Wall St Week Ahead-Recession Fears Pose Challenge to Energy Shares After Stellar Year

Alex

Economic

Stocks

Commodity

Summary:

A potential U.S. recession and tough comparisons to a stellar 2022 are weighing on the prospects of energy stocks delivering an encore to last year's stunning run, despite valuations that are seen as still comparatively cheap.

The S&P 500 energy sector is up 4.2% year-to-date, slightly lagging the rise for the broader index. The sector logged a 59% jump in 2022, an otherwise brutal year for stocks that saw the S&P 500 drop 19.4%.

Energy bulls argue the sector's valuations bolster the case for a third-straight year of gains, which would be the first such feat for the group since 2013. Goldman Sachs, RBC Capital Markets and UBS Global Wealth Management are among the Wall Street firms recommending energy stocks.

Despite last year's run, the sector trades at a 10 times forward price-to-earnings ratio, compared to 17 times for the broad market, and many of its stocks offer robust dividend yields. The potential returns for shareholders were highlighted this week when Chevron shares rose almost 5% after announcing plans to buy $75 billion worth of its stock.

Some investors worry, however, that energy companies may find it hard to increase profits after huge jumps in 2022, especially if a widely expected U.S. economic downturn hits commodity prices.

"The group appears to be holding up well, but there is some trepidation due to the fact that investors are concerned about an economic slowdown and what that will do to demand," said Robert Pavlik, senior portfolio manager at Dakota Wealth.

He said he is slightly overweight the energy sector, including shares of Chevron and Pioneer Natural Resources.

Wall St Week Ahead-Recession Fears Pose Challenge to Energy Shares After Stellar Year_1

Economists and analysts in a Reuters survey forecast U.S. crude would average $84.84 per barrel in 2023, compared to an average price of $94.33 last year, citing expectations of global economic weakness. U.S. crude prices recently stood at around $80 per barrel.

At the same time, many investors beefed up their holdings of energy stocks in 2022 after years of avoiding the sector, which had often underperformed the broader market amid concerns such as poor capital allocation by companies and uncertainties over the future of fossil fuel. The sector's weight in the S&P 500 roughly doubled last year to 5.2%.

However, that dynamic may be petering out, said Aaron Dunn, co-head of the value equity team at Eaton Vance.

"People have come back to energy in a big way," he said. "We had that tailwind the last couple of years, which was that everyone was under-invested in energy. I don't think that's the case anymore."

Wall St Week Ahead-Recession Fears Pose Challenge to Energy Shares After Stellar Year_2

And while energy companies are expected to deliver strong quarterly reports over the coming weeks after a roaring 2022, those numbers may have set a high bar for this year.

With 30% of the sector's 23 companies reported so far, energy's fourth-quarter earnings are expected to have climbed 60% from a year earlier, and 155% for full-year 2022, according to Refintiv IBES. But earnings are expected to decline 15% this year, the biggest drop among the 11 S&P 500 sectors.

Exxon Mobil and ConocoPhillips are among the reports due next week, when investors also will focus on the Federal Reserve's latest policy meeting.

"Last year was a banner year," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. "Now they have got to try to beat that to show growth, and I think that is going to be a challenge."

In the meantime, bullish investors point to shareholder-friendly uses of cash by the companies.

The energy sector's 3.43% dividend yield as of year-end 2022 was nearly twice the level of the index overall, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Energy companies executed $22 billion in share buybacks in the third quarter, just over 10% of all S&P 500 buybacks.

"From a total return perspective, that is where I think energy can still continue to differentiate itself versus the broader market," said Noah Barrett, energy and utilities sector research lead at Janus Henderson Investors.

Others, however, believe more value may exist in areas of the market that were beaten down last year. Dunn, of Eaton Vance, said stocks in areas such as consumer discretionary and industrials may appear more attractive.

"Energy probably does OK this year, but I think you have got a lot of areas in the market that have done extremely poorly where we're finding excellent opportunity," he said.

Source: Yahoo

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Devin

When farmer Elijah Murithi grew bananas in the 1980s and 1990s, central Kenya's increasingly erratic weather meant he could rarely make a steady income from the thirsty crop.

