The possibility of a rate cut has many market participants wondering if there will be a bull market in 2024.
Despite the Fed's tightening cycle, both and have performed quite well, with 12 so far this year6%, *essentially flat at 24 per ounce at the start of 2023$00, trading at $24 per ounce as of December 22$29. But that doesn't tell the whole story. Gold prices have seen some wild swings, falling to a low of $20 an ounce in March and climbing to a little over $26 an ounce in May.
The Federal Reserve paused interest rate hikes due to its success in bringing down inflation and is clearly set to pivot to rate cuts in 2024, which is good news for commodities.
Lower interest rates will lead to a weaker dollar, stronger and stronger commodities, and when positive real interest rates that favor bond investors become negative, it will particularly affect the upside of the dollar.
The argument for support revolves around three factors: the Fed's monetary policy is increasingly activeUnsustainably high debt due to overspending;There are also central bank purchases.
We have seen bond yields fall and the dollar weaken. ** And the U.S. dollar usually moves in the opposite direction.
The yield on the benchmark 10-year Treasury note has fallen steadily over the past three months, from 5% in November last year to 39%。The DXY has fallen from 106 on November 2388 fell to 10171, down 5%.
The release of the Personal Consumption Expenditures** Index (CPI) on Friday, December 22, reinforced the view that the Fed wants to cut rates in 2024, which could be larger than the 75bps announced earlier this month. The Personal Consumption Expenditures** index is the Fed's preferred measure of inflation.
According to the U.S. Department of Commerce, U.S. prices in November were at 3For the first time in more than 5 years, the annual increase was pushed to 26%。Excluding food and energy core** at a six-month annualized rate**19%。
According to Reuters, both the headline and core indicators cooled more than economists expected, bringing annualized interest rates over the past three and six months to at or below the Fed's 2% target.
In the second half of the year, as there is growing evidence that pressure is easing and the labor market is cooling in the face of the Fed's rate hikes from March 2022 to July 2023, the center of gravity on the Fed's decision-making table has become significantly more important.
On Thursday, U.S. third-quarter GDP growth was lower than expected at 49 percent, while initial jobless claims rose by 2,000 to a seasonally adjusted 2050,000 people, less than market expectations.
Weaker economic data and slowing inflation suggest that the Fed's monetary policy is restrictive enough to keep inflation on track.
However, we are still at 1A positive real interest rate of 3% (3.)9% 10-year yield minus 26% inflation), which means that further rate cuts are necessary before we enter a negative real interest rate environment.
The market is pricing in a 79% chance of a rate cut in March.
Economist Daniel Lacalle insists that inflation would have fallen faster if it weren't for the fact that "fiscal policy is moving in the opposite direction to monetary policy for the first time in decades." This can cause major problems in the future. ”
The first time we pointed out the conflict between the federal ** and the Fed was in 2018, when Trump was **. At the time, the Fed was raising interest rates, much to the disappointment of Trump, who wanted to keep them low.
Consider this: While the Fed is tightening monetary policy, shrinking its balance sheet, and raising interest rates, the Treasury has been printing money, which the federal government has been spending to deliver on many of its promises. Three of Biden's signature pieces of legislation — the Inflation Reduction Act, the Bipartisan Infrastructure Act, and the CHIPS and Science Act — cost trillions of dollars.
Also keep in mind that most of these pledged funds have not been spent.
Unsurprisingly, inflation has increased the cost of construction projects, which also means delays. An article in The Economist notes that the largest component of the infrastructure package is to increase funding for highways by 50 percent to $350 billion over five years. But from late 2020 to early 2023, highway construction costs soared by more than 50%, effectively offsetting the additional funding.
The federal government is constantly spending money, and the Treasury is constantly printing money to make up for the growing deficit. About $13 trillion** of debt is expected to be rolled over at higher interest rates next year, meaning more money printing is underway.
In a recent interview with BNN Bloomberg, Pierre Lassonde, chairman emeritus of France-Nevada Mining, said he believes the dollar has peaked, "*anti-dollar, so that's one of the reasons I'm so bullish on 2024**." ”
He also said that inflation will remain "sticky" next year, at around 3-4%. He noted that the federal ** will face a deficit of $2 trillion and argues that due to *** interest rates will fall.
What will the Fed do in the first year?"They like to make it easy for the incumbent to win the election. "So interest rates are going to go down, but that's not going to happen in Europe, I think the euro is going to be against the dollar, all other currencies are going to be and will be."
