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Gold and Silver Prices
Gold prices were up on Friday but closed lower overall for the week as the U.S. dollar gained further strength partly by the Fed's decision to raise interest rates for the third time this year.
"The Fed raised interest rates on Wednesday and said it planned four more increases by the end of 2019 and another in 2020.
"'Robust U.S. economic fundamentals despite an escalation in trade tariffs have done little to lift demand for the non-interest bearing asset,' said Benjamin Lu, commodities analyst at Phillip Futures.
"'The outlook for gold prices in the current term remains dim as such in lieu of rising rates and yields amidst buoyant U.S. economic conditions.'
"'The trade war continues to favor the U.S. dollar and this will generally dampen gold's upside,' said Nicholas Frappell, global general manager, ABC Bullion, Australia." ("Gold hits 6-week trough; set for longest monthly losing streak in 2 decades," Reuters Staff, CNBC, 09/28/18.)
Gold ended the week down $6.60, closing at $1,198.80. Silver ended the week up $0.39, closing at $14.64.
Gold Set to Soar Above $1,300, Bank of America Says - Pakiam
The future of the U.S. economy and trade wars has Bank of America forecasting gold higher.
"Gold is set to surge over the next year as concerns deepen about the widening U.S. budget deficit and a tariff-driven trade war starts to damage the country's economy, according to Bank of America Merrill Lynch.
"Bullion could average $1,350 an ounce in 2019 as corporate tax reforms worsen the U.S. fiscal balance, Francisco Blanch, head of global commodities and derivatives research, said in a phone interview last week. Spot gold traded at $1,198.82 on Monday and has averaged about $1,285 this year.
"'We're still pretty constructive longer term on gold,' because of worries over the future of the U.S. economy even though it's performing relatively well right now, said New York-based Blanch. 'In the short run, the effects of strong dollar, higher rates dominate. But in the long run, a huge U.S. government budget deficit is pretty positive for gold,' he said.
"The warning over the budget echoes billionaire hedge fund manager Ray Dalio, who predicted this month that the U.S. economy is about two years from a downturn, which will see the dollar plunge as the government prints money to fund a swelling deficit. Goldman Sachs Group Inc. has also joined the chorus of bulls, seeing gold at $1,325 in 12 months. Bullion has been building a base around $1,200, after five months of losses, the worst run since 2013.
"The Congressional Budget Office has predicted the U.S. administration's tax cuts, when combined with new federal spending, will push the budget deficit to $1 trillion in 2020. That's forced the U.S. Treasury to lift note and bond sales to levels last seen in the aftermath of the recession that ended in 2009.
"In the near term, the Federal Reserve is the main driver in determining gold's path. While an interest rate hike is widely expected at this week's policy meeting, the market will scrutinize the statement from the Federal Open Market Committee for any concerns about the threat to U.S. growth posed by trade tensions, which could change tightening expectations, Blanch said.
"The U.S. imposed new duties on $200 billion in Chinese goods on Monday, with Beijing warning President Donald Trump his threats of further tariffs are blocking any potential negotiations. Trump has threatened duties on a further $267 billion of made-in-China products, and signaled the trade war won't end any time soon, telling Fox News it's time to take a stand on China.
"'Eventually the trade wars are going to come back to bite the U.S.,' said Blanch. 'It could take longer, it could take shorter, eventually it's going to happen, but maybe the Fed acknowledges it sooner, which is what people are going to be looking for in terms of getting more bullish on gold. We know that trade wars are not good for the economy.'" ("Gold Set to Spar Above $1,300, Bank of America Says," Ranjeetha Pakiam, Bloomberg, 09/23/18, Updated 09/24/18.)
JPMorgan's Marko Kolanovic Says Dollar Hegemony Is Now at Risk -Gutscher
When the dollar is at risk and geo-political issues at hand, gold is a great hedge.
"A backlash against the world's reserve currency may be brewing as rivals to America look to weaken the dollar's hold over the global financial system, says Marko Kolanovic, macro-market wiz at JPMorgan Chase & Co.
"President Donald's Trump's isolationist foreign policy is a "catalyst for long-term de-dollarization" among countries from Europe and Asia to the Middle East that have long lamented the hegemony of the U.S. currency, he wrote in a note co-authored with Bram Kaplan.
"'With the current U.S. administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, the question arises whether the rest of the world should diversify away from the risks of the U.S. dollar and dollar-centric finance,' said the quantitative and derivatives strategists.
