Tag: Gold

Posted on

No Happy Ending

Key Points

  • US forces carried out what the Pentagon called “defensive” strikes on missile launch sites and minelaying boats in southern Iran on Monday.
  • Iran’s Revolutionary Guard retaliated with a drone attack on a US airbase on Thursday.
  • Brent crude rallies to $96.60 per barrel.
  • President Trump insists a deal is within reach.
  • Trump allies have voiced opposition to the proposed deal, which they say favors Iran.
  • Trump says he can outwait Iran and that Iranian leaders had miscalculated if they thought ‌the November midterm elections would force him into a deal.
  • Gold and silver fall as prospects for a peace deal fade.

DUBAI/WASHINGTON, May 28 (Reuters) – Iran’s Revolutionary Guard targeted a U.S. airbase on Thursday after the U.S. military carried out what a Washington official said were strikes on an Iranian drone operation near ‌the Strait of Hormuz….

The U.S. official, who requested anonymity to speak candidly about military operations, told Reuters the military shot down four Iranian attack drones and struck a ground control station ​in the port city of Bandar Abbas that was about to launch a fifth drone.

“These actions were measured, purely defensive and intended to maintain the ceasefire,” the official said.

The Islamic ​Revolutionary Guard Corps said it targeted a U.S. base in response to what it described as an early morning U.S. attack near Bandar Abbas airport, ⁠Tasnim news agency reported. The IRGC said it targeted the U.S. airbase from which the attack on the control station near Bandar Abbas was launched, without identifying the base.

Brent crude (July’26 futures) rallied to $96.60 on news of the air strikes.

Brent Crude Futures (ICE July'26)

Crude oil flows through the Strait of Hormuz remain at a trickle.

Oil Tanker Transits Through the Strait of Hormuz

For those hoping the end of the price surge is near, Sultan Al Jaber, the head of the Abu Dhabi National Oil Company (ADNOC), has disappointing news.

“Even if this conflict [with Iran] ends tomorrow,” he said today at an Atlantic Council event, “full flows will not return before the first or even second quarter of 2027.”

US Strategic Petroleum Reserves (SPR) are shrinking, falling from 415 million barrels to 374 million over the past 6 weeks.

Strategic Petroleum Reserves (SPR)

The emerging deal puts off many critical issues to be resolved later and has already exposed the Republican president to fierce criticism — even from some of his own supporters — that Iran’s hardline leaders will emerge from the conflict battered but emboldened. It all comes to a head just as the midterm elections to determine control of Congress come into focus and as Republicans worry that rising costs and fuel prices are darkening the American electorate’s mood.

But Trump on Wednesday dismissed the idea that the upcoming elections would shape his Iran strategy.

“They thought they were gonna outwait me. You know, ‘We’ll outwait him. He’s got the midterms,'” Trump said. “I don’t care about the midterms.”

….The president is also facing scrutiny from Republican allies, including Sens. Roger Wicker of Mississippi, Lindsey Graham of South Carolina and Ted Cruz of Texas, who have said the terms seem too favorable to Tehran.

They’re balking at aspects of the deal that have emerged publicly that they say too closely resemble the nuclear agreement reached with Iran by Democratic President Barack Obama, which Trump scrapped during his first term.(NPR)

Trump faces the risk that higher crude prices cause a similar inflation spike to the 2022 Russian invasion of Ukraine, resulting in a wipeout at the November midterms.

Brent Crude & CPI

Gold & Silver

Gold and silver face increased selling pressure as the sudden drop in oil export revenues forces Gulf States to liquidate reserves, including bullion. High oil prices have also forced Turkiye to enter into an $80 billion gold swap to cover higher import costs without crashing the already-weak Turkish Lira. Russia, for different reasons, is also liquidating gold reserves to help fund its war with Ukraine.

Gold broke support at $4,500 per ounce, signaling a likely test of support at $4,000.

Spot Gold

Silver has retraced similarly, and a break below $70 per barrel would signal another test of primary support at $60. Declining Trend Index peaks warn of continued selling pressure.

Spot Silver

Conclusion

The US war with Iran — and negotiations — will likely continue for months, if not years. Crude oil shortages and high prices are expected to cause an inflation spike ahead of the US midterm elections, resulting in a Republican wipeout in November.

