Category: Commodities

Commodities other than Gold & Precious Metals, Crude Oil & Natural Gas.

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Stocks battered by headwinds from Asia

Falling demand from China and rising inflation in Japan are both having an impact on stocks and Treasury markets. Precious metals have also suffered from the sell-off, while crude and industrial metals warn of a global contraction.

Stocks

The top 7 technology stocks all fell, led by a steep plunge in Tesla (TSLA) and Nvidia (NVDA), two stocks with considerable exposure to China.

Top 7 Technology Stocks

The Nasdaq plunged 3.7%, its second 3.0% draw-down in July confirms selling pressure signaled by declining Trend Index peaks. Lawrence MacDonald:

The NDX went 17 months without a 3.0% drawdown. To us this means a lot. Looking back 20 years, these events come in patterns and clusters, NOT isolated events. This speaks to high volatility ahead.

Nasdaq 100 ETF (QQQ)

The S&P 500 recorded its first 2.0% draw-down in 357 trading days. Declining Trend Index peaks reflect selling pressure. Breach of support at 5400 is likely and would offer a target of 5200.

S&P 500

The S&P 500 Equal-Weighted Index ($IQX) broke support at 6800, offering a target of 6600.

S&P 500 Equal-Weighted Index

Declines were across the board, with both the Russell 1000 Large Cap ETF [blue] and Russell 2000 Small Cap ETF [pink] falling sharply.

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM)

Treasury Market

Two-year Treasury yields are falling in anticipation of an early rate cut by the Fed.

2-Year Treasury Yield

But 10-Year yields respected support at 4.20%, signaling a test of 4.5%.

10-Year Treasury Yield

Liquidity in financial markets is strong but rising long-term yields could come from Japanese selling in support of the Yen.

Japanese Yen

Jim Grant on the prospects for US and Japanese interest rates:

How the turntables have turned: as the Federal Reserve and Bank of Japan each prepare to render their respective rate decisions next week, recent events suggest a shift in the zeitgeist. Thus, former New York Fed president William Dudley took to the Bloomberg Opinion page Wednesday to lobby his former colleagues for a July cut, citing a weakening labor market along with ebbing inflationary pressures and moderating wage growth.

“I’ve long been in the ‘higher for longer’ camp. . . [but] the facts have changed, so I’ve changed my mind,” Dudley writes…..

Monetary crosswinds are swirling in the Far East. Futures assess the likelihood of a July BoJ hike from the current 0% to 0.1% range at 72%, up from 51% three weeks ago. Similarly, more than 90% of economists surveyed by Bloomberg “see the risk” that the BoJ will opt to pull the trigger, turning the page on its longstanding negative, now, zero-rates policy in the face of mounting price pressures.

To that end, core CPI grew a 2.6% annual clip in June, remaining north of the bank’s self-assigned 2% goal for the 27th consecutive month. On Friday, Tokyo’s Cabinet Office bumped its forecasted inflation rate over the fiscal year ending March 2025 to 2.8% from 2.5%.

“We expect underlying inflation to remain around 2% until early 2025, which we think will prompt the BoJ to hike rates both this month and in October,” writes Marcel Thielant, head of Asia-Pacific at Capital Economics, adding that pronounced currency weakness is placing upward pressure on the price level, as evidenced by a recent pickup in the “other industrial products” CPI component.

The prospect of simultaneous Fed and BoJ policy pivots duly resonates in the currency market, as the yen has snapped higher by 5% over the past three weeks to 154 per dollar after marking a near 40-year low against the buck. Hefty outlays from the Ministry of Finance in service of propping up the yen – estimated by Reuters at $38 billion in July alone – have added oomph to the present course correction.

“This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY positioning that is now facing intense pressure from Ministry of Finance intervention to support the [yen],” Richard Franulovich, head of FX strategy at Westpac Banking Corp, commented to Bloomberg this morning. “Local politicians have become more vocal about the economic dangers from unfettered JPY weakness,” he added.

Financial Markets

Monetary easing continues, with the Chicago Fed Financial Conditions Index declining to -0.58% on July 19, signaling rising liquidity in financial markets.

Chicago Fed Financial Conditions Index

Dollar & Gold

The Dollar Index continues to test support at 104, despite strengthening long-term Treasury yields.Dollar Index

Gold fell to $2,375 per ounce, signaling a test of long-term support at $2,300. Respect of $2,300 remains likely and would be a long-term bull signal for gold.