"America looked increasingly isolated on the international stage this week, with Trump adopting an abrasive stance at the United Nations. Europe, China and Russia also said they're seeking to sidestep U.S sanctions against Iran through a mechanism that would allow some trade to continue unhindered.
"Whether geo-political rivals take material action to undercut the dollar's privileged position in international finance is anyone's guess. But Kolanovic says it's worth diversifying risk exposures outside American borders regardless of Trump's antics, citing the secular nature of the threat.
"Gold, which tends to benefit from a weaker greenback, also offers a hedge for any tentative push to de-dollarize. And it's looking decidedly cheap right now, according to JPMorgan.
"'U.S. unilateral policies risk bringing major powers of China, Europe and Russia closer, and such an alliance could profoundly impact the dollar-centric financial system,' JPMorgan concluded." ("JP Morgan's Marko Kolanovic Says Dollar Hegemony Is Now at Risk," Cecile Gutscher, Bloomberg, 09/27/18.)
Gold Will Rally When Investors Stop Focusing On Short-Term Momentum- State Street - Kitco News
U.S. dollar rally unlikely with trade wars and threat of higher inflation while gold offers long term value.
"Investors are focused on short-term momentum in the marketplace that will see a steady rise in interest rates but are ignoring growing risks to financial stability, according to one gold market analyst.
"Gold prices have fallen to a one-month low as investors continue to digest Wednesday's Federal Reserve monetary policy announcement, which is providing some momentum to the U.S. dollar...
"In a telephone interview with Kitco News, George Milling-Stanley, head of gold investments at State Street Global Advisors, said that he is not surprised by the reaction from investors. He added that it is part of the pattern that gold has established in the previous interest rate decision.
"'The market got exactly what they expected,' he said. 'Once it has absorbed the message that real interest rates will remain low, I expect that we will start to see gold recover,' he said. 'Today's move is more of kneejerk response to short-term factors.'
"The U.S. dollar continues to be the most significant headwind for gold. In his press conference after raising interest rates by 25-basis points, Federal Reserve Chairman Jerome Powell said that there is still potential for the U.S. dollar to rise as the U.S. economy outperforms other nations.
"Milling-Stanley agreed that the U.S. dollar could continue to rally, but he added that current levels are unstainable in the long-term... Milling-Stanley said that they are downplaying increasing threats in the marketplace, particularly the threat of rising inflation as the U.S. and China embark on what could be a prolonged trade war.
"'Trade wars or tariff wars, whatever you want to call them, are extremely serious and we should not take the threat of higher inflation lightly,' he said.
"Along with growing inflation pressures, Milling-Stanley said that higher interest rates are also unsustainable as government and corporate debt continue to grow. He added that at some point investors will start to pay attention to the looming potential of a recession.
"'Right now it is very difficult for markets to look beyond the next few weeks and that is a very risky thing to be doing,' he said.
"Looking at the gold market, Milling-Stanley said that at current prices, the precious metal offers long-term value for investors looking to establish defensive positions.
"'I think gold is still in a good place right now and a repricing of risk, which I expect to see soon, will eventually push prices higher,' he said." ("Gold Will Rally When Investors stop Focusing On Short-Term Momentum-State Street," Kitco News, 09/27/18.)
The Dollar Doubts of a JPMorgan Star - Burgess
JPMorgan's top analyst does not see many big days ahead for the U.S. dollar.
"The Bloomberg Dollar Spot Index rose the most in more than a month on Thursday, which isn't surprising given that the Federal Reserve raised interest rates again on Wednesday. After all, higher rates tend to attract foreign capital. What is surprising is that traders shouldn't get used to many more big days for the greenback if JPMorgan Chase & Co.'s all-world analyst Marko Kolanovic is to be believed.
"Kolanovic, who has dominated Institutional Investor's annual rankings of top strategists for a decade or so, was out with a research note Thursday arguing that President Donald's Trump's isolationist foreign policy is a 'catalyst for long-term de-dollarization.' Put another way, the dollar is in jeopardy of no longer being the world's primary reserve currency and all the benefits that go along with that, such as interest rates that are lower than they otherwise might be and the government's ability to fund budget deficits in perpetuity. "With the current U.S. administration policies of unilateralism, trade wars, and sanctions increasingly affecting both friends and foes, the question arises whether the rest of the world should diversify away from the risks of the U.S. dollar and dollar-centric finance," Kolanovic and his team of quantitative and derivatives strategists wrote in the note, according to Bloomberg News's Cecile Gutscher. To be sure, this won't happen overnight, and any shift away from the dollar would take many years, but the warning serves to highlight a topic that is increasingly being discussed. That's why Friday's International Monetary Fund report on global currency reserves is most likely to get more attention than usual...
