The gold market continues to struggle in the face of unprecedented strength in the U.S. dollar; however, a new report from the World Gold Council said that investors need to put the recent price action in perspective compared to larger movements within financial markets.
Although the gold market has seen some significant selling pressure, dropping briefly to fresh two-year lows at $1,633 an ounce, prices are still only down less than 10% since the start of the year. In his latest report, Juan Carlos Artigas, global head of research at World Gold Council, said that given where the U.S. dollar is along with bond yields, gold prices should be down closer to 30%. December gold futures last traded at $1,646.90 an ounce, down 0.53% on the day.
“In fact, gold has done much better than inflation-linked bonds both in the U.S. and elsewhere. And we believe that gold’s performance so far this year reflects the behavior of its underlying drivers,” he said in the report.
Looking at broader financial markets, the S&P 500 is down nearly 23% year to date. The tech sector has been even harder hit, with the Nasdaq dropping more than 30%. The only sector that gold hasn’t outperformed is the broader commodity index.
It’s time to buy commodities, not equities – Goldman Sachs
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“The fact that gold has performed as well as it has, all things considered, is a testament to its global appeal and more nuanced reaction to a wider set of variables,” said Artigas.
Although gold prices are expected to continue to struggle in the face of rising interest rates, Artigas said he remains optimistic that the gold market can still find some support through year end.
Although the Federal Reserve is expected to continue to aggressively raise interest rates, the WGC said that the tightening cycle is closer to the end.
“Given how much tightening has occurred so far, we would expect rate hikes to slow down, allowing some of gold’s other supporting factors to play a more important role.Also, the fact the other central banks are being more resolute in their policy decisions – partly to curb inflation, partly to defend their currencies – should weigh on the U.S. dollar,” Artigas said.
Artigas added that growing recession risks as central banks continue to tighten monetary policy worldwide should also provide some support for the yellow metal.
Finally, Artigas said that central bank demand is also providing solid support for gold as they continue to diversify their holdings away from the U.S. dollar.
Last week, the WGC noted that the central bank of Uzbekistan has been extremely active in the gold sector, buying another 8.7 tonnes of gold in August. This is the third consecutive month of purchases.The WGC noted that Uzbekistan has bought 19.3 tonnes of gold this year, pushing total reserves to 381.3 tonnes
Gold is rallying after the U.S. housing market surpassed all expectations and showed surprising strength in March, according to the latest government data.
New home sales shot up 8.8% last month to a seasonally adjusted annual sales rate of 693,000 homes, well above March’s downwardly revised rate of 637,000, which was originally reported as 664,000, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development announced on Tuesday.
The data was far better than expected, as consensus forecasts looked for a 2.7% increase to a sales rate of 668,000 homes.
After spending the overnight and much of the morning in negative territory, gold prices have rallied in the wake of the housing data release. Spot gold last traded at $2,329.55 an ounce, up 0.08% on the day.
The U.S. housing sector has struggled since the Federal Reserve’s aggressive monetary policy pushed mortgage rates to multi-year highs, while a low supply of new homes is keeping prices elevated.
The report said the median sales price of new houses sold in March was $430,700, while the average sales price was $524,800.
Looking at the inventory of homes for sale, the report said there were an estimated 477,000 new houses for sale at the end of March, representing 8.3 months of supply at the current sales rate.
Billionaire investor Ray Dalio has had a mixed relationship with the U.S. dollar over the last few years, and it appears he is once again raising doubts about the health of the greenback.
In a commentary posted to LinkedIn on Thursday, the former Bridgewater Associates CEO said he is holding gold as a hedge against a potential debt crisis and higher inflation.
The comments come as the U.S. government’s burgeoning debt comes into greater focus. The U.S. national debt has surpassed $34.5 trillion. However, this is not just a United States-based threat.
During its annual spring meeting in Washington, D.C., the International Monetary Fund said in its Fiscal Monitor that China and the U.S. will drive global public debt over the next five years.
