Welcome to a very brief overview of the recent performance in the markets. The essentials are captured in the table below and each week we will show a chart of interest.
All the precious metals came under renewed pressure last week as the bond markets continued their roller-coaster ride and investors continued to look to the medium-term future and potential inflationary forces developing in the markets. The focus has remained on yields although the correlation between the ten-year bond yield in the United States and the gold price has not been that high and was most recently at minus 0.14. The relationship with the dollar has tightened even further, however, with the correlation most recently at minus 0.80, although gold’s move has been a lot larger than that of the dollar; since the start of the year gold has lost 10.4%, while the dollar index has gained 2.4%.
Meanwhile the Federal Reserve’s five-year forward breakeven inflation rate has risen to 2.2%; a year ago, just as the pandemic was starting to take hold, it stood at 1.2%, before a sharp short-lived drop to 0.8% as the markets went into meltdown. The core PCE rate (personal consumption and expenditure), which is the rate that the Fed follows most closely when determining policy adjustments, stands at just 1.5%, which underpins the Fed’s intention to keep rates lower for longer. There was however something of a nervous reaction in the markets at the end of last week, following Fed Chair Jay Powell’s comments at a Wall street Journal Jobs Summit seminar last Thursday. The sharp rise in yields in the days prior to the webinar had led some observers to expect him to perhaps express some concern at the moves; he did not, stating that the bank’s current policy is appropriate. He said that the Fed might take action if overall financial conditions tightened much further, but he did not commit to stepping into the bond market. Clearly the Fed has a fine line to tread as continued increases in yields could potentially derail an economic recovery because of the effect on borrowing costs, but the markets should rest assured that the bank is keeping a close eye on developments.
To that end the publication of the Beige Book last week was instructive. This is a study, released eight times a year, in which the local Federal Reserve Bank gathers anecdotal information on current economic conditions in its District. Twelve Districts are involved, and the information is gathered on a wide range of contacts through a variety of formal and informal contacts and is qualitative rather than quantitative. The major conclusions from this month’s Book are that economic activity expanded “modestly” between January and mid-February for most Districts, with most businesses remaining optimistic over the next six to twelve months. Overall manufacturing activity for most Districts improved moderately despite supply chain disruptions. Activity was mixed in the non-financial sector, while most financial institutions reported reduced loan volumes, but higher deposit levels. This makes sense since consumers are not yet spending and corporates are protecting balance sheets and does underpin the expectations for the unleashing of pent-up demand down the line. Rising prices were attributed in many Districts to supply chain disruptions, which should be only a transitory influence, although it may persist for some months yet.
In the background the physical market for gold at the retail level is vibrant. India and China are both showing healthy demand and local prices are at premia typically of $6-7 to loco London (first time they have both been active in at least 18 months). Indian demand has been particularly robust over the past eight weeks with substantial tonnages going in; and some pressure is developing on supply. Imports are reported unofficially at 55.6t, against 39.4t in February last year, just before lockdown came into force. Imports this January were 35.4t, taking estimated imports so far this year to 91t. The reduction in import tax at the start of February, from 12.5% to 7.5%, allied to falling prices, were both influential. Indian demand for jewellery+bar&coin averaged 860tpa from 2000 to 2018 before demand started to dwindle in mid-2019 as prices changed range.
The latest figures from the Perth Mint show rampant demand, with the Mint shipping a record 124,104 ounces (3.2t) of gold coins in February, a gain of 63% on January, and 1.83M ounces of silver (57t), 57% up against January. The US Mint has reported sales of 130,000 ounces of gold Eagles in February and 11,500 ounces have already been sold in March, with premia soaring. Silver sales were 3.19M ounces in February and 761,000 ounces in March already. Total sales year-to-date are 357,500 ounces of gold against 818,000 ounces in the whole of 2020; silver sales have reached 8.7M ounces against full-year sales last year of 28.2M ounces.