Spot Gold

Silver fell to $28 per ounce, signaling a bear market driven by falling industrial demand. Expect a test of support at $26.

Silver
Industrial demand for silver is falling as Chinese solar manufacturers face severe overcapacity:

China should push struggling solar manufacturers to exit the market as soon as possible to reduce severe overcapacity in a sector that’s vital to the energy transition, according to a major industry group. Central and local government, financial institutions, and companies should coordinate to speed up industry consolidation, Wang Bohua, head of the China Photovoltaic Industry Association, said at a solar conference in Zhejiang province on Thursday. ~ Bloomberg

Crude Oil

Nymex WTI crude ticked up slightly but is unlikely to reverse its steep down-trend, headed for a test of support between $72 and $73 per barrel.

Nymex WTI Crude

Low crude prices are likely to lead to falling inflation, increasing pressure on the Fed to cut interest rates.

Industrial Metals

Copper and aluminum continue in a strong down-trend as Chinese demand falls.

Copper & Aluminum

Iron ore has so far respected support at $106 per tonne. The steel industry faces similar overcapacity to other industrial metals and has only survived so far by exporting steel, driving down prices in international markets.

Iron Ore

But resistance is growing. Iron ore is likely to plunge if international markets, like India below, erect barriers to Chinese dumping.

Indian Steelmakers Suffer from Chinese Steel Exports

Conclusion

Financial market liquidity is strengthening but stocks and Treasury markets are being battered by headwinds from Asia.

The Bank of Japan is expected to hike interest rates at its next meeting in response to rising inflation caused by the weakening Japanese Yen. The result is likely to be bearish for US Treasuries, driving up long-term yields.

Falling demand from China is likely to impact on revenues from Western multinationals with large exposure, leading to a correction in stocks as growth prospects fade.

The probability of a rate cut at the next Fed meeting grows increasingly likely. Inflationary pressures are declining — as crude oil plunges in response to weak global demand — and economic headwinds are rising.

Gold and silver are likely to diverge. Silver is likely to enter a bear market as industrial demand from China fades, while gold is likely to benefit from safe-haven demand as the global economy contracts.

Industrial metals are already in a bear market which is likely to worsen as international resistance to China exporting its overcapacity grows.

Acknowledgements

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Stocks and precious metals headed for a correction

Stocks are retreating across the board after climbing to dizzy heights in recent weeks. They continue to enjoy support, however, from falling Treasury yields and robust financial market liquidity. Support from crude oil is less certain, with a potential up-trend that could delay interest rate cuts.

Gold and silver are also retreating after strong gains in recent weeks. The correction appears to be a secondary movement. Base metals copper and aluminum are also weakening but the sell-off appears far stronger.

Stocks

Three out of seven mega-caps in the S&P 500 (Nvidia, Tesla, and Meta Platforms) show gains on Thursday, while four declined.

Top 7 Technology Stocks

The S&P 500 as a whole declined steeply, headed for a test of support at 5500.

S&P 500

The equal-weighted index ($IQX) took a similar pounding, breaking support at 6900. Retracement that respects the new resistance level would confirm a target of 6600.

S&P 500 Equal-Weighted Index

The retreat is across the board, with the Russell 2000 Small Cap ETF (IWM) [pink] falling faster than Russell 1000 Large Caps ETF (IWB) [blue] after spectacular gains earlier in the week.

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM),

Treasuries

Ten-year Treasury yields are retracing to test resistance at 4.2%. Respect is likely and would confirm our short-term target of 4.0%. Declining Trend Index peaks below zero continue to warn of downward pressure on yields. The low inflation outlook is bullish for bonds.

10-Year Treasury Yield

Financial Markets

Commercial bank reserves at the Fed finished largely unchanged for the week ended Wednesday, July 17, suggesting stable liquidity levels.

Commercial Bank Reserves at the Fed

Bitcoin is retracing to test support at $60K; respect would signal rising liquidity in financial markets.

Bitcoin

Labor Market

Initial claims climbed to 243K for the week ended July 13. This still well below levels normally seen leading up to a recession.

Initial Claims

Continued unemployment below 2.0m indicate a tight labor market.

Continued Claims

The Conference Board Leading Economic Indicator shows signs of a recovery after initially warning of a recession with a fall below -5.0%.