The IMF projects that public debt in the world’s two largest economies could double by 2053. They also singled out the U.K. and Italy as two nations that face significant fiscal risks as their government debt rises.
“History and logic show that when there are big risks that the debts will either 1) not be paid back or 2) be paid back with money of depreciated value, the debt and the money become unattractive,” Dalio said in his commentary. “Since debts are promises to pay money, when a government has too much debt to be paid, its central bank is likely to print money. This prevents a big debt squeeze from happening by devaluing the money (i.e., inflation).”
“Gold, on the other hand, is a non-debt-backed form of money. It’s like cash, except unlike cash and bonds, which are devalued by risks of default or inflation, gold is supported by risks of debt defaults and inflation,” he added.
Dalio said that debt and other financial assets are only attractive when the financial system works well and governments can meet their debt obligations without having to print money.
“On the other hand, when the reverse is the case, gold is a good asset to own,” he said. “That’s the main reason that gold is a good diversifier and why I have some in my portfolio.”
In early 2020, Dalio made headlines across global financial markets as he declared in a LinkedIn post that “cash was trash” in a low-interest-rate environment.
However, in September 2023, Dalio declared that “cash is now good,” as the Federal Reserve pushed interest rates to their highest level in more than 40 years.
In his latest post, he said that gold is one of just a few examples of “good money” in the world.
“It is held by central banks and other investors for this reason,” he said. “In fact, gold is the third-most-held reserve currency by central banks, more so than the yen or renminbi. Cryptocurrencies are also non-debt monies. I don’t know of any other types of non-debt monies, though some people might argue that gems and art act similarly because they are non-debt, portable, and widely accepted storeholds of wealth.”
Rising levels of global debt are a big reason why many commodity analysts have turned significantly bullish on gold, with some looking for prices to hit $3,000 an ounce.
The gold market has seen broad-based gains to record highs against all major global currencies in the last few months.
The gold market is seeing solid selling pressure afte failing to hold its ground at $2,400 an ounce. Although the market has room to fall lower during the summer, one market analyst says that the precious metal remains in a solid position to rally by year-end. In an interview with K-News, Chantell Schieven, Head of Research at Capitalight Research, said that not only is gold technically overbought, but it has also started its historical seasonal weak period. In this environment, Schieven noted that she sees gold prices potentially falling back to $2,150 an ounce, representing the March breakout level.
Although Schieven is looking for a correction in gold in the next few months, she remains a long-term bull. She said she is raising her year-end price target to $2,500 an ounce, up from $2,400 an ounce.
The comments come as June gold futures start the week with a more than 2% loss, last trading at $2,349.10 an ounce.
At the start of the year, Schieven was the most bullish analyst who participated in the London Bullion Market Association’s annual price forecast.
“It’s been kind of surprising to see gold take out all these levels, and while I do think it goes higher, I do think we need to see a bit of a pullback,” she said. “I don’t think gold goes all the way back to $2,000 or below, but we could see $2,100 before the end of the summer.”
Schieven said that the most significant reason she has turned near-term cautious on gold is due to shifting interest rate expectations that are supporting higher bond yields and a stronger U.S. dollar. Markets are now pushing back the start of the Federal Reserve’s easing cycle until after the summer.
According to the CME FedWatch Tool, markets see less than 20% chance of a rate cut in June. At the same time, the chance of a rate cut in July has dropped below 50%.
“Gold has broken a bit away from its fundamental drivers, and I think we are starting to see these drivers come back into focus, which can be negative for gold,” she said.
However, Schieven added that the gold market has become significantly more nuanced than just following bond yields and the U.S. dollar. Although the Federal Reserve is not expected to cut rates during the summer, it’s unlikely to raise interest rates.
“The Federal Reserve will eventually cut rates this year. I expect to see them cut rates after the 2024 election, and that is when we will see gold prices climb higher and push towards $2,500 an ounce. The summer lows could prove to be a good time to buy for long-term investors.”