We remain bullish on the long-term outlook for gold and silver, but their current weakness will likely persist until the Strait of Hormuz reopens and oil prices fall.

Acknowledgments

Posted on

Bipolar Disorder

Key Points

  • The University of Michigan Consumer Sentiment Index fell to a new record low since the series started in 1960.
  • The Dow Jones Industrial Average broke through resistance at 50,000, confirming a fresh bull market advance.

The University of Michigan Consumer Sentiment Index fell to a new low of 44.8.

University of Michigan: Consumer Sentiment

A plot of the 3-month moving average since 1960, when the Consumer Sentiment series started, shows that consumer sentiment is at a record low.

University of Michigan: Consumer Sentiment

[Content protected for Premium, Australian Growth, International Growth, Market Analysis members only] …..

If you are already a subscriber, please log in to continue reading:

If you are not a subscriber, click here to find out more about our latest offer.

Posted on

CPI Jump to 3.8% Spooks Bond Market

Key Points

  • Headline CPI jumped to 3.8% in April in response to rising energy prices.
  • We expect Food CPI to jump sharply as rising costs pass through the supply chain over the next few months.
  • 10-year Treasury yields jumped to 4.46%, a bearish sign for stocks, but the Dow continues to test resistance at 50,000.
  • The silver breakout above $80 per ounce continues.
  • Surplus Gold and silver inventories in the US have been depleted, which will likely increase upward pressure on prices when the Persian Gulf crisis is resolved.

The headline Consumer Price Index (CPI) jumped to 3.8% for the 12 months to April 2026, up from 3.3% in March. Core CPI (excluding food and energy) increased more gradually to 2.7% in April, up from 2.6% in the previous month.

CPI & Core CPI - Annual

[Content protected for Premium, Australian Growth, International Growth, Market Analysis members only] ….. If you are already a subscriber, please log in to continue reading:

If you are not a subscriber, to find out more click here

Posted on

Blockade

Key Points

  • President Donald Trump announced a US blockade on Iranian shipments through the Strait of Hormuz.
  • Closure of the Strait will restrict 20% of the global oil supply.
[Content protected for Premium, Australian Growth, International Growth, Market Analysis members only] ….. If you are already a subscriber, please login to continue reading:

If you are not a subscriber, to find out more click here

Posted on

Ceasefire But No Long-term Peace in Sight

Key Points

  • President Trump announced he had agreed to a two-week ceasefire with Iran.
  • Iranian Foreign Minister Seyed Abbas Araghchi confirmed that Iran will allow safe passage through the Strait of Hormuz for two weeks.
  • Brent crude futures (Jun’26) plunged to $93.86 per barrel.
  • Gold climbed to $4,800 per ounce as the Dollar weakened.

President Trump has agreed to a two-week ceasefire with Iran.

Truth Social Post

[Content protected for Premium, Australian Growth, International Growth, Market Analysis members only] ….. If you are already a subscriber, please login to continue reading:

If you are not a subscriber, to find out more click here

Posted on

How the SRF could blow up the Treasury market

Key Points

  • The Fed’s Standing Repo Facility (SRF) is designed to provide backup funding to the repo market during periods of liquidity stress.
  • The $12 trillion repo market is secured by government securities, normally USTs, and has largely replaced unsecured interbank lending.
  • However, hedge funds are taking advantage of the SRF to finance highly leveraged basis trades.

Unsecured interbank lending has largely been replaced by repo financing after the breakdown of trust in the global financial crisis of 2008.

A repo is short for repurchase agreement, where the borrower sells government securities, typically US Treasuries, with an agreement to repurchase them at a slight discount the following day. The repo (discount) rate, formally known as the Secured Overnight Financing Rate (SOFR), has increased in importance as the repo market has grown to almost $12 trillion, overshadowing the widely known Fed Funds Rate (FFR). Both the SOFR and FFR are managed by the Fed through its open market operations.

A sharp spike in the repo rate in 2008 threatened to collapse the entire financial system. The Achilles heel of the banking system, and the reason for the Fed’s existence, is maturity mismatch. Borrowers take advantage of low interest rates in the short-term market and invest in long-term assets, capturing the wide spread. That works well until the yield curve inverts. Short-term rates spike upward as available credit contracts, causing a fire sale of long-term assets as borrowers scramble to raise cash to repay loans. A spike in the repo rate effectively serves as a margin call on long-term assets.