When asked if cryptocurrencies limit the upside, Lasonde noted that none of the central banks are buying crypto, but many of them are. They're diversifying the dollar, they're saying we don't really trust the dollar, we don't believe the U.S. is letting us exchange our money when we need it, they're buying," he said, noting that when the EU regulates the crypto market, "[it's] going to be very small compared to the market." ”
Finally, Lasonde said that the trading of **shares** appears to be $1,500 per ounce, which is about half of their actual value, "so I think 2024 will be a catch-up year for the vast majority of ** stocks." "I think they're going to outperform any other ** on the market.
Central banks bought a record 1,136t** last year and a further 228t** in the first quarter of this year, the most in Q1 on record.
In the first half of this year, central bank demand hit a record high since 2000, according to the World Gold Council.
Louis Streeter, Senior Market Analyst at the World Association, commented: "Record central bank demand dominated the market last year, and despite the slowdown in demand in the second quarter, this trend underscores the importance of being a safe-haven asset at a time when geopolitical tensions persist and the global economic situation is challenging. ”
Strong demand for ** continued in Q3, with banks buying a total of 337t**, the second-highest Q3 on record. According to the latest quarterly report of the World ** Association, "global official ** reserves increased by 120% quarter-on-quarter, the second highest third quarter after the third quarter of 2022." "On an annualised basis, central banks netted a staggering 800t, 14% higher than the same period last year. ”
It can be said that the main reason for central bank purchases is that it is a solution to currency depreciation. As we wrote in previous articles, in an extreme hypothetical scenario, all other asset classes are destroyed, including the currency itself, leaving only **.
The aforementioned economist Daniel Lacalle writes: "* is now the only real defense against the loss of the purchasing power of fiat money." Considering that central banks are looking to launch their own digital currencies, it proves once again that it is an important asset in the portfolios of investors trying to escape the currency collapse as we know it. ”
Two headlines picked from my feed this week suggest that the trend of dollar depreciation is real and accelerating.
Global ** debt is expected to reach 97 percent this year, according to a report by Visual Capital$1 trillion, up 40% from 2019. In the total debt table, the United States tops the list with a debt-to-GDP ratio of 1233%。This compares to the world average of 90%.
Just like the U.S. debt is ballooning, so is Canada's debt, which currently ranks 10th in the world at 106 percent of GDP4%。
While the U.S. dollar is the most important unit of account in the world, the primary medium of exchange for settling international transactions, and a store of value for central banks, countries with different agendas from the United States are pursuing "de-dollarization," including Russia, China, Saudi Arabia, and Iran.
As Lasonde suggests, many emerging-market economies are buying** because they don't want to be in the same situation as Russia. Russia froze about half of its foreign exchange reserves after it invaded Ukraine in 2022.
According to "Markets Insider", China and Russia have now almost completely stopped using the dollar bilaterally**. Currently, more than 90%** of the two countries are denominated in Russian rubles or yuan. In addition, the ** between the two countries has expanded this year due to Western sanctions, which has made Russia more dependent on China on **. According to reports, Russian Prime Minister Mikhail Mishustin said that the total amount of the two countries this year reached a record $200 billion, while Russia and the United States reached a 30-year low.
Silver
* and ** tend to trade in sync. When gold moves higher, it usually lags, but then outperforms.
Against the backdrop of lockdowns, interest rates falling to zero, quantitative easing and general market concerns, in 2020, the increase was twice as high. From January to December 2020, 43% was up, while "only" 208%。Earlier this year, gold rose 39% as it topped $2,000 an ounce and* also** rose 147% to nearly $30 an ounce.
The interesting thing about *is that there is the same amount of investment on the ground as there is, because 60% of it is for industrial purposes and 80% ends up in landfills. Only 40% is invested.
As the metal with the highest electrical and thermal conductivity, silver is ideal for solar panels. A 2020 report by Saxo Bank noted that "in terms of the energy output per solar panel, the potential alternative metal cannot be compared to silver." ”
Photovoltaic cells use silver as a conductive ink to convert sunlight into electricity. The silver paste inside the solar cell ensures that the electrons are stored or consumed as needed. It is estimated that approximately 100 million ounces of ** are consumed annually for this purpose alone.
The U.S. Department of Commerce has officially stated that it will impose import tariffs on Chinese solar manufacturers that have been evading tariffs and "hurting the U.S. industry," according to the law arbitration body.
The U.S. Department of Commerce found that some of the major Chinese solar panel manufacturers — BYD, Canadian Solar, Trina Solar and Wiener Solar — circumvented existing anti-dumping duties by shipping their products to Cambodia, Malaysia, Thailand or Vietnam for "small processing" before shipping to the United States. These companies, which provide a sizable portion of solar panels to the United States, will now face high tariffs starting in June 2024. A fifth company, Cambodia-based New East Solar, was also subject to tariffs for failing to comply with the investigation. Canary**.