At the same time, Schieven said that she expects inflation to play a more critical role in gold’s price action. She pointed out that with the Federal Reserve holding firm on its monetary policy, higher interest rates mean that real rates will rise, lowering gold’s opportunity costs as a non-yielding asset.
“Ultimately, the Fed, even with their hawkish comments, continue to leave themselves room to lower interest rates,” she said. “They will be lowering interest rates even as inflation remains stubbornly above the 2% target. The Federal Reserve can’t afford to maintain higher interest rates because of rising debt levels.”
Looking beyond U.S. monetary policy, Schieven said that she expects gold to remain an attractive safe-haven asset. Although the global economy has seen relatively better-than-expected growth so far this year, Schieven said she has not entirely dismissed the threat of a recession.
She added that rising U.S. debt will strangle economic growth as more money is thrown at just servicing its debt. In March, economists at Bank of America noted that U.S. national debt is rising by $1 trillion every 100 days. Schieven pointed out that this is a significant reason why central banks will continue to buy gold.
“Nobody wants our debt right now,” she said. “As the debt grows, it’s not surprising that central banks want fewer U.S. dollars and want to diversify their holdings.”
Finally, Schieven said that U.S. geopolitical instability as the 2024 election draws closer will also provide new support for gold.
“I don’t really know how to put this, but neither choice is that great. No matter who gets elected, deficits will still rise, and the U.S. dollar will still be devalued,” she said. “Those things are not good for the U.S., but they are certainly good for gold.”
Looking through higher volatility this year, Schieven said that gold remains in a long-term uptrend. She pointed out that during the 1970s, higher inflation, economic uncertainty, and geopolitical turmoil caused gold prices to double.
While that might be an unlikely scenario today, Schieven said that it is not out of the question.
“We do not think it is out of line to look for a $3300+ gold price over the next 5-6 years,” Schieven wrote in a recent report.
The polling organization, Gallup, conducted a survey between June 1-22 to update its annual poll that measures the confidence that Americans have in key U.S. institutions. Banks, as might be expected, continued their downward trend, registering an abysmal 26 percent of Americans who have “a great deal” or “fair amount” of confidence in the banks. That confidence ranking stood at 27 percent last year and at 33 percent in 2021.
Measured against a longer time horizon, confidence in U.S. banks looks far worse. In 1979, the Gallup poll showed 60 percent of Americans had confidence in the banks. In the years prior to the Wall Street financial crisis of 2008, roughly half of Americans had confidence in the banks.The 2008 crisis pulled back the dark curtain that had surrounded the mega banks on Wall Street, revealing them to be trading casinos on steroids, in drag as federally-insured banks.
The repeal of the Glass-Steagall Act in 1999 by the Wall Street friendly Bill Clinton administration was a watershed moment in its impact on all of the following in America: national security, the safety and soundness of the banking system, the ability of Americans to believe in their government to act honestly and fairly, the rise of the billionaire class, and with it, the greatest wealth inequality in U.S. history.
The Glass-Steagall Act was passed by Congress at the height of the Wall Street collapse that began with the 1929 stock market crash, the ensuing insolvency and closure of thousands of banks, followed by the Great Depression. The legislation addressed two equally critical flaws in the U.S. banking system of that time. It created, for the first time, federally-insured deposits at commercial banks to restore the public’s trust in the U.S. banking system and it barred commercial banks that were holding those newly-insured deposits from being part of Wall Street’s trading casinos – the brokerage firms and investment banks that were underwriting and/or trading in stocks and other speculative securities.
As a result of the repeal of the Glass-Steagall Act (also known as the Banking Act of 1933), trading casinos on Wall Street like JPMorgan, Goldman Sachs, Citigroup, and Morgan Stanley are allowed to own federally-insured commercial banks (and do own them) and hold trillions of dollars (yes, trillions) of complex and hard to price derivatives inside the insured banks.