The first instance occurred during the 2008 subprime crisis, when the repo market ceased functioning, leading to a panicked sale of assets. Then, in 2019, repo rates spiked after the Fed’s QT had lowered bank reserves, reducing the supply of bank credit available to fund repos. The spike led to the famous Powell pivot, where the Fed abruptly ended QT and expanded its balance sheet (QE) to inject liquidity into financial markets.

Again in March 2020, repo rates spiked during the COVID pandemic, causing a sell-off of US Treasuries financed through highly leveraged basis trades.

The chart below shows the spread between the repo rate (SOFR) and the fed funds rate (FFR) in 2019 and 2020.

SOFR-FFR

The Fed responded by establishing the Standing Repo Facility (SRF), through which borrowers can obtain repo finance directly from the Fed when there is a shortage in the repo markets. The SRF acts as a market stabilizer, limiting increases in the SOFR and preventing a repeat of earlier repo market collapses. The underlying purpose is to avoid a fire sale of US Treasuries if the repo market ceases to function.

Hedge funds have increasingly tapped the repo market to finance highly-leveraged basis trades, which take advantage of the spread between repo rates and the implied discount on Treasury futures. The SRF has encouraged these trades by limiting the downside risk. Hedge funds pocket the spread when repo rates are low, and rely on the SRF to save them if rates rise.

We suspect that the size of leverage investment in US Treasuries is greater than commonly believed. Over the past decade, offshore investment in US Treasuries has swung from foreign central banks to private sector investment, primarily through offshore financial centers favored by hedge funds.

Basis trades are likely to continue growing as long as the Fed maintains a standing repo facility to stabilize the repo market. The SRF enables hedge funds to enter profitable leveraged trades on US Treasuries with limited downside risk.

As Charlie Munger said, “Show me the incentive and I’ll tell you the outcome.”

Stocks

The S&P 500 remains tentative after last week’s contraction in financial market liquidity.

S&P 500

A contraction in the ADP’s four-week moving average of private sector job creation to -11,250 has not helped.

ADP Private Sector Jobs - NER Pulse

Financial Markets

The secured overnight financing rate (SOFR) remains above the rate paid to banks on reserve balances (IORB), indicating financial market stress.

Secured Overnight Financing Rate (SOFR) & Interest on Reserve Balance (IORB)

Bitcoin is re-testing support at 100K, warning that liquidity remains tight.

Bitcoin (BTC)

Dollar & Gold

The dollar is weakening as prospects for a December rate cut improve.

Dollar Index

Silver rallied to test its previous high at $54 per ounce.

Spot Silver

Gold followed, with a rise to $4,230 per ounce. A breakout above the resistance level at $4,400 would offer a target of $5,000.

Spot Gold

Conclusion

Basis trades funded through repo markets are expanding as the Fed’s standing repo facility (SRF) enables hedge funds to profit with limited downside risk while the Fed acts as a backstop.

Basis trades increase the vulnerability of US Treasury markets as hedge funds are highly leveraged short-term holders of USTs. In the past, unwinding basis trades have caused a sharp rise in Treasury yields when repo rates spike. The SRF may prevent a repeat of past spikes but provides an incentive for hedge funds to take on greater risk, expanding the size of their basis trades and increasing Treasury market vulnerability.

Financial markets remain unsettled, with Bitcoin testing long-term support at 100K. Gold and silver rallied, and breakout to new highs would offer targets of $5,000 and $62 per ounce, respectively.

Acknowledgments

Posted on

Gold, the Dollar and a big hole in the desert

Summary

  • Stocks rallied on news of a ceasefire between Iran and Israel
  • But celebrations may be premature
  • The dollar weakened, which is likely to boost demand for gold

The S&P 500 rallied to test resistance at 6100. Breakout would signal a fresh advance, but declining Trend Index peaks warn of selling pressure.

S&P 500

Uncertainty remains high.

The White House was quick to claim victory after the US airstrike on Iranian nuclear enrichment facilities. But claims that the subsequent ceasefire is the start of a new era of peace in the Middle East will likely prove premature.

