Tag Archives: fed

FXC Gold Image

Looming bond market crisis set to improve gold demand

 

Historically low bond yields across both the private and government sectors are reducing the margin for error when it comes to the ability of financial markets to withstand a bond market shock.

Global quantitative easing (QE) has seen bond yields driven to low and often sub-zero levels in many economies. The European Central Bank is currently undertaking a EUR60 billion a month eurozone bond buying programme, this is expected to last at least until September 2016. In the past Japan, U.K . and the U.S. have been very active when it comes to QE to stimulate their economies and create inflation with the bond market being a key asset.

Why would investors essentially pay good money to lend out their own money? Well, one reason an investor would do this is if they expect to see a decline in prices such, as in a deflationary environment when negative yields can in fact be higher than other variable yields offered. Another reason is an investor wants to store their wealth in what they believe to be a safe asset. Investors often like to park their money in German and U.S. government bonds in times of uncertainty, both are considered by many to be safe-have assets.

It is however risky for any investors to invest in long term fixed income with low or sub-zero returns. It certainly is not the safe bet that many investors think, nor should these low rates of returns be considered the new normal. At the other end of the scale and what is even more risky are junk bonds and bonds such as those offered by troubled governments such as Venezuela and Greece. In the current low yield environment too many investors are chasing higher yields without considering the significant consequences, the attraction of double digit yields blinds them to the risk. This is a similar thought process, or lack of thought process that in hindsight we saw before the GFC when the price of risk was often undersold or not properly priced in. It will only take one or two high profile defaults from these high yielding investments and we can expect to see investor expectations shift and potentially cause a run on bonds as investors head for the door.

While banks and financial firms in the U.S. have reduced their exposure to the more questionable grade bonds due to new regulations, what we have seen in the past 6 years is that insurance firms, mutual funds and other institutions are taking up the slack. This would see the reach of any crisis spread beyond ‘Wall Street’ and into other sectors of the economy. Restricting financial firms also has the unintended consequence of reducing liquidity, should we see investors move quickly out of bonds in search of higher returns (something entirely possible with the Fed set to lift rates soon), or we see general bond market jitters then do not be surprised to see investors scramble to be first to get to the exit door, no one wants to be last out. This scenario could see prices dive in a short period, not helped by the lack of support and buying from financial firms as they are restricted on what and how much they can purchase. A number of financial market experts such as JP Morgan Chase CEO Jamie Dimon and billionaire investor Jeffrey Gundlach have expressed concerns around the lack of liquidity in the bond market.

The big losers from a bond market crisis will be governments, corporations, pension holders and funds, money managers and other institutions. This would be significant as most, if not all investors would be touched in some way by a bond market crisis, just as all investors were when the GFC hit.

The big winners from a bond market crisis are those investors holding gold and other precious metals, just as we saw following the GFC.

Adding to the concerns around financial markets is the fact that equity markets in key markets such as the U.S. and Germany have reached fresh new highs, highs not even seen before the GFC. Investors need to be wary about investing in the bonds or equities as we are moving closer to a crisis, it is not going to take much for financial markets to tip over with bonds often of questionable grades potentially being the match that starts the fire. It was the subprime crisis that sparked the GFC and it could be a bond crisis that sparks the next global financial crisis.

The closer we move to a new financial crisis, the more funds investors should be allocating to precious metals. Investors should currently be looking to position their portfolios to withstand a crisis by re-weighting their portfolios to include approximately 20-25% of their funds in gold.

Courtesy of Bullion Index .

FXC Gold Image

Gold bulls are thanking the Fed

 

Bullion Index report that, leading into the Federal Reserve March monetary policy meeting last week investors dumped gold sending it to a 4 month low, while at the same time trades went long dollars on expectation the Fed would suggest it will move as early as June on raising interest rates. While the Fed dropped the highly anticipated word ‘patient’ from their statement following the meeting, the statement however contained a number of surprises which have sent gold higher and the US dollar lower since its release. The Fed statement saw it lower the GDP growth forecast and importantly also lower its forecast for inflation. This is important to financial markets as the Fed has said it will look to tighten rates when it is “reasonably confident” that inflation will hit its 2% objective over the medium term. With the lowering of its inflation forecast this will see it take even longer to get back to its 2% inflation objective. The Fed now sees inflation running at between 0.6-0.7% for 2015 and between 1.6-1.7% in 2016, still materially lower than the 2% figure the Fed has said it needs to be confident of hitting before it pulls the trigger on rates.

 

 

Export growth in the U.S. is also weakening according to the Fed which is an acknowledgement by the Fed of the recent strength of the US dollar. Even taking into account the dollars biggest weekly fall since 2011 the dollar is still strong by any standard. According to the Bloomberg Dollar Index, a measure against a basket of 10 currencies, the US dollar is trading near its highest level in at least 10 years. The dollar strength is something that is coming into consideration by the Fed, traditionally it steers clear of commenting on the dollar. Any rate increase by the Fed is expected to send the dollar even higher. The strong dollar is making imports cheaper, reducing inflationary pressures, something the Fed is trying to lift, while at the same time making exports more expensive which puts pressure on GDP growth. A high dollar should be of a concern to the Fed.