For a deeper dive into the banking trainwreck that has ensued since the repeal of the Glass-Steagall Act, we highly recommend the brilliant book by Arthur E. Wilmarth, Jr., Taming the Megabanks: Why We Need a New Glass-Steagall Act.
It should trouble every American that a major newspaper in the U.S., which just happens to be located in Wall Street’s hometown, used its editorial page to lobby for the repeal of the Glass-Steagall Act. The New York Times began to wave its pom poms for the repeal of the Glass-Steagall Act in 1988, writing as follows about the 1929 crash:
“Few economic historians now find the logic behind Glass-Steagall persuasive. Banks did lose some money in the crash, but largely through defaults of loans secured by stock. Restrictions on investors’ ability to buy stock on credit would have helped to protect the banks, but not the Glass-Steagall prohibitions on selling or underwriting securities.”
That statement stands as a complete contradiction of the findings of the 3-year Senate investigation into the causes of the 1929-1932 crash. Investigators found that the Wall Street banks that were underwriting securities were also creating “pool operations” where they coordinated pumping up share prices until they could sell at a big profit. This created an artificially inflated market and undermined the safety and soundness of their banks, which also held savings deposits.
In 1990 the Times again attacked the Glass-Steagall Act, writing:
“The Glass-Steagall Act was passed in part to settle a turf war between competing interests in U.S. financial markets. But it also reflected a belief, fueled by the 1929 crash on Wall Street and the subsequent cascade of bank failures, that banks and stocks were a dangerous mixture.
“Whether that belief made sense 50 years ago is a matter of dispute among economists. But it makes little sense now…”
Smelling victory in its long push to repeal the Glass-Steagall Act, on April 8, 1998 the New York Times editorial page slobbered over what would become one of the worst banking mergers in U.S. history, and one that it knew would force the hand of Congress to repeal Glass-Steagall. The Times wrote:
“Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own. They have announced a $70 billion merger — the biggest in history — that would create the largest financial services company in the world, worth more than $140 billion… In one stroke, Mr. Reed and Mr. Weill will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.”
The merger went through and one year later, in 1999, the Bill Clinton administration repealed the Glass-Steagall Act. Just nine years later, Wall Street collapsed in the same epic fashion as 1929, leaving the U.S. economy in shambles. Citigroup became a 99-cent stock in early 2009 while receiving the largest bailout in U.S. banking history from December 2007 through at least June of 2010.
On July 27, 2012, the New York Times sheepishly owned up to its role in helping to crater Wall Street and confidence in the banks. The editorial page editors wrote:
“While we are on this subject, add The New York Times editorial page to the list of the converted. We forcefully advocated the repeal of the Glass-Steagall Act…
“Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.”
One might be inclined to consider that gesture by The Times as too little, too late.
Speaking of which, Americans’ confidence in newspapers is even lower than is their confidence in the banks. According to the 1979 Gallup poll, 51 percent of Americans had confidence in newspapers. In the current 2023 Gallup poll, that figure stands at 18 percent. The only institutions with a lower rating are: the criminal justice system at 17 percent; television news at 14 percent; big business at 14 percent; and Congress at 8 percent, just one percent above its all-time low of 7 percent, which it clocked in at last year.
Until the Glass-Steagall Act is restored in the United States, the frequency and severity of banking crises will grow. Tinkering around the edges of capital reform, or stress test reform, as Fed Vice Chair for Supervision Michael Barr delivered a speech about yesterday, is a fool’s errand.
In June, Reuters reported that JPMorgan Chase was expanding the reach of its commercial bank into two additional foreign countries – Israel and Singapore – bringing its foreign commercial bank presence to a total of 28 countries. Those plans could potentially add billions of dollars more to its already problematic uninsured deposits.
According to its regulatory filings, as of December 31, 2022, JPMorgan Chase Bank N.A. held $2.015 trillion in deposits in domestic offices, of which $1.058 trillion were uninsured. It also held another $418.9 billion in deposits in foreign offices, which were also not insured by the Federal Deposit Insurance Corporation (FDIC). That brought its uninsured deposits as of year-end to a total of $1.48 trillion or 60 percent of its total deposits.