FINANCIAL REPRESSION LIVES
"In a press conference Wednesday, Trump lamented the Fed's decision to raise rates for the eighth time since December 2015 but offered that it's good for savers. In reality, one would be hard pressed to find any happy savers. Despite the Fed raising its target federal funds rate from near zero in 2015 to the current range of 2 percent to 2.25 percent, rates on three-month certificates of deposit have increased from 0.20 percent to just 0.46 percent on average, according to Bankrate.com. The reason banks aren't offering higher rates is because they don't need the money. Fed data show surplus liquidity at U.S. banking institutions stands at $2.80 trillion, up from about $250 billion before the financial crisis. This goes a long way toward explaining the big gains in housing and why the current bull market in stocks, which last month became the longest on record, shows few signs of reversing soon. In short, savers can either watch their purchasing power erode sharply over time by keeping cash in time deposits that pay far less than the inflation rate or funnel their cash into risky assets. Maybe that's why the S&P 500 Index snapped a four-day losing streak on Thursday.
WHEN CONVENTIONAL WISDOM FAILS
"Most market participants blame the big sell-off in emerging markets this year on the Fed's rate increases and a stronger dollar. That sounds logical, but only if you're willing to overlook some inconvenient truths, such as a banner year for emerging markets in 2017 even though the Fed boosted rates four times in 12 months...
OIL AND YEN DON'T MIX
"Japan's currency is under pressure, with the Bloomberg Correlated-Weighted Index of the yen versus its major peers dropping 4.3 percent since mid-August. The yen fell on Thursday to its weakest level against the dollar since December. To understand what is happening to the yen, you need to understand what is happening in the market for oil. Brent crude has risen to its highest level since 2014 this week, reaching $82.55 a barrel. West Texas Intermediate isn't far behind, rising above $70 a barrel from about $50 a year ago. This puts Japan in a significant bind - more so than even potential tariffs threatened by the Trump administration - because its economy is dependent on importing oil. Bloomberg Intelligence economist Yuki Masujima put things in perspective in a research note Wednesday. He figures that an increase in U.S. tariffs on imports of Japanese cars to 25 percent could reduce Japanese car makers' profits by 1 trillion yen ($8.2 billion). A rise in oil prices to $80 a barrel from $70, though, could deal a heavier blow, reducing Japan's trading gains by 1.7 trillion yen. "Japan relies heavily on imported oil, so a price decline could deliver a significant boost to its terms of trade," Masujima wrote.
TRUMP SAID WHAT?
"Trump said this week that the tariffs that he has imposed on other countries have had no effect on the U.S. economy. That was before Thursday's Commerce Department report on the merchandise-trade deficit, which unexpectedly grew in August to $75.8 billion, the widest in six months and close to a record. A decline in food, industrial supplies and auto exports primarily accounted for the bigger shortfall, according to Bloomberg News's Shobhana Chandra. On top of that, Chandra reports that a separate report from the department signaled corporate investment took a breather, with business-equipment orders at U.S. factories falling in August after a run of strong gains while shipments of those items slowed. Economists at JPMorgan Chase & Co., Amherst Pierpont Securities and Capital Economics trimmed their estimates for third-quarter gross domestic product growth. Before Thursday's data, the median estimate in a Bloomberg survey was for 3 percent expansion. "The data are grim," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note, referring to the August goods-trade gap. "The administration's narrative, that the second-quarter drop in the deficit was a result of their trade policies, has now fallen apart, as it was always likely to do." If the economy is slowing, then it's increasingly unlikely that yields on benchmark 10-year Treasury yields can remain above 3 percent much longer.
"Despite the lowest unemployment rate in 20 years, one would think that U.S. workers are enjoying huge raises, but they aren't. There are plenty of theories for why that is, from the diminishing influence of unions to technological advances. The Commerce Department will provide an update on the situation Friday when it releases its monthly data on personal income and spending for August. The median estimate of economists surveyed by Bloomberg is that incomes jumped 0.4 percent last month, but they have been disappointed before. That was what they forecast for July only to see the number come in at 0.3 percent. Personal spending is seen rising 0.3 percent after increasing 0.4 percent in July." ("The Dollar Doubts of a JPMorganStar," Robert Burgess, 09/27/18.)