Today's Market View - Gold poised for major bull run
London (July 22) The gold market looks poised to enter a major bull market, with the precious metal trading above $1,400/oz for the first time since 2013 for more than 12% growth year to date.
• While growth of 20% strictly defines a bull market, some market participants are suggesting a rally could involve significant higher gains that last for years. The gold market has only surged twice since World War II, rising +1,755% through 1980 and +611% through 2011.
• The precious metal could build on recent gains as the Federal Reserve gets set to lower rates, US economic activity slows and trade tensions remain. Historically, gold has rallied when Fed cuts occur because the move depresses bond yields and the US dollar.
• Investors are betting the Fed will cut interest rates at its July 30-31 policy meeting. Market expectations for a 25 basis-point cut are at 58.9%, according to the CME Group’s FedWatch tool. Expectations for a 50 basis-point decrease are at 41.1%.
• Fed Chairman Jerome Powell said on July 10 that business investments have slowed across the U.S. recently as “crosscurrents ” from the ongoing U.S.-China trade war and slower economic growth overseas dampen the outlook on the U.S. economy.
• European growth mirrors faltering global growth, with manufacturing activity contracting last month, according to data from HIS Markit. Data sets are leading European Central Bank President Mario Draghi to clear the path for more stimulus in the region.
• “Gold thrives and core consumer price inflation tends to rise in an environment where policymakers are deliberately and persistently keeping policy rates and bond yields anchored below nominal GDP growth (i.e. fueling growth and inflation with an easy policy), which was the case of the 1960s and 1970s”, according to MRB Partners.
China debt levels and bank nationalisation threatens to undermine economy as repo rates spike >1,000%
China debt levels rise to 303% of GDP and 15% of global total debt
• China’s debt pile has risen to >300% of its GDP according to the Institute of International Finance ‘IIF’.
• The debt estimate includes total corporate, household and government debt in Q1.
• "While authorities' efforts to curb shadow bank lending (particularly to smaller companies) have prompted a cutback in non-financial corporate debt, net borrowing in other sectors has brought China's total debt to over $40 trillion - some 15% of all global debt,” according to the IIF report ..
• Unconfirmed reports suggest a leading sports shoe retailers may be struggling to get supply chain financing
• Shanghai 4-day Repo rates spiked to >1000% on Friday, though rates have pulled back to between 2.75-3.1%.
• Baoshang Bank and another bank have been nationalised causing a repricing of risk as China may be changing its long-standing policy on supporting local banks.
• While there may be internal issues at Baoshang Bank which have prompted the nationalisation of the bank the government’s refusal to simply bail out the organisation may cause the repricing of funding to many small and medium sized banks and the effective withdrawal of easy money into the broader market.
• The bank nationalisation is at a time when China should least want to upset its financial system as it struggles with slower exports to the US due to Trump’s Trade War Tariffs.
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