 

The consensus in financial markets suggests the Fed is on track to raise rates in 2015, however it now seems the market is expecting rates to move later (e.g. September instead of June) and possible not hit the high levels previously expected.  Leading Banks such as Bank of America Merrill Lynch and Deutsche Bank suggest the Fed will increase rates in September, while a recent Reuters poll of top Wall Street banks also favour a September rate increase. I still believe we will not see a US rate increase in 2015 and even more so after the Fed statement and continuing weak data that seems to be coming out of the US such as the recent worse than expected durable goods data. The Fed noted in its statement that “economic growth has moderated somewhat” since its January meeting, that is not a foundation for a near term rate increase. Federal Reserve Bank of Chicago President and a voting member of the Federal Open Market Committee Charles Evans said in a speech this week that he thinks “economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016”. He suggests that inflation will not hit the 2% target until 2018 and that inflation is currently “uncomfortably low”.

 

The Fed’s monetary policy is very much driven by data flow and what is expected and what is actually delivered and at the moment most of the data coming out is not setting the markets alight. The longer the Fed holds off moving on rates the better it will be for gold demand given it reduces the opportunity cost between holding non-interest bearing gold and investing in interest bearing assets or term deposits. Gold also performs well in times of uncertainty so with the increased confusion as to when and by how much the Fed will increase rates, it is only going to add support to the price of gold.

 

With weak data coming out of the US along with exceptionally low inflation rates, well below the Fed’s target of 2%, the Fed would be reckless to move on rates until they see solid evidence of underlying economic growth, positive wage growth and inflation heading to 2%. I do see that happening in 2015. The risks on moving too soon on rate hikes are too significant while the benefits remain relatively low which leads me to believe the Fed will be very conservative and hold off on raising rates until 2016. In the meantime while interest rates remain low and uncertainty is at the forefront of investors’ minds gold demand is going to increase.

 

Now that gold has broken through US$1,200/oz, the next upside target to watch is US$1,208/oz which is the 100 day simple moving average followed by US$1,22o/oz the 50 day simple moving average.

 

*******

Courtesy of: http://www.bullionindex.com.au/

FXC Gold Image

Gold Trading Week Ahead

 

Bullion Index report: Late last week gold managed to stem the recent losses as the dollar rally paused. An 8 day run of consecutive losses on gold came to an end on Thursday, not before posting a new 4 month low.

Last week we saw solid buying from our clients at the low US$1,150’s/oz levels.

This week is going to be a key week for gold with the Federal Reserve’s two day policy meeting Tuesday and Wednesday. The main focus will be Fed Chair Janet Yellen’s press conference following the FOMC announcement at 2pm Wednesday New York time. The price of gold is being driven almost solely by US dollar movements at the moment (dollar up, gold down or dollar down, gold up), so if any wording coming out of the Fed next week hints at a June rate rise, look to see further US dollar strength and gold soften. If the Fed notes that it still remains ‘patient’, the market is going to take that as a post June rate rise which should give gold a boost. Gold investors should also look out for any commentary from Yellen surrounding the US dollar. Traditionally the Fed would not mention the US dollar however given its stunning run it may play a factor in the Fed’s monetary policy. If it does come into play then the Fed may look to hold off tightening until later on in the year or even possibly next year.

The Fed is facing one of its biggest decisions since the GFC, they do not want to go too early or too late when it comes to raising interest rates.

The other events of the week that gold traders should be aware of include; ECB President Mario Draghi’s speech on Monday, US Building Permits and Housing Starts on Tuesday, Swiss National Bank Monetary Policy Decision and Philadelphia Fed Manufacturing Index both on Thursday.

I do not expect to see any further big moves on gold until after Yellen’s press conference on Wednesday. Between the open on Monday and her press conference I expect to see investors adding to long gold trades on any dips.

Investors have been showing more interest in platinum in the past week as they look for value, platinum has recently hit lows not seen since mid-2009.

Gold closed at US$1,158.60oz in New York on Friday, down US$10oz on the week.

******

Courtesy of:  www.bullionindex.com.au

FXC Notes Image

EURUSD all front end story as Fed stops QE – SocGen

 

Societe Generale report “EUR/USD is likely to stay down as the front end of the UST curve reprices from low levels. However, reserve managers et al still need to offload considerable amounts of EUR treasuries, cash, short term paper into longer dated UST. This combines with an equity market digesting the news means that most of the move is one in the USD and front end UST as the Fed path is repriced. EM which had done well pre-Fed meeting should still benefit eventually from a sense that the US economy is recovery. There the wealth effect of a recovering US economy will eventually come through trumping the subsitutiton effect (Fed tightening). EUR/USD will have no such luck as it is all driven by substitution. USDCAD there is an inbetween case between EM and EURUSD”.

(Source: Societe Generale)

FXC Trading Image

USD aggregate positions are near their historical highs

 

SwissQuote report “the International Monetary Market (IMM) non-commercial positioning is used to visualise the flow of funds from one currency to another. It is usually viewed as a contrarian indicator when it reaches an extreme in positioning.

The IMM data covers investors’ positions for the week ending 14 October 2014. The most recent data confirm the investors preference to the US dollar, as all major currencies remain net short against the greenback. The net short EUR positioning has remained stable in recent weeks, suggesting that a new catalyst is needed to create a new wave of Euro selling. However, with the ECB implementing its recent easing measures (purchases of asset-backed securities and covered bonds) and given the increased Germany’s resistances to a broad-based QE, the odds to see an imminent QE seems fairly low.

Net short positions in commodity currencies have significantly increased, pushing aggregate USD positions near their historical highs. Even if we continue to favour long-term USD strength, the current highly polarized market suggests risk of increased volatility. Long USD positions are currently best taken on price weakness”.

swissquote usd oct14

(Source: SwissQuote)