Conference Board Leading Economic Indicator

Dollar & Gold

The Dollar index reversed its sharp fall from Wednesday. Penetration of the descending trendline would warn of another test of 105 but we think this is unlikely considering the fall in Treasury yields.

Dollar Index

Gold retreated below support at $2,450 per ounce, indicating another test of $2,400. Respect of $2,400 would signal another attempt at $2,500, while breach would warn of a correction to $2,300.

Spot Gold

Silver followed through below $30, headed for a test of primary support at $29.

Spot Silver

Declining Trend Index peaks warn of medium-term selling pressure. But respect of support at $29 per ounce would suggest a target of $35 per ounce.

Spot Silver

Crude Oil

Nymex WTI crude steadied at close to $83 per barrel. Respect of resistance at $84 would be a strong bear signal.

Nymex WTI Crude

Brent crude is similarly testing resistance at $86 per barrel. Breach of support at $84 would be a strong bear signal.

Brent Crude

Base Metals

Copper broke support at $9,400 per metric ton. Expect retracement to test the new resistance level but respect is likely and would confirm the long-term target of $8,000.

Copper

Copper and aluminum track each other closely. The down-trend below has a likely target of $2,200 and is bearish for copper.

Aluminum

Conclusion

Stocks and precious metals appear headed for a much-needed correction after climbing to dizzy heights in recent weeks.

Of the three pillars, falling Treasury yields and robust financial market liquidity continue to support stocks. But crude oil is less certain, with a potential up-trend that would threaten higher inflation and could delay interest rate cuts.

Gold and silver are also retreating, after strong gains in recent weeks, in what appears to be a secondary correction. Support would provide a base for further gains.

But weakness in copper and aluminum is more concerning, signaling slowing demand from China which could easily trigger a global recession.

Acknowledgements

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Small caps signal Risk On

Falling Treasury yields and a surge in liquidity in financial markets is bullish for stocks, bonds and precious metals. The rotation from growth to value has slowed, while increased interest in small caps signals risk on for stocks.

Crude and base metals are weakening as demand from China slows. Uranium prices are also testing support, despite long-term growth prospects.

Financial Markets

Bitcoin rebounded from $56K to $64K, confirming a resurgence of liquidity in financial markets. Retracement that respects support at $60K would strengthen the bull signal.

Bitcoin

Treasuries

Ten-year Treasury yields are testing support at 4.2%, reflecting optimism over an early rate cut. Breach of support is likely and would offer a target of 4.0%.

S&P 500

Stocks

The sector rotation between growth and value has slowed, with both the Russell 1000 Growth ETF (green) and Value (blue) advancing at a similar rate.

Russell 1000 Growth ETF (IWF) & Russell 1000 Value ETF (IWD)

The S&P 500 made a small gain but the weak close and declining Trend Index warn of selling pressure.

S&P 500

The equal-weighted index ($IQX) shows a similar weak close, retracing to test support at 6800.

S&P 500 Equal-Weighted Index ($IQX)

But the rotation into small caps continues, with the Russell 2000 Small Caps ETF (Pink) closing the gap with the large cap Russell 1000 ETF (blue).

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM)

Precious Metals

Gold respected support at $2,400 per ounce, signaling another test of $2,450. Rising Trend Index troughs continue to signal buying pressure.

Spot Gold

Silver remains below resistance at $31 per ounce, with a lower Trend Index peak warning of secondary selling pressure. Another test of $30 is likely.

Spot Silver

Crude Oil

Nymex WTI crude continues to test support at $82 per barrel. Breach of $80 would be a strong bear signal.

Nymex WTI Crude

Brent crude retreated below support at $86 per barrel. Breach of $84 would offer a similar strong bear signal.

Brent Crude

Falling crude prices would ease the prospect of resurgent inflation and increase the likelihood of an early Fed rate cut.

Base Metals

Aluminum broke support at $2,420 per metric ton, warning of another decline. Retracement that respects the new resistance level would strengthen the bear signal.
Aluminum

Copper and aluminum tend to track each other closely, so the breach is bearish for copper as well.

Copper

Uranium

The Sprott Physical Uranium Trust (SRUUF) respected resistance at $20.50, signaling another test of support at $18.50. Breach of $18.50 would signal a down-trend for uranium prices.

Sprott Physical Uranium Trust (SRUUF)

Several uranium stocks, apart from Canadian miner Cameco (red), are testing support levels. Uranium Stocks

Conclusion

Treasury yields are declining as prospects for an early rate cut grow. Stock prices are also supported by rising liquidity in financial markets.

