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05 August 2020
Video commentary for August 4th 2020
Eoin Treacy's view
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: gold breaks above $2000, silver and platinum firm, oil steadies, stocks advance, China banks rebound, Treasury yields compress, uncertainty about the timing of a US stimulus agreement.
Gold ETFs Top German Holdings to Become World's No. 2 Stash
This article by Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:
Investors are so concerned about the global outlook that worldwide holdings in gold-backed exchange-traded funds now stand behind only the official U.S. reserves of bullion after they surpassed Germany’s holdings.
Gold has rallied to a record this year as the coronavirus pandemic savaged growth, with gains supported by massive inflows into bullion-backed ETFs. Bulls are fearful that the waves of stimulus to fight the slowdown may debase paper currencies and ignite inflation. They also point to simmering geopolitical tensions, rising government debt burdens, and lofty equity valuations.
Worldwide holdings in gold-backed ETFs rose to 3,365.6 tons on Monday, up 30.5% this year, according to preliminary data compiled by Bloomberg. That’s a couple of tons ahead of Germany’s stash. U.S. reserves exceed 8,000 tons.
Even after futures topped $2,000 an ounce, there are plenty of forecasts for further, substantial gains. Among them, Goldman Sachs Group Inc. says gold may climb to $2,300 as investors are “in search of a new reserve currency,” while RBC Capital Markets puts the odds of a rally to $3,000 at 40%.
Eoin Treacy's view
China and India have historically been the biggest consumers of gold. However, prices are set by the marginal buyer. Right now, that is investment demand from ETFs which has jumped by more than 50% in the last 12 months. This is a totally fresh phenomenon. ETFs did not exist in prior cycles so it was impossible to estimate how much gold was owned by investors. It is reasonable to conclude that before this bull market has climaxed ETF holding will be the largest gold stockpile in the world.
John Authers' Points of No return
This edition of the former Lex Column’s editor contains some interesting charts on the correlation between Fed intervention and stock market recoveries. Here is a section:
There is a negative correlation between what the S&P did a month ago and moves in the Fed’s balance sheet. In other words, if the S&P falls, we should expect the balance sheet to be increased about a month later. Once the Fed has made its change, we should expect the two to move in the same direction for the next month — a rising balance sheet raises the S&P, a shrinking balance sheet brings it down. The lag is clear; it takes about a month for a weak stock market to prod the Fed into a response, and once that response has been made the effect is felt in full a month later.
So, the two are indeed related but with a lag. How strong is the link? The top chart shows us what we should expect the Fed to do in response to a 10% correction, while the lower chart shows the S&P 500’s response to a 10% shift in the balance sheet:
There was also — and this should surprise nobody — a marked asymmetry to the Fed’s actions. It responds to falls in the market with alacrity. It doesn’t seem to feel any great macro-prudential need to prick bubbles by comparison, and so the tendency to respond to a rise in stocks with a shrinking of the balance sheet, as seen at the end of Janet Yellen’s tenure and the beginning of Jerome Powell’s, was much weaker. In late 1996, less than two years before the “Put” era began with LTCM, Alan Greenspan was plainly worried about the possibility of asset bubbles, and uttered his famous warning of “irrational exuberance” (following through with a rise in rates that induced a minor stock market correction). Now, the idea of raising rates to curb share prices appears so outlandish to Powell that he said in June “we would never do this.”
Eoin Treacy's view
The Fed is reluctant to intervene to slow or reverse the rise in asset prices for a very simple reason. They believe the easiest way to objectively measure the success of their policies is in asset prices.
The continued uptrend in bond, stock and property markets is viewed as positive from the Fed’s perspective because it signals efforts to stimulate risk taking behaviour are effective. Unfortunately, that way of thinking about markets pays little heed to egregious risk taking or the assumption bad behaviour will always be bailed out.
Email of the day on a double dip
Read a very interesting piece in Saturday's Telegraph by financial journalist, Ambrose Evans Pritchard. In a nutshell he suggests that western governments risk making the most catastrophic error of economic policy since the thirties by pulling away the stimulus rug too soon. The pandemic is still causing havoc and stimulus is running out before the rebound can reach self-sustaining escape velocity. He suggests the crunch will come in September/October.
Eoin Treacy's view
The prospect of stimulus being removed too early has made it onto the front page because of the politically motivated rancorous debate over extending the USA’s fiscal stimulus. It remains the base case that some form of agreement will be agreed to because neither party wants to be blamed for making the lives of tens of millions of unemployed people worse.
Eoin's personal portfolio: stock market long closed 22/7
Eoin Treacy's view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.
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