I'm sure that most on this forum are aware of the long term trends in the gold market in relation to central bank purchases. Also, the current geopolitical tensions, trade disputes and wars. I'd like to take a closer look at some of the short term drivers, which may explain the rally we've observed over the last few weeks.
The US Federal Reserve's Bank term funding program is set to expire on Monday the 11/03/24. The program Offered loans of up to 1 year in exchange for certain collateral. In particular, underwater securities, worth cents on the dollar. Banks have been able, through the use of this program, to receive full price (or near full price) for their underwater assets. The program has been praised for temporarily alleviating some of the issues US banks faced in 2023. The core of the problem, however, is the banks unwillingness, or inability, to abide fair value accounting practices. Banks assign securities they own into one of three categories, trading, available for sale, or hold to maturity. Only the first of which are marked to market (fair value). This accounting practice has allowed banks to play numberwang with their balance sheets, allowing them to take on more risk than they should. In April, the US Federal Reserve will release the BTFP figures for March (the end of the program).
Australia posted it's 4th straight quarter of negative GDP, meaning for 12 months we've been in recession. 15 months, if you include December quarter 2022, which was rounded to 0.0% growth. The UK and Japan slumped into recession at the end of 2023. Italy and France are lagging a few months behind, however, recession looks increasingly likely. Germany, Europe's largest economy, has been stuck at zero growth for a couple of years now. Growth in almost all Western countries is either flat or going backwards.
US nonfarm payroll data was released on Friday 08/03/24. Mainstream media thought the data were ambiguous. The initial figures for February were strong, 275 vs 200 expected. However, we continued to see strong data from prior months being revised lower. February saw a continuation in new government employment (52k). Unemployment rose from 3.7% to 3.9%. I would tentatively hazard a guess, the US economy is just as weak as the rest of the Western economies, being held aloft by inaccurate data. The continuing claims of American exceptionalism from both political and economic commentators is the kind of rhetoric typical of the US. We see wall street talking heads shift from hard landing to soft landing, and more recently, no landing. I assume these ideas will soon see their final days as the data continue to evolve. The tendrils of our interconnected world economy will drag the US into recession, if it's not there already.
To the major reserve banks. Both the Fed and the ECB signalled rate cuts on the horizon. We no longer hear the mantra 'higher for longer'. We saw Christine Lagarde this week, in her usual careful and bureaucratic tone, say something along the lines of; we're moving from the tightening phase to the restrictive phase, from the restrictive phase we'll move to the easing phase. But, we have not discussed rate cuts yet. In fact, I'm sure they aren't even thinking about thinking about easing rates, yet. In the US, Jerome Powell revealed rate cuts are on the table for this year.
We see New York Community Bancorp standing on shaky footing. Last year, the bank purchased the assets of Silvergate bank (now defunct). This purchase doubled NYCB's assets over a six month period, they now hold 120 billion. On 05/03/24 roughly 7% of deposits had left the bank, drawing parallels to the US banking crisis of 2023. In this weeks release of the FDIC's banking profile, we continue to see non-accrual rates increase on commercial real estate. Past due loans increased 13% to 17.5 billion.
In politics last week, we witnessed Joe Biden's state of the union address, in essence, no more than an attack on his political opponent. A week earlier we saw Rishi Sunak on the steps of Downing street, attacking the election of George Galloway. Both Biden and Sunak seem to be getting progressively more desperate, as their popularity wanes. Earlier in the week we witnessed the resignation of Victoria Nuland, US undersecretary of state. Possibly the first domino to fall, as the US begins re-assessing it's stance on Ukraine. Emmanuel Macron became increasingly vocal on the war in Ukraine, much to the dismay of his colleagues, and other European leaders. The US election season seems to have started early. I will use a popular American phrase, tongue in cheek, it's their chance to choose the least worst option.
We see political storms, both local and global, and financial storms. We stand at the precipice of impending rate cuts, looking down upon 0% rates, once again. A renewed proliferation of cheap credit. This time however, inflation remains stubbornly high. Trending lower, but not close enough to the central banks global target rate of 2%. We see economic growth stall in major economies. We are possibly witnessing the first stirrings of the 2023 US banking crisis, creeping it's way into 2024.
With all these goings on, how do we see sentiment in the gold space?
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