The rotation from growth to value sectors has slowed but the move to small caps is accelerating, signaling a more aggressive risk on stance from investors.

Weak crude prices are also bullish for stocks and bonds. The prospect of lower inflation is likely to result in lower Treasury yields.

Gold respected support at $2,400 per ounce, indicating another test of $2,450, boosted by the prospect of falling Treasury yields and a weaker Dollar. Silver lags behind, encountering stronger selling pressure and less domestic demand from China.

Aluminum broke support, signaling a down-trend. This is a bear signal for copper which tends to track closely.

Uranium is also looking bearish, with several stocks testing support levels.

Acknowledgements

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In Gold we Trust

Rising demand for gold and silver reflect the failure of central banks to maintain price stability and efficient functioning of credit markets. Private investor mistrust of fiat currencies was historically an emerging market problem, with countries like India and China holding large private savings in the form of precious metals or real estate.  But now growing US fiscal problems have caused mistrust to spread to the global reserve currency as central banks reduce exposure to the Dollar and increase purchases of gold bullion.

Stocks & Treasuries

The S&P 500 respected support at 5250, the short harami candle indicating uncertainty. Breakout above Thursday’s high would confirm our target of 5500.

S&P 500

Ten-year Treasury yields are testing resistance at 4.5% but the short candle and weak close look tentative and respect is likely.

10-Year Treasury Yield

Gold & Silver

Gold is likely to test support at $2,300 per ounce. Respect is likely and would confirm that the up-trend is intact.

Spot Gold

Silver is similarly poised to test support between $29 and $30 per ounce. Respect of support is again likely to confirm the up-trend.

Spot Silver

Gold Demand from the East

Ronnie Stoeferle — managing director of Liechtenstein-based asset manager Incrementum AG and author of the annual In Gold We Trust report — says that 70% of gold demand is now from the East. Mainly China and India but supported by buying in Vietnam, Thailand and lately Japan.

De-Dollarization

Jeff Currie — chief energy strategist at the Carlyle Group and former Global Head of Commodities Research at Goldman Sachs — says that central banks are now recycling commodity surpluses into Gold, not Dollars. When prices are high, crude oil producers generate trade surpluses which they historically have invested in Dollar-based assets — mainly US Treasuries — but are now investing in gold.

The Saudis and Russia are increasingly selling crude oil and gas in Yuan and Rupees which they then use to import goods from China and India. Any remaining surplus is then used to purchase gold as they do not want to hold the currencies in their official reserves. Physical gold is flowing from West to East, to meet increased demand, and driving up prices.

The change has caused a dramatic divergence between gold (brown below) and real long-term interest rates, represented by the TIPS yield (blue) below.

Gold & TIPS Yield

Source: Gainesville Coins

The scale of increased demand and its impact on gold prices is not hard to imagine when one considers that global crude oil production is more than 13 times the Dollar value of total gold output.

USD Value of Gold & Crude Oil Production

Source: FFTT

Central Bank Purchases

China and India are ranked among the top 10 countries in terms of official gold holdings.

Official Gold Reserves by Country - Top 10 Holdings

Source: Gold.org

But many purchases are not made through official channels and go unreported. Jan Nieuwenhuijs estimates that the PBOC actually held close to 5,550 metric tons1 at the end of Q1 2024.

Quarterly Central Bank Gold Buying

Source: Gainesville Coins

Private Purchases

Private gold holdings in China and India dwarf official reserves.

China’s private sector holds approximately 25,700 metric tons2 at the end of Q1 2024, according to Nieuwenhuijs.

India’s gold market is similar in size, with private investors holding between 24,000 and 27,000 metric tons of gold jewellery and bullion according to Blue Hill Research.

Conclusion

Gold demand is driven by a lack of faith in fiat currencies — whether it be US Dollars, Chinese Yuan or Indian Rupees — to maintain their value. Private investors are buying gold as a store of value while central banks are recycling trade surpluses into gold, rather than holding fiat currencies.

Silver and Copper are becoming the “poor man’s gold”, with price-sensitive buyers switching from gold into silver and copper as they grow relatively cheaper.

Countries with high private gold investment are likely to experience low rates of growth. Keyne’s Paradox of Thrift illustrates how savings parked in assets like gold and silver crowd out investment in productive assets, leading to lower growth in output.

