGUST 2020 : Gold's first print of $2000/oz occurred on 28th Jul 2020, one day after it had finally broken the £1920 record attained on September 2011. The dynamics were plenty and ideal. The +$10 trillion governmental stimulus response to combat Covid-19 was three times the size of the response to the 2008/9 financial crisis. Any signs of USD-liquidity crisis was swiftly suppressed. The Fed crushed interest rates back to zero and sent its balance sheet doubling to $7.2 trillion in under five months. 

The combination of exploding financial liquidity, force majeure fears and tumbling US dollar was the perfect scenario for metals and financial stocks. Gold bugs did not blink, hitting a new record of $2075 on Friday, August 7th 2020. 

MARCH 2022: Gold's ascent to $2000 in March 2022 was the product of an unprecedented combination of geopolitical/nuclear uncertainty (first total war in Western Europe in 80 years), and biggest supply shock in energy, agricultural and metals commodities. Unlike the central bank liquidity creation and government stimuli of 2020, which gradually elevated inflation and later commodities, the outright supply shock and geopolitical uncertainty of the Russia-Ukraine War triggered immediate inflation and shortage repercussions. It was the first time in over four decades, when the classic macro geopolitical playbook of rising USD, gold and oil) played out. 

How we called Gold's peak 1 day before the $2075 Top of 2020 Watch Video

MARCH 2023: Gold's rally of late 2022 emerged on the Fed's slowing down its tightening campaign even as inflation remained 3x the Fed's target. Growing signs of stress in US treasury markets, coupled with the 2nd biggest US bank failure in history as well as ongoing inflation force the inevitable conclusion: Looming credit contraction and rate hikes' lag effect will force down yields (and possibly rates) faster than the Fed anticipates. And if that keeps inflation above 3.0%, then it's a new normal for gold bulls. 

For the first time since March 2020, the Fed Funds rate is now above Fed's preferred inflation gauge (Core PCE). Emerging signs of real positive rates and unflattening of the US yield curve should continue to prop gold higher, as long as the upcoming recession is not too severe for industrial metals to corrode and for deflation to return. 

Regardless of whether SVB's was a case of poor asset-duration mismatch, or whether the Fed should have caught it well before, the aftermath is the following:  Deepening credit contraction + tightening bank lending standards. Add to it the Fed's attempt to keep some semblance of quantitaive tightening and a fresh reflex to ease becomes inevitable. That's how it was in summer 2019 and that's how it will be late this summer. 

 

It is Sunday 5:20 pm Eastern (9:20 pm GMT) and you're doing what you usually do on a Sunday evening, then hear rumblings (in your phone alerts/messaging) that major central banks are engaging in coordinated USD-liquidity operations. You go to Twitter and find sarcastic/mocking comments how it's the return to QE, or a new GFC is upon us. Even financial reporters pieces do not shed any valuable light. You have positions in FX, gold and indices. You're confused -- what to understand, whom to believe, what to do with your positions when the market opens in 30 mins. The charts/snapshots, illustrate what/how our WhatsApp Broadcast Group was guided through the unexpected Sunday announcement and found clarity/calm through the chaos.

Five minutes after the coordinated central bank announcement, I sent out a message on how I viewed the developments impacting USD, gold and equity indices. My take was that it was: “Neutral to negative on USD; Short term positive for indices and probably short term neutral to negative on gold but overall v[ery] positive”. The outcome was exactly what happened as shown in the 15-min charts on DXY, US500 and US500. No, we neither sent out a video or a 400-word piece explaining FX liquidity operations, nor speculated on the likelihood of success of such developments. We simply got to the point in guiding our WBG members.  

You can bet your final this is not the last time you'll hear breaking markets news on a Sunday night. 

It's probably no coincidence that gold is staging its biggest weekly gain since Nov, and bitcoin posting its fastest jump since February 2021 on the same week that the 2nd largest bank failure in the US found no buyers – and was left to rot in the courts of bankruptcy. Regardless of whether the FDIC will make all depositors whole, all US banks will continue to lose depositors as investors/savers start to discover the higher yields on Money Market funds. Even the biggest/most profitable US banks will struggle, forcing a faster than expected credit contraction—probably not exactly what Jay Powell had in mind when he wished for that soft landing. So what do you have to learn from the chart below?

The top panel shows the daily percentage change of inflows in Gold ETFs, with gold in the lower panel. As you can see, inflows are finally ticking higher for the first time since May of last year. Unlike in the previous three phases of rising gold (1, 2 & 3) the latest 8 days of gold gains coincide with an increase in ETF inflows. In each of phases 1, 2 and 3 gold managed to rally despite ongoing slowdown in ETF flows, as it was aided by either USD-centric developments or dovish Fed statements. Today, the combination of the biggest 2-week decline in US-10 year yields since July 2020 + the year's 2nd largest weekly decline in DXY + (wait for it)…the steepest 2-week plunge in KBW (Banking sector index) since 2009 is generating a powerful rally in the yellow metal.

You know when you try to find out the year's best performing commodity and always find it to be some crop, or obscure scrap metal? Well, so far this year, gold is up 7.6%, only behind Iron ore (+11%) and coffee (9%). All energy commodities are in the red for the year, while copper and silver are up 2% and -7% respectively.  We're only 17th of March, 5 days away from a Federal Reserve decision, that's likely to produce straightforward 25-bp rate hike and a highly confusing/messy dot-plot. Not to mention, a press conference, where Jay Powell will have to explain how the 50% reversal in quantitative tightening “is not at all QE”, as well as explain dots disparity on the terminal rate. 

 

In a matter of 4 days, US 2-year yields have gone from hitting 16-year highs to posting the biggest drop in 40 years. The 4.09% print is 0.66 below the Fed Funds rate—a level at which the Fed Funds rate had peaked shortly before the Fed began cutting rates. This is highlighted in the chart as Aug 2007 and June 2019. 

What's the rationale for this development? In absolute terms (not relative to other tenors), the short-end of the curve is always the last to begin pricing the end of rate hikes or rate cuts. So when 10-year yields fell below their 2-year and 3-month counterparts last autumn, the yield curve entered inversion as the longer-end began pricing slowdown/end of hikes. During that time, however, both 2-year and 3-month yields (t-bills) were on the rise. And as we know, 2-yr yields hit a 15-year high early last week. So just a reminder: Yield curve inversions usually precede rate cuts by 1-2 years, while re-steepening of the curve (when short-term yields start to fall towards longer-term yields) is usually a more accurate indicator of timing of the cuts as it is closer to it materialising.

Finally this week, both 2-year and 3-month yields registered a sharp decline, in response to deep repricing of Fed hike expectations following the collapse of SVB. The rise in US unemployment and slowdown in average hourly earnings in Friday's jobs report (full analysis here) did help to weigh on yields, USD and boost metals. When it rains, it pours -- “Risk happens fast” as the market saying goes.

If Tuesday's release of the Feb CPI comes in at or below 6.0%, then gold could easily regain $1960. This also depends on what the m/m reading does. There are various permutations from the CPI release, paving the way for a $30-40 jump in gold. What if CPI rises above 6.5% y/y? I would say stocks will generally bear the worst of such outcome, with a possible bounce in yields but eventual rally in gold following an initial selloff. 

Meanwhile, our WhatsApp Broadcast Group does not waste time. 5-7 seconds after the CPI release, members will get a voice note with my immediate assessment of the whole CPI report, focusing on what it means for gold/indices/FX, later followed by text messages, trades and charts. Good luck.