A ceasefire is not a peace settlement. It’s a pause in hostilities that allows both parties to rearm and re-strategize.

A precision strike is nothing more than a big hole in the desert, the effectiveness of which can only be determined by subsequent Iranian actions.

The damage assessment reported by CNN is premature, but it does raise some interesting questions.

The assessment, which has not been previously reported, was produced by the Defense Intelligence Agency, the Pentagon’s intelligence arm. It is based on a battle damage assessment conducted by US Central Command in the aftermath of the US strikes, one of the sources said.

The analysis of the damage to the sites and the impact of the strikes on Iran’s nuclear ambitions is ongoing, and could change as more intelligence becomes available.

….Two of the people familiar with the assessment said Iran’s stockpile of enriched uranium was not destroyed. One of the people said the centrifuges are largely “intact.” Another source said that the intelligence assessed enriched uranium was moved out of the sites prior to the US strikes. (CNN)

If the stockpile of enriched uranium were moved or otherwise not destroyed, how would this affect Israel’s security?

The only way to finish this is with boots on the ground. Neither Israel nor President Trump is likely to commit to that.

In the Treasury market, 10-year yields declined to 4.3%, easing the pressure on stocks.

10-Year Treasury Yield

However, the dollar continues to weaken, with the US Dollar Index testing support at 98. A breach would confirm our target of 90.

Dollar Index

The chart below shows how Brent crude and the dollar moved contra-cyclically, with the dollar weakening when crude oil prices rose, and vice versa.

However, that changed shortly before Russia’s full-scale invasion of Ukraine in 2022, the dollar strengthened despite a spike in energy prices, diverging from past behavior as investors sought safety. The divergence continues, with the dollar weakening while crude oil prices are falling. The dollar’s role is under threat.

Brent Crude & USD Index for Advanced Economies

Investors globally appear to be gradually reducing their exposure to dollar-denominated assets, driving the greenback down to its lowest level against a basket of major currencies in three and a half years….

According to Bank of America’s FX strategy team, European “real money” investors – institutions like pension funds and insurance companies – are the main drivers of the dollar’s selloff in the second quarter, slashing their dollar positioning to the lowest since 2022 in a matter of weeks.

But the story might not be so straightforward…. research shows that most of the dollar’s average daily declines in the last few months have come in Asian trading hours, suggesting Asian holders of U.S. bonds may also be increasing their dollar hedges. (Reuters)

Demand for gold remains strong as the dollar weakens, with the metal finding support at $3,300 per ounce. Respect of this level would signal another test of resistance at $3,400.

Spot Gold

Conclusion

Stocks have rallied, but uncertainty in the Middle East remains high.

Long-term Treasury yields have softened, but the dollar continues to weaken, reflecting uncertainty over the US role in the global monetary system.

Private investors have replaced central banks as major investors in US Treasuries. They are far more price sensitive, and both European and Asian investors are increasingly hedging their dollar positions, expecting dollar weakness.

A weakening dollar is expected to boost demand for gold.

Acknowledgments

Posted on

Rising recession risk threatens bond market

Summary

  • Trade talks with China have stalled
  • President Trump announces steel and aluminum tariffs will increase from 25% to 50%
  • Input costs for US manufacturers are expected to soar
  • Spending is expected to slow after the introduction of tariffs in April
  • The economic outlook is clouded with uncertainty, and the risk of a recession is rising

President Trump accused China of “totally violating its agreement” with the United States last week. (Reuters)

The Geneva agreement concluded between Treasury Secretary Bessent and his Chinese counterpart called for a 90-day pause in increased tariffs and for China to lift restrictions on exports of critical materials such as rare earths needed for semiconductor, electronics, and defense applications.

According to a US trade representative, the Chinese are moving slowly on granting export licenses for critical materials. The automobile industry is already warning that shortages of rare earth magnets could halt production in a matter of weeks.

The Chinese slow-walking of export licenses appears to be retaliation for the US last week imposing license requirements, and revoking some licenses, for exports of design software and chemicals for semiconductors, butane and ethane, machine tools, and aviation equipment.

In another blow to the auto industry, President Trump announced that he will increase tariffs on steel and aluminum imports from 25% to 50%. Steelmakers are expected to benefit from higher domestic prices, boosting output, but automobile manufacturing, heavy engineering, and construction industries will likely bear the costs.