Savings invested in debt and equity markets, by comparison, are largely channeled into investment in productive assets3 that contribute to GDP growth.

Efficient credit markets are the lifeblood of the economy, ensuring the transfer of savings into productive investment. Demand for speculative assets — such as precious metals and much real estate — reflect the failure of central banks to maintain price stability. Inflation increases investment risk in debt markets, leading to higher interest rates and increased demand for speculative assets, lowering economic growth. Inflation also accentuates the boom-bust cycle as central banks flip-flop between restrictive and stimulative monetary policy in an attempt to undo the consequences of their failed monetary policies.

The world is edging back towards a “gold standard” of sorts, where trade surpluses are converted to gold — or some other commodity like silver, copper or crude oil — rather than held as currency reserves. While not a perfect system, this would impose greater fiscal discipline on sovereigns, including the US, and contribute to increased price stability. It would also reduce the role of the US Dollar as global reserve currency and help to stem the damage done to the US economy over the past forty years by this “exorbitant privilege”.

Notes

  1. Estimated total PBOC gold holdings are 5,358 metric tons at the end of 2023 plus 189 tons in Q1 of 2024.
  2. Estimated total private gold holdings in China are 23,745 metric tons at the end of 2022 plus 1,411 tons in 2023 and 543 tons in Q1 of 2024.
  3. Debt that finances investment in speculative assets — producing low returns, like many real estate investments — does not contribute much to economic growth.

Acknowledgements

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Solid-state Lithium batteries: the next generation

Money is pouring into research into solid-state lithium batteries (SSBs) which promise to leapfrog existing lithium-ion battery technology.

A battery consists of three parts: a cathode, an anode, and the electrolyte. The cathode releases electrons which are then transported through the electrolyte and received by the anode. Current lithium-ion batteries use a graphite-silicon anode with a liquid electrolyte. Solid-state batteries replace the liquid with a solid electrolyte (SE), normally in a thin film — made from either an oxide, sulfide, a halide or a polymer.

Solid-State Battery

Metal-halides are gaining more attention due to their excellent compatibility toward oxide cathode materials, acceptable ionic conductivity and wide electrochemical stability. (Science Direct)

SSB Advantages

Solid-state batteries promise greater energy density, better performance at low temperatures, greater safety, faster charging, longer range, and longer battery life.

Enhanced thermal performance is expected to improve operation at low temperatures — a key weakness in cold climates. Safety is also improved by the solid electrolyte which is unlikely to leak if the battery casing is punctured — for example in a car accident — reducing the risk of a fire.

Anodes

There are still problems that have to be solved. A key stumbling block is the anode.

Lithium-metal anodes show promise but development has been plagued by dendrites which accumulate on the anode and rapidly reduce its effectiveness. Dendrites are also likely to cause a fire if they grow to the point that they pierce the barrier between the anode and the cathode.

Other developers have opted for silicon anodes but these present a different problem. Silicon is highly conductive, making it suitable for use in battery construction, but the silicon expands and contracts with each charging cycle, causing deterioration over time.

State of Progress

Toyota, one of the leading developers, has pushed back the planned introduction date for their new SSBs until 2028.

Another developer, California-based QuantumScape (NYSE:QS), seems to be making progress:

In January, Volkswagen announced successful testing on a solid-state battery developed by QuantumScape achieved more than 1,000 charging cycles and maintained 95% of its capacity. (The Guardian)

Acknowledgements

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The big lithium short gets ‘dangerous’ on lower supply outlook | Bloomberg

From Mining.com:

Short bets worth billions against some of the world’s largest lithium producers are under threat as a supply glut shows signs of thinning.

UBS Group AG and Goldman Sachs Group Inc. have trimmed their 2024 supply estimates by 33% and 26%, respectively, while Morgan Stanley warned about the growing risk of lower inventories in China. The revisions come after lithium prices cratered last year as supply ran ahead of demand, with some producers cutting output.

Now, prices of the key material used to power electric vehicles are showing signs of a revival after the rout last year sent stocks spiraling and attracted short sellers. Bets against top producer Albemarle Corp. and Australian miner Pilbara Minerals Ltd. account for more than a fifth of their outstanding shares, or the equivalent to about $5 billion, according to data compiled by Bloomberg….

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Strong US jobs data but signs that growth is slowing

The S&P 500 retreated Friday, the bearish engulfing candle and a lower peak on the Trend Index warn of a test of support at 5050. The longer-term outlook remains bullish, with rising Trend Index troughs above zero signaling unusual buying pressure.