According to BMO Capital Markets' analysis, annual silver consumption in the solar industry will grow at a rate of 85% over the next 10 years to reach 1Around 8.5 billion ounces.
5G technology will become another new driving force for ** demand. 5G components that require silver include semiconductor chips, cables, microelectromechanical systems (MEMS), and Internet of Things (IoT)-enabled devices.
*The association expects demand for 5G to more than double from about 7.5 million ounces today, to around 16 million ounces by 2025, and 23 million ounces by 2030, an increase of 206% from current levels.
The third major industrial demand driver is that silver is also present in many automotive components of automotive electronic systems, and although not used in batteries, its superior electrical properties make it difficult to replace in a wide range and growing number of automotive applications.
*Battery electric vehicles contain twice as much silver as internal combustion engine vehicles, while self-driving cars require even more silver due to their complexity, according to a report by the association. Charging points and charging stations are also expected to require more**.
The agency estimates that the industry's demand for ** will rise to 88 million ounces within five years as the transition to electric vehicles accelerates with conventional cars and trucks. Others estimate that by 2040, demand for electric vehicles could account for nearly half of the annual volume.
In 2021, 47700 million ounces of silver, accounting for 93%。Last year, brazing and alloys accounted for 49 million ounces.
According to the ** Association's report entitled "Silver in Brazing and Welding Alloy Materials", the demand for silver used in brazing and welding is expected to reach 58 by 2030800,000 ounces, up 23% from 2021.
Finally, demand for "printed and flexible electronics" is expected to grow by 54% over the next nine years, from 48Moz in 2021 to 74Moz in 2030, implying consumption of 615Moz during this period.
A press release from the Silver Institute described them as the "backbones" of various electronics, including sensors that measure everything from temperature, pressure, motion, humidity, relative humidity, and carbon monoxide. They are also used in medical devices, mobile**, appliance displays, and consumer electronics.
In 2021, Sprott released a comprehensive report titled "Silver's Clean Energy Future" that found that three areas of growing demand for ** – solar, automotive, and 5G – could account for 1More than 2.5 billion ounces. And that's not counting the growth in investment demand, which, as mentioned earlier, accounts for about 40% of usage.
Analysts have long pointed out that there will be a severe shortage due to the continued growth in demand.
According to the 2023 World Silver Survey, the global market in 2022 is less than 2At 37.7 billion ounces, the institute said it was "probably the worst shortfall on record".
It took just two years of shortages — shortages in 2022 and shortages of 51.1 million ounces in 2021 — to erase the accumulated surplus of the previous decade.
Global silver mine production is expected to fall 2% to 8Around 200 million ounces, compared to a projected demand of 1.2 billion ounces. Keith Neumeyer, CEO of First Majestic Silver, recently commented that the solar panel and electric vehicle industries currently consume about 30% of mined silver**. In addition, he said a primary silver mine produces about 10 million ounces per year, meaning its impact on the deficit"Zero", and this represents the output of several mines.
*Association**, this year** will appear 1The shortfall of 400 million ounces, the third consecutive year of shortages, while strong** industrial demand is expected to rise 8% to a record 63.2 billion ounces. Key drivers include investments in photovoltaics, power grids, and 5G networks, growth in consumer electronics, and increasing production of automobiles.
Metals Focus believes that the gap in the market will persist for the foreseeable future.
Conclusion
At AOTH, we think there will be strong room for **and **as we move into 2024.
My ** is correct that the Fed will pause its rate hikes in June and raise rates one or two more times before the end of the year.
I also expressed my view that we're going to have a soft landing, no recession, or a very shallow, very short recession, but the important proviso is that the Fed pauses its rate hike cycle, and it has done so.
It is worth noting that the Fed has raised interest rates enough to reverse inflation without causing a severe recession. And it was done in a very short time.
Weaker economic data and slowing inflation suggest that the Fed's monetary policy is restrictive enough to keep inflation on track.
The dollar is weakening and bond yields are falling. With real interest rates positive, we are not yet in a **-friendly environment, but we believe that rates will turn negative as bond yields fall further and inflation remains sticky, possibly in the 3-4% range.
There are many reasons to trade** – dollar movements, geopolitical tensions, ETF outflows, central banks**, negative real interest rates, and so on, but there is only one reason to hold**: to maintain your purchasing power relative to the dollar (or other currencies) because inflation takes its toll.