Factors Behind the Record-Setting Rally in Gold

The Daily Shot: 27-Jul-20
Commodities
Cryptocurrency
Energy
Equities
Rates
Emerging Markets
China
Asia – Pacific
The Eurozone
The United Kingdom
The United States
Global Developments
Food for Thought



 

Commodities

1. Spot gold broke through the 2011 high this morning.
 

 
Below are some of the drivers of the latest rally.
 
Unprecedented monetary and fiscal stimulus has been boosting inflation expectations. Here is the US 10yr breakeven rate.
 
Source: @lisaabramowicz1  
 
Positioning for higher inflation, investors are pouring capital into inflation-linked Treasuries (TIPS).
 
Source: Arbor Research & Trading  
 
As a result, real rates are moving deeper into negative territory, supporting gold.
 
Source: @TaviCosta  
 
The recent dollar weakness is another factor behind the rally.
 
Source: barchart.com  
 
Will the dollar continue to weaken? Asset managers keep increasing their bets against the US currency.
 
Source: Goldman Sachs  
 
Rising US-China tensions are also boosting demand for gold.
 
Source: BBC   Read full article  
 
Goldman’s geopolitics tension barometer hit a new high.
 
Source: Goldman Sachs, @themarketear  
 
China will be further irritated by the possibility of the US expanding its relationship with Taiwan.
 
Source: The Taipei Times   Read full article  
 
Another factor boosting gold is a concern about a double-dip recession in the US. The drag on the recovery will come from the potential income cliff …
 
Source: @axios   Read full article  
 
… and schools/daycare establishments remaining closed.
 
Source: Barrons   Read full article  
 
As a result, the Fed’s balance sheet will expand further, …
 
Source: @ISABELNET_SA, @GoldmanSachs  
 
… with risks to the upside if the central bank is forced to fill the deficit gap.
 
Source: Deutsche Bank Research  

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2. Next, we have some additional updates on precious metals.
 
Adjusted for inflation, gold isn’t near record highs.
 
Source: @acemaxx, @JohnAuthers   Read full article  
 
Technical indicators suggest that the gold rally is stretched.
 
Source: barchart.com  
 
The rally in silver has been impressive.
 

 
Silver hasn’t had a month this strong since the Hunt Brothers tried to corner the market.
 

 
The silver miners ETF (SIL) saw its largest inflows on record.
 
Source: @TaviCosta  

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3. Global steel production (ex-China) is gradually recovering but remains well below pre-crisis levels.
 
Source: World Steel Association   
 
4. Speculative accounts have boosted their bets on US soybean futures and cut back their short positions in corn.
 
Source: Fitch Solutions Macro Research  


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Cryptocurrency

Cryptos are rallying with gold as Bitcoin blasts past $10k. The next resistance level is $10.5K.
 

 
Etherium continues to outperform.
 


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Energy

1. The US rig count rose last week for the first time since March.
 

 
Production is rebounding.
 
Source: @financialtimes   Read full article  

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2. US natural gas rig productivity accelerated as prices fell.
 
Source: @WSJ   Read full article  


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Equities

1. Insiders have been selling into the rally.
 
Source: @hmeisler, @DiMartinoBooth  
 
The Nasdaq Composite has diverged from insider sentiment.
 
Source: @Not_Jim_Cramer  

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2. Market breadth has been weak.
 
Source: @ISABELNET_SA, @GoldmanSachs  
 
3. The NYSE trading volume hit the lowest level since mid-March.
 
Source: @hmeisler  
 
4. The Citi sentiment index is holding in “euphoria” territory.
 
Source: @hmeisler  
 
5. Related to the above, single-stock options volumes are outpacing share trading.
 
Source: @LizAnnSonders, @GoldmanSachs, @OptionMetrics  
 
6. ETF flows into equities have slowed, as bond investment picks up.
 
Source: Arbor Research & Trading  
 
7. The “all-weather portfolio” (25/25/25/25 in stocks, bonds, cash, and gold) is up 18% over the past 90 days.
 
Source: @ISABELNET_SA, @BofAML  
 
8. Tech concentrations are not yet near record highs. It’s the tech mega-caps that are at extreme levels.
 
Source: JP Morgan, @chigrl  
 
9. These charts show earnings and revenue surprises for the Q2 results thus far.
 
Source: @FactSet   Read full article  


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Rates

1. Treasury implied volatility index (MOVE) hit a record low. Complacency is setting in again.
 

 
2. The surge in the US economic surprise index hasn’t done much to support the long-end of the Treasury yield curve (2 charts).
 
Source: Pavilion Global Markets  

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3. The 10yr Treasury yield is holding support.
 
Source: @DantesOutlook  
 
4. The market continues to price in some probability that the Fed will take rates into negative territory.
 

 
What about a rate hike? Here is what economists think.
 