Steel exports from Canada and Mexico will be most affected, but South Korea, Germany, and Brazil are also expected to suffer. The EU has threatened retaliatory measures if the issue cannot be resolved.

Aluminum imports are likely to continue despite the increased tariffs. Bauxite and electricity are the two primary input costs of smelters, and domestic US smelters will struggle to match the low-cost hydroelectric power of global competitors.

Financial Markets

The S&P 500 is testing the band of resistance at 6000, but short weekly candles indicate hesitancy.

S&P 500

Strong liquidity supports financial markets, with the Chicago Fed National Financial Conditions Index falling to -0.606, signaling easy monetary conditions.

Chicago Fed National Financial Conditions Index

10-year Treasury yields are testing support between 4.4% and 4.5%, but the weak dollar warns of capital outflows that are expected to send long-term yields higher.

10-Year Treasury Yield

JPMorgan CEO Jamie Dimon says, “You are going to see a crack in the bond market. It is going to happen…. I’m telling you it’s going to happen….”

Economy

Former Fed economist Dr Lacy Hunt warns that the US economy is slowing, with a higher than 50% probability of recession. He warns that the economy is far weaker than generally understood, and what markets are not considering is that spending brought forward to front-run tariffs is likely to cause a sharp drop in spending in the next few months.

A recession would also cause the fiscal deficit to increase sharply, by at least another 2.0% of GDP, adding further stress on the bond market.

The ISM manufacturing PMI declined to 48.5% in May, indicating a long-term contraction.

ISM Manufacturing PMI

Manufacturing inventories surged in March as manufacturers brought forward purchases to get ahead of April’s tariff increases.

ISM Manufacturing Inventories

Imports also surged in the first quarter, followed by a steep plunge in May.

ISM Manufacturing Imports

Exports are contracting at a similar rate.

ISM Manufacturing Exports

Prices is the only sub-index that has surged, warning of steeply rising input costs.

ISM Manufacturing Prices

Crude Oil

OPEC+ decided to increase production targets by 411.000 barrels per day in July, which is equal to the increases in May and June.

However, in a sign of shrinking global trade, China’s seaborne imports declined by more than a million barrels per day in May. Kpler estimates imports at 9.43 mbpd compared to 10.46 mbpd in April and 10.45 mbpd in March. (Reuters)

Brent crude is likely to re-test support at $60 per barrel, and breach would offer a target of $50.

Brent Crude

Dollar & Gold

Capital outflows are weakening the dollar. The US Dollar Index has broken support at 100, and follow-through below 98 would confirm another decline with a target of 90.

Dollar Index

Gold rallied to test the band of resistance at $3,400 per ounce. A breakout above $3,500 would strengthen our target of $4,000 by the end of 2025.

Spot Gold

Conclusion

Due to high levels of uncertainty, consumers and corporations are expected to defer capital expenditures in the months ahead. The drop in spending is likely to be accelerated by the build-up in inventories and the bringing forward of expenditures to get ahead of tariff increases in April.

Contracting imports and exports in the manufacturing sector warn that the economy will slow. Falling crude oil imports in China paint a similar outlook, suggesting a global recession.

A recession would increase the deficit and further stress the bond market, which is already concerned about spiraling debt levels.

A falling dollar and rising gold price warn of capital outflows from US financial markets. JPMorgan CEO Jamie Dimon tells us to prepare for a coming crack in the bond market. That would mean higher long-term yields and sharply lower stock prices, likely boosting demand for gold even higher.

Acknowledgments

Posted on

Gold headed for $3,000

Gold broke short-term resistance at $2,900 per ounce, signaling a test of our $3,000 target. The precious metal advanced to $2,934 on the announcement of US tariffs on steel and aluminum. Uncertainty over the geopolitical outlook has increased volatility in global financial markets and demand for gold as a haven. Breakout above $3,000 would offer a medium-term target of $3,600.

Spot Gold

From the WSJ:

President Trump announced 25% tariffs on imports of steel and aluminum to the U.S., reinstating global duties without exceptions for allies such as Canada, Mexico, Japan and South Korea that were relaxed by the Biden administration.

