What explains Gold down so much?

Outlook

Today we get a slew of housing data plus the Conference Board consumer confidence index. We thing consumer surveys are not useful because consumers do not understand economics, as is fully demonstrated by their having voted for a new president who will cause a giant rise in inflation. Still, it has some application in the form of what the Fed sees as confirmation bias in terms of demand for goods and services.

Markets are behaving normally, odd as that statement may seem—big jumps on a big piece of news, as we saw with the naming of a new Treasury Secretary. But that’s a single ray of light in an otherwise darkening world. The impulsive tariff story yesterday reverberating today is just the start of the Great Trump Disruption. This sets up a conflict between sane economic reasoning and knee-jerk reactions to additional Shocks. Example: what happens to the price of all those Mexican-built cars? Where will be get garden mulch if not from Canada?

Bloomberg has a story about panic buying in Q4, especially from China, to build up inventories ahead of tariffs. Those buying supplies now will be selling them in Q1 and Q2 as though they had paid the post-tariff price, meaning a decent bump in importer earnings but misery for the consumer who needs a new washing machine.

Every top economist warns that the tariffs are inflationary. Former TreasSec Summers, talking down to us peons on weekend TV, pointed out that we just got over the supply side inflation triggered by the pandemic and this will be a far worse supply side inflation. Open the Wall Street Journal and find whoever is excoriating the tariff plan today. Yesterday it was Alan Blinder, a former Fed who literally wrote the book (A Monetary and Fiscal History of the United States, 1961-2021).

As noted yesterday, the big event this week is the US PCE on Wednesday. We had core at 2.7% y/y in Sept, the same as Aug, and this time the forecast is for a small rise to 2.8%, although Trading economics goes for 2.8%. Wearily we have to prepare for the usual variations in quotation method, including m/m and 3-month and 6-month averages, plus supercore.

The big question is what are the 2-year and 10-year yields going to do? The correlation of those spreads is a key FX determinant. We already see the differential narrowing between the US and Japan, coupled with the suspicion that Mr. Ueda is about to slide in a hike or at least hawkish talk. Japan whispers but hardly any Westerner is attuned. In a logical world, the threat of rising inflation “should” push yields back up and the dollar with them.

The Gold Puzzle: The vast drop in the 10-year is a fat contributor to the dollar falling, too, but what explains gold down so much? The usual easy answer is dollar down, gold up and vice versa. If we have both of them down, the dollar drop must be attributed to a temporary condition. It’s still on the high side and likely to return to new highs, Well, we can’t remember this as a standard development. Commentary on gold has become increasingly bizarre over the past couple of years—since crypto came along.

Bloomberg writes that “Gold fell as the dollar jumped after President-elect Donald Trump threatened import tariffs of 25% on Canada and Mexico….  A stronger dollar reduces the allure of gold as it makes it more expensive for many buyers.” Except the dollar was not stronger yesterday overall. Bloomberg goes on: “Bullion traded near $2,620 an ounce after slumping 3.4% in the previous session on a deescalation of tensions in the Middle East that sapped haven demand.” Talk about cherry-picking.

For what it’s worth, we think the havoc Trump is about to wreak can only take gold higher. Bitcoin and its cousins are kind of fun, especially the part where advocates tie themselves in knots explaining that crypto has intrinsic value and is money. It has no intrinsic value and is not money. Money is trust—-trust that it can be used for transactions, is a store of value and is how we measure the value of things. Crypto has only the temporary trust of the people who own it that the other people who own it won’t jump ship. When trust flies out the window, as it is certain to do with predictable regularity, gold will be the beneficiary instead of crypto’s victim,

Central Bank meetings

ECB December 12.

Fed December 18.

BoE December 19.

Bank of Japan Dec 19.

Forecast

A ceasefire agreement may be pending in the Middle East and many expect Trump to get a deal with Putin that doesn’t give all of Ukraine to him. These factors are considered a prod to risk appetite. It’s also short-termism since neither issue is even remotely close to being “fixed.”

Similarly, analysts are scrambling to design the “disruption” that Musk and his gang might reasonably do, noting that bureaucratic herds do need to be culled from time to time (and it’s something the voter has wanted since just after Eisenhower). This is also wishful thinking, since reasonableness is not the style of this show.

It’s obvious that current inflation is still sticky and future inflation is likely to be horrendous. The disruption for US-UK and US-Europe ties has not left the front page since Nov 5. Those are two factors in the lead for expectation of risk-off, an end to Fed cuts, and terrified traders and investors piling into the dollar. Granted, these are longer-time issues, but we expect them to become clearer and more urgent as Jan 20 comes closer.

Tidbit: Comments by regional Fed presidents can take up all your day if you don’t watch out. But this time we should note that Minneapolis Fed Kashari says the 25 bp rate cut at the Dec meeting is well worth considering.

His argument is that the economy is more resilient than anyone had expected even at higher interest rates, meaning that pesky hypothetical, the “natural” rate, is likely higher than we thought, too. As Bloomberg summarizes, “The longer that resiliency continues, the more he thinks that shift might be structural and not merely temporary.”

This comment could well be the Fed’s reasoning when it dials back rate cut expectations for 2025.

Note to Readers: Thursday is a national holiday in the US. There are no reports on Thursday or Friday this week. 

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