Source: LPL Research  


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Emerging Markets

1. Mexico’s economic contraction worsened in May. It will take a while to dig out of this hole.
 

 
2. Brazil’s consumer sentiment rebounded in July.
 

 
3. South Africa’s central bank cut rates again last week.
 

 
4. Russia’s central bank has been reducing rates as the economy stalls.
 
Source: @WSJ   Read full article  
 
5. The number of visitors to Turkey held near zero last month.
 

 
Separately, foreign investors have been getting out of local Turkish bonds.
 
Source: @WSJ   Read full article  


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China

1. Industrial profits continue to rebound.
 

 
2. Money supply growth has been weak relative to historical trends.
 
Source: Pavilion Global Markets  
 
3. China-domiciled funds saw some outflows in recent days.
 
Source: Goldman Sachs  
 
4. Mainland companies dominate Hong Kong’s stock market.
 
Source: @WSJ   Read full article  
 
5. Vacancies in Hong Kong’s shopping districts have been rising.
 
Source: @business   Read full article  


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Asia – Pacific

1. Taiwan’s stock market is soaring, partially supported by a potential shift in US policy (see the commodities section).
 

 
2. South Korea’s property prices jumped following the Bank of Korea’s rate cuts.
 
Source: Barclays Research  
 
3. Singapore’s industrial production surprised to the downside.
 

 
4. Shipbuilding orders from Asia have slowed.
 
Source: @WSJ   Read full article  
 
5. Australia is facing a substantial income cliff.
 
Source: @Scutty  
 
At the same time, new cases in Victoria keep rising.
 
Source: Goldman Sachs  


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The Eurozone

1. The July preliminary PMI reports surprised to the upside, with gains driven mostly by services.
 
Germany:
 
Manufacturing (no longer contracting):
 

 
Services:
 

 
Composite output PMI:
 
Source: @IHSMarkitPMI   Read full article  
 
France:
 
Manufacturing (still expanding):
 

 
Services:
 

 
Composite output:
 
Source: @IHSMarkitPMI   Read full article  
 
Eurozone composite PMI:
 
Source: @IHSMarkitPMI   Read full article  

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2. The Citi Economic Surprise index hit the highest level in nearly a decade.
 

 
3. The euro is soaring:
 

 
4. Italian consumer sentiment unexpectedly weakened this month.
 

 
Manufacturing confidence is recovering from extreme lows.
 


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The United Kingdom

1. The UK Markit PMI report also surprised to the upside.
 
Manufacturing:
 

 
Services:
 

 
Composite:
 
Source: @IHSMarkitPMI   Read full article  
 
However, the labor market remains weak.
 
Source: Pantheon Macroeconomics  

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2. The UK’s mobility trends are still lagging that of other European economies.
 
Source: ING  
 
3. Support for Scottish independence has risen.
 
Source: @financialtimes   Read full article  


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The United States

1. Markit manufacturing PMI continues to show expansion (PMI > 50).
 

 
However, the nation’s service-sector activity is still soft.
 

 
The index of new business dipped in July.
 

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2. Models point to new coronavirus cases peaking over the next couple of weeks.
 
Source: Princeton Energy Advisors  
 
But the reopening will be uneven.
 
Source: Pantheon Macroeconomics  

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3. Business applications are soaring.
 

 
4. Need your credit card limit increased? The latest NY Fed’s survey points to a higher rate of rejections.
 
Source: NY Fed  
 
5. This chart shows consumer spending trends by sector.
 
Source: Deutsche Bank Research  
 
6. New home sales topped economists’ forecasts.
 

Source: HW   Read full article  
 
Here is the trend without seasonal adjustments.
 

 
Seales in the Northeast were especially strong.
 


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Global Developments

1. Let’s start with the share of COVID fatalities in advanced vs. emerging countries.
 
Source: Philip Schellekens (World Bank)  
 
2. Here is the status of school openings around the world.
 
Source: @PoliticoRyan  
 
3. European business activity is outpacing the US and Japan.
 
Source: @WSJ   Read full article  
 
4. This chart shows central bank rate cuts in 2020 across major economies.
 
Source: Gavekal   
 
5. Growth in the global monetary base is fading.
 
Source: @crossbordercap  


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Food for Thought

1. Relative changes in dissatisfaction with democracy (since 1995):
 
Source: @financialtimes   Read full article  
 
2. Recent incidents in the South China Sea:
 
Source: @financialtimes   Read full article  
 
3. COVID-19 deaths in Canada vs. the US (per million people):
 
Source: @MaxCRoser   Read full article  
 
4. Concerns about climate change vs. distance from the coast:
 
Source: @FactTank   Read full article  
 
5. Truckers’ wages:
 
Source: @business   Read full article  
 
6. Industries with the highest unemployment:
 
Source: Statista  
 
7. The demographics of US low-wage workers:
 
Source: @financialtimes   Read full article  
 
8. Food delivery sales:
 
Source: @WSJ   Read full article  
 
9. The Great Lakes system profile:
 
Source: @simongerman600   Read full article  

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