Central bank purchases of bullion increased to 333 tonnes in Q4 of last year, according to the World Gold Council, with uncertainty over the US presidential election boosting demand.

Gold Purchases by Central Banks

Silver also caught a bid, testing resistance at $32 per ounce, but lags gold.

Spot Silver

Conclusion

Gold is headed for a test of $3,000 per ounce for the first time. Expect retracement to test new support at $2,900, but respect will likely confirm the advance to $3,000.

Breakout above $3,000 would offer a medium-term target of $3,600.

Uncertainty over US federal debt, long-term inflation, and geopolitical tensions drive demand.

Acknowledgments

Posted on

Threat of a US-China trade war boosts gold

Donald Trump’s reversal on tariffs on Canadian and Mexican imports caused a sharp rebound in the S&P 500. However, tariffs on Chinese imports remain in place and have elicited a response from the Middle Kingdom.

Stocks

The S&P 500 retraced to test resistance at 6000. Respect would confirm a correction.

S&P 500

Six of seven mega-cap technology stocks showed losses, with only Meta Platforms (META) recording an up-day.

Top 7 Technology Stocks

Financial Markets

Financial market conditions remain stimulative, with Moody’s Baa corporate bond spread narrowing to 1.45%, the lowest level since 1997. This indicates the ready availability of credit.

Moody's Baa Corporate Bond Spreads

Treasury Markets

Ten-year Treasury yields continue to test support at 4.5%. Respect will likely confirm an advance to test resistance at 5.0%.

10-Year Treasury Yield

US Economy

ISM Manufacturing PMI improved to 50.9%, the highest level in 27 months, indicating a recovery in the sector.

ISM Manufacturing PMI

New orders jumped to 55.1%, indicating expansion.

ISM Manufacturing New Orders

However, the Prices sub-index also increased, indicating inflationary pressures.

ISM Manufacturing Prices

Leading industry sectors also warn of a slowing economy. Airfreight and logistics (blue) plunged by more than 10% and would flag a recession ahead if joined by a decline in either containers and packaging (orange) or road and rail (green).

Leading Industry Sectors

China Tariffs

China has slapped tariffs on US imports in a swift response to Donald Trump’s duties on Chinese goods, renewing a trade war between the world’s top two economies as America’s President seeks to punish Beijing for not halting the flow of illicit drugs.

Mr Trump’s additional 10% tariff across all Chinese imports into the US came into effect at 12.01am Eastern Time on Tuesday (5.01am GMT).

Within minutes, China’s Finance Ministry said it would impose levies of 15% for US coal and Liquid Natural Gas and 10% for crude oil, farm equipment and some cars and trucks. The new tariffs on US exports will start on February 10, the ministry said.

China also said it was starting an anti-monopoly investigation in Alphabet Inc’s Google, while including both PVH Corp, the holding company for brands including Calvin Klein, and US biotechnology company Illumina on its “unreliable entities list”.

Separately, China’s Commerce Ministry and its Customs Administration said it is imposing export controls on tungsten, tellurium, ruthenium, molybdenum and ruthenium-related items to “safeguard national security interests”. China controls much of the world’s supply of such rare earths that are critical for the clean energy transition. (Evening Standard)

Dollar & Gold

The Dollar Index retreated from resistance at 110, but respect of support at 108 will likely confirm another test of 110. The threat of increased tariffs is expected to strengthen the Dollar and increase upward pressure on long-term interest rates as foreign central banks sell reserves to support their currencies.

Dollar Index

Gold broke resistance to set a new high at $2,816 per ounce. Expect retracement to test the new support level at $2,800, but respect will likely confirm our target of $3,000.

Spot Gold

Conclusion

Canada and Mexico are a sideshow, with China likely to be the primary target of US sanctions imposed by the Trump administration. China’s swift retaliation is expected to lead to escalation.

China is in a far weaker position because of its large trade surplus with the US. A trade war is expected to hurt Chinese manufacturing and raw material imports. However, the US will also likely suffer an economic slowdown as global trade shrinks.

We expect the Dollar to strengthen, driving up long-term Treasury yields, which would be bearish for stocks and bonds.

We also expect a trade war to boost demand for gold as central banks reduce their exposure to US Treasuries.

Acknowledgments

Powered by WordPress / WordPress Maintenance Service By Website Helper