S&P 500

S&P 500 (purple below) outperformed the broader Equal-Weighted S&P 500 (lime green) in February, a bullish sign. Periods when $IQX outperforms the general index ($INX) can highlight when the top stocks are no longer participating in the advance — a strong bear signal.

S&P 500 & S&P 500 Equal-Weighted Index

Labor Market

The economy added 275,000 jobs in February, a strong result.

Employment

Of the cyclical sectors that normally lead the economic cycle, manufacturing showed a small loss of 4K jobs but construction and transport & warehousing showed gains of 23K and 20K respectively.

Employment: Cyclical Sectors

The unemployment rate increased to 3.9% as more people entered the workforce. The 3-month moving average of the unemployment rate has increased 27 basis points (red below) from its preceding low. According to the Sahm Rule — developed by former Fed economist Claudia Sahm — a 50 basis point increase signals the start of a recession, while 35 points provides an early warning.

Unemployment Rate & 3-Month Moving Average

Average weekly hours worked ticked up to 34.3 hours but the downward trend warns that the economy is slowing.

Average Weekly Hours Worked

Another good indicator is the quit rate which soars when the labor market is tight and jobs are readily available. The down-trend since 2022 indicates that the heat is coming out of the job market.

Quit Rate

The decline in average hourly earnings annual growth is slowing.

Average Hourly Earnings

But the February monthly rate fell sharply, after a strong January. The 3-month moving average growth rate of 1.0% — 4.0% annualized — suggests further easing ahead despite a robust economy.

Average Hourly Earnings - Monthly Change

Aggregate weekly hours worked (purple below) are growing at an annual rate of 1.2%. We are unlikely to see productivity benefits from AI this year and real GDP growth (blue) is expected to converge with the slower labor growth rate.

Real GDP Growth & Aggregate Weekly Hours Worked

Financial Markets

10-Year Treasury yields found short-term support above 4.0%. Retracement to test the new resistance level at 4.20% is now likely. Respect of resistance would confirm the target of 3.80%.

10-Year Treasury Yield

The Chicago Fed Financial Conditions Index ticked up to -0.47 but continues below zero, signaling easy monetary policy.

Chicago Fed Financial Conditions Index

Commercial bank cash assets — primarily reserves at the Fed — are leveling off at $3.6 trillion.

Commercial Bank Cash Assets (Primarily Reserves at the Fed)

Strong growth in bank reserves over the last 6 months is unlikely to be repeated, with a decline expected after the Fed’s reverse repo (RRP) balance is drained. Money market funds are switching to T-Bills. After the RRP is depleted, further Treasury issuance is likely to be taken up by private investors — either through direct purchases or by switching from bank deposits to money market funds.

Reverse Repo (RRP)

Bank time deposits are still growing but the rate of growth, especially in retail deposits (blue below), has fallen dramatically over the past 12 months. Negative growth would be a strong recession warning.

Commercial Bank Time Deposits

Gold & the Dollar

The Dollar Index broke support at 103, warning of a decline to 100. Retracement that respects the new resistance level at 103 would confirm the target.

Dollar Index

Gold continues to climb, reaching close to $2200 per ounce on during the day. A weaker close signals some profit taking but is so far insufficient to set off retracement. Follow-through above $2200 would lead us to revise our short-term target to $2250 — calculated as $2050 + ($2050 – 1850).

Spot Gold

Our long-term target of $2450 is calculated as $2050 + ($2050 – $1650).

Spot Gold

Crude & Commodities

Brent crude continues in a narrow range between $82 and $84 per barrel. Downward breakout would offer short-term relief but supply issues threaten a rally to test resistance at $90 per barrel — warning of higher inflation in the months ahead.

Faster-than-expected land inventory drawdowns due to seaborne trade disruptions from the Red Sea crisis have prompted Goldman Sachs to revise up its forecast for summer peak Brent Crude prices to $87 per barrel, up by $2 from earlier expectations.

“OECD commercial stocks on land have drawn somewhat faster than expected as the redirection of flows away from the Red Sea has increased inventories on water,” analysts at the investment bank wrote in a Sunday note, as carried by Reuters. ~ Oilprice.com

Brent Crude

Copper broke through resistance at $8500 per metric ton, signaling an advance to $9000, but expect retracement to test the new support level first.