Under federal statute, the deposits held by U.S. banks that are located on foreign soil are not insured by the FDIC. Depositors in the Cayman Islands’ branch of Silicon Valley Bank found that out the hard way when their deposits were seized by the FDIC earlier this year after the bank failed in March. Deposits in domestic bank offices in the U.S. that exceed $250,000 per depositor/per bank are also not insured by the FDIC.
After the second, third and fourth largest bank failures in U.S. history over the span of seven weeks this past spring, the FDIC has awakened to the dangers of U.S. banks holding large amounts of uninsured deposits – whether they are uninsured because they exceed the $250,000 insurance cap per depositor/per bank or are uninsured because the deposits reside on foreign soil. Large holdings of uninsured deposits contributed to the bank runs at Silicon Valley Bank and Signature Bank in March, which toppled the banks and forced an FDIC receivership at both banks.
Because billions of dollars in domestic uninsured deposits were at risk at both failed banks, federal regulators issued a “special risk assessment” that allowed the FDIC to cover all uninsured domestic deposits. That action resulted in billions of dollars in extra losses to the FDIC’s Deposit Insurance Fund (DIF).
To wake up the mega banks on Wall Street to their own vulnerability with uninsured deposits as well as cover the DIF’s losses, the FDIC released a proposal on May 11 to levy a special assessment based on the individual bank’s holdings of uninsured deposits as of December 31, 2022. The assessment would amount to a charge of 0.125 percent of a bank’s uninsured deposits above $5 billion. The charge would be spread over eight quarters.
If the proposal survives as planned, that’s going to mean a very large financial hit to JPMorgan Chase and other mega banks with large amounts of uninsured deposits.
The proposal was subject to a 60-day comment period and, of course, the largest banks are howling through their lobbying organization, the Bank Policy Institute (BPI). In a letter dated July 21, the BPI argued that it wants to see some evidence that the biggest banks were the primary beneficiaries of the federal regulators’ “systemic risk assessment” that quieted things down during the banking panic. The BPI used the word “future” 13 times in its letter, repeatedly making the point that this better not be an assessment that the FDIC plans to make on an ongoing basis in the future.
Dennis Kelleher, President and CEO of the nonprofit watchdog, Better Markets, countered the whines of the mega banks in his own detailed letter, writing in part:
“The primary purpose of FDIC deposit insurance is to protect bank depositors. The standard deposit insurance coverage limit is currently $250,000 per depositor, per FDIC-insured bank, per ownership category. At most banks, especially most community banks that conduct traditional banking services in support of their local cities and towns, most deposit accounts are insured. In fact, as of December 2022, more than 99 percent of deposit accounts were below the $250,000 deposit insurance limit. As stated in the FDIC’s May 2023 Deposit Insurance Study mandated by Congress, ‘Uninsured deposits are held in a small share of accounts but can be a large proportion of banks’ funding, particularly among the largest 10 percent and largest 1 percent of banks by asset size. Large concentrations of uninsured deposits, or other short-term demandable liabilities, increase the potential for bank runs and can threaten financial stability.’ ”
Kelleher would also like to see the largest banks pay the special assessment in one year rather than eight quarters, along with other suggestions he made to improve the proposal. He writes:
“…the largest banks remain able to fund stock buybacks. After dropping sharply in 2020 because of uncertainty about the economy and effects of the pandemic, stock buybacks have, for the largest banks, resumed in 2021. Between the first quarter of 2021 and third quarter of 2022, aggregate stock buybacks for 21 large bank holding companies averaged more than $22 billion per quarter and reached a high of nearly $40 billion in the third quarter of 2021 alone. Several large bank CEOs indicated that plans for buybacks in 2023 will exceed 2022 levels, citing the fact that capital is ‘well above’ regulatory minimums, allowing for buyback flexibility.”