Copper

China’s real estate/financial woes are weighing more heavily on iron ore which continues to test support at $114 per metric ton.

Iron Ore

Uranium has fallen about 20% from its peak earlier in the year, with the Sprott Physical Uranium Trust (SRUUF) testing support at 20. Respect of support would suggest another advance with a target of 30.

Sprott Physical Uranium Fund

Please note: This is not a recommendation to buy SRUUF. It is simply being used as an indicator of physical uranium prices.

Growth in electricity demand is likely to have more than doubled in 2023 as data centers, crypto-mining and re-shored manufacturing facilities joined the grid.

Washington Post: US Electricity Demand

Conclusion

Demand for stocks and Gold is booming. Investors seek real assets ahead of anticipated June rate cuts by the Fed and a likely resurgence in inflation.

The labor market remains tight but there are signs that upward pressure on average hourly earnings is easing as growth in aggregate weekly hours worked slows.

Declining reverse repo (RRP) balances at the Fed warn that bank reserves are likely to decline in the not-too-distant future. Liquidity is expected to tighten unless the Fed slows QT after the RRP is drained. The current $95 billion per month reduction in the Fed holdings of securities cannot be sustained without hurting liquidity in financial markets. A liquidity contraction is unlikely before the November elections but would cause a sharp fall in stock prices.

An alternative for the Fed would be to encourage commercial banks to buy Treasuries by excluding USTs from bank SLR leverage calculations. But that seems less likely than tapering QT, especially after the Silicon Valley Bank disaster where SVB took huge losses on their holdings of long-duration Treasuries and mortgage-backed securities.

We are overweight Gold, Critical Materials and Defensive stocks. We feel that Technology stocks and Industrial Real Estate are over-priced and will wait for better opportunities in 2025.

Acknowledgements

 

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Gold soars as UST yields fall

The S&P 500 has retraced to test short-term support at 5050, accompanied by a retreat in the Equal-Weighted Index and Russell 2000 Small Caps. The outlook remains bullish, however, with Trend Index troughs high above zero signaling extraordinary buying pressure.

S&P 500

Bond market anticipation of June rate cuts is growing. 10-Year Treasury yields broke support at 4.20%, signaling a decline to test support at 3.80%.

10-Year Treasury Yield

Gold is at a new high of $2129 per ounce. We expect retracement to test support at $2080 but respect would offer a ST target of $2180 per ounce.

Spot Gold

Gold versus TIPS

Economic Activity

ISM Services PMI recorded its 14th month of expansion in February, retreating to 52.6% from 53.4% in January. The decline suggests continued but slower growth.

ISM Services PMI

Crude & Commodities

Nymex WTI light crude continues to respect resistance at $80 per barrel. Breach of $78 would suggest a correction to the ascending trendline at $75.

Nymex Light Crude

Copper continues to test resistance at $8500 per metric ton, indicating some resilience in the Chinese economy — by far the biggest buyer of industrial metals.

Copper

In China, Caixin Services PMI eased to 52.5 in February, from 52.7 in January — maintaining the expansion since January last year.

Caixin Services PMI

Earlier, Caixin Manufacturing PMI edged up to 50.9, compared to 50.8 in January. But whipsawing around 50 indicates poor and erratic growth which is affecting metals prices.

Caixin Manufacturing PMI

Iron ore continues to test support at $114 per metric ton. Breach would warn of another test of $100. The Chinese government is likely to do enough to keep the economy from collapse but does not have the means to stimulate on a large scale.

Iron Ore

Conclusion

The 10-year treasury yield is expected to test support at 3.80%, offering further upside for Gold.

Our short-term target is $2180 per ounce and our long-term target is $2450.

Acknowledgements

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Gold and stocks jump as Treasury yields plunge

The Fed is talking down the strong January PCE inflation result:

Feb 29 (Reuters) – “I expect things are going to be bumpy,” Atlanta Federal Reserve Bank President Raphael Bostic said during an interview at a banking conference in Atlanta, Georgia, after a Commerce Department report showed the core personal consumption expenditures price index rose more than 5% on an annualized basis….Bostic said his eye remains on the longer-term trends and repeated his view that he sees the U.S. central bank beginning to cut rates “in the summer time,” if the economy evolves as he expects.

Cleveland Fed President Loretta Mester, speaking with Yahoo! Finance later in the day, said three rate cuts is still her baseline view…..Mester said she expects employment and wage growth to cool in coming months, easing price pressures and giving her more assurance that inflation is headed sustainably back to the Fed’s goal.

Chicago Federal Reserve Bank President Austan Goolsbee also shrugged off January’s inflation data as indicative of a setback, and said he believes the disinflationary effect of last year’s supply chain improvements and immigration-fueled rise in labor supply have a “decent chance” of continuing into this year. And that, he said, means there is still scope for the U.S. economy this year to continue on what he has dubbed the “golden path” of falling inflation alongside a robust labor market and economic growth, a historically unusual pattern.

March 1 (Bloomberg) – The S&P 500 topped 5,100 — hitting its 15th record this year. Traders looked past weak economic data amid bets policymakers will be able to cut rates as soon as June. US two-year yields sank as Fed Governor Christopher Waller noted he’d like a shift in the central bank’s holdings toward a larger share of short-term Treasuries…

The 2-year yield is testing support at 4.5%.
10-Year Treasury Yield

10-Year Treasury yields broke support at 4.20%, closing at 4.18% on Friday.

10-Year Treasury Yield

The S&P 500 broke resistance at 5100 — our target from December 2023 — to make a new high at 5137. Trend Index troughs above zero flag strong buying pressure.

S&P 500

Russell 2000 Small Caps ETF (IWM) closed above resistance at 205 but we expect retracement to test the new support level.

Russell 2000 Small Caps ETF (IWM)

Gold

Spot Gold shot up to $2083 per ounce. We expect retracement to test support at $2060 but respect would be a strong bull signal, confirming a target of $2100.

Spot Gold

Financial Markets

Commercial bank cash assets, consisting mainly of reserve deposits at the Fed, continue their up-trend with an increase to $3.6 trillion.

Commercial Bank Cash Assets

Reverse repo (RRP) balances at the Fed declined to $570 billion as money market funds switched into higher-yielding T-Bills. The outflow cannot continue at the same rate for long and the Fed is likely to reduce the level of QT — from the current $95 billion per month — in order to offset this.

Fed Reverse Repo (RRP)

Moody’s Baa corporate bond spread fell to 1.55% — the lowest level in more than twenty years — indicating abundant liquidity in credit markets.

Moody's Baa Corporate Bond Spread

Europe

DJ Stoxx Euro 600 — the top 600 stocks in Europe — is making new highs as well.

DJ Stoxx Euro 600

Australia

In Australia, the ASX 200 broke resistance at its previous high of 7700, offering a target of 8000.

ASX 200

Crude Oil & Commodities

Nymex light crude is testing resistance at $80 per barrel. Breakout would confirm a fresh advance, with a target of $90.

Nymex Light Crude

Brent crude is also testing resistance at $83 per barrel. Narrow consolidation is a bullish sign (in an up-trend) and breakout would offer a target of $93.

Brent Crude

Copper continues to test resistance at $8500 per metric ton despite weak manufacturing activity in China.

Copper

China Beige Book

Conclusion

The bond market is getting excited about rate cuts around mid-year after plenty of dovish guidance from Fed officials. Ten-year Treasury yields broke support at 4.2%, warning of a decline to test primary support at 3.8%, but retracement is likely to test the new resistance level.

Strong growth in average hourly earnings, CPI and PCE inflation in January, warn that early rate cuts would be premature. Investors are piling into real assets as a hedge against an expected resurgence of inflation.

Stock indices broke to new highs, including the S&P 500, DJ Stoxx Euro 600, and the ASX 200 in Australia.

Gold jumped to $2083 per ounce. Retracement that respects support at $2060 would confirm an advance to $2100 per ounce.

Crude oil threatens a breakout that would likely see a $10 rise in the price per barrel, increasing expectations of a sharp rebound in inflation.

The Fed is under pressure to support the Treasury market, lowering long-term yields to reduce rising debt servicing costs for the US Treasury. Latest CBO projections show how interest servicing costs (pink) are likely to expand deficits in the years ahead.

CBO: Budget Deficit (% of GDP)Treasury debt held by the public is projected to rise to a precarious 160% of GDP by 2050.

CBO: Debt/GDP

As we mentioned in a recent post, the only way to solve this is through high inflation — which would expand GDP relative to nominal debt — and negative real interest rates.

Our long-term outlook is overweight real assets — stocks, Gold, critical materials, and industrial real estate — and underweight long-duration financial assets like USTs.

Acknowledgements

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