Prolonged dry spells killed Murithi's young plants and long, intense rainy periods produced a glut of bananas that forced him to lower his prices to sell them in the market.

Even when he shifted to coffee, which needs less water, the farmer still struggled to produce reliable yields.

But that changed in 2021 when he added an unusual crop to his farm: fish.

A fish pond - filled with more than 1,500 tilapia - now allows him to harvest rainwater during heavy rains and use some of it to irrigate his crops when dry spells hit, the farmer explained.

Now, he said, he makes a decent living through drought or downpours, growing coffee and vegetables year-round while making extra income selling fish.

"This really worked to my advantage," he said, explaining how water he regularly drains from his 10-by-25-metre fishpond, built just uphill from his coffee plantation, allows him to water other crops on his 1.25-acre (0.5-hectare) farm in Kibingo, about 130km (80 miles) northeast of Nairobi.

Since he started fish farming in April last year, Murithi said his coffee harvests have more than doubled, to 2,000 kg a year, and his overall income has tripled.

As the East African country grapples with climate swings that batter crops and choke incomes - including a current drought that is the worst in four decades - some farmers are discovering that adding fish to their farms can help with water storage, make their diets more nutritious, and boost earnings.

Since 2019, the Kirinyaga county government has been helping farmers build fish ponds under an economic stimulus programme.

The fisheries department said it has so far supported about 20 farming groups and more than 1,350 individuals. It did not provide any information about the cost of the initiative.

The county covers the cost of a pond liner, and, for the first year, pays for baby fish - also called fingerlings - and enough fish feed to sustain them until they mature.

Kirinyaga's government said in October it was working to increase annual fish production from 29 tonnes - with a value of 12.8 million Kenyan shillings ($104,000) - to 62 tonnes.

Changing Attitudes

At first, most farmers resisted the idea of raising fish in an often-parched region, said Harrison Mwangi, chairperson of the Kamwaka Self Help farmers group, which has 26 members.

He said the prospect was alien to many of the members, who instead thought they would have better results raising chickens.

But after county officials provided training on how to successfully raise fish - as well as help with key costs - many farmers have given it a try.

Ultimately, Mwangi said his group decided to convert a field of napier grass at a farm owned by one of its members - a field that was producing less and less fodder, especially during the dry season - into a fish pond at the start of 2021.

Through the rest of year, the farmers then sold 17,000 shillings ($137) worth of fish to people visiting the farm or at local markets, Mwangi said, describing the sales as "quite encouraging" for a first harvest.

"The group could not have found a better way to utilise the farm," he said, explaining how farming fish was easier than managing other livestock.

The Kamwaka farmers - who each have an annual income of between 100,000 - 150,000 shillings ($807 - $1,211) - should see even higher earnings from fish farming in the future as their stocks multiple, according to Mwangi.

John Wilson, the manager of Mwea Aquaculture Farm, which raises tilapia and catfish and also offers training to farmers, said fish farming was not only good business but also provided an alternative source of protein for Kenyans.

Eat more fish?

Apart from the challenge of convincing drought-hit farmers in Kenya that fish are a realistic future crop, the project still has a few other kinks to work out, Murithi and Mwangi said.

While the ponds can be a buffer against drought by storing rain to be used for irrigation in the dry season, farmers hit with particularly extended dry spells can struggle to find ways to top them up.

Murithi said he has at times replenished his pond using agricultural water rations provided by the county to help farmers in dry periods.

Meanwhile, the Kamwaka farmers have to pump clean water from nearby rivers to their pond on a weekly basis during drought periods, using a generator which is costly to run, Mwangi said.

Another challenge facing fish farmers is how to deal with a surplus of fish now filling local markets as more people take up raising them, according to industry insiders.

"Farmers need to be aggressive in looking for a market for their produce, and should not wait for the county government to do the marketing for them," said Michael Manyeki, a fingerling producer in Sagana, a small industrial town in Kirinyaga.

For Ntiba Micheni, a professor of marine and fisheries biology at Nairobi University, the solution to excess production is getting more Kenyans to think of fish as dinner in a country where eating them is not common everywhere.

"If there is no robust 'Eat More Fish' campaign for young children, for schools, and for communities, fish (eating) will forever remain a challenge," said Micheni, a former official at the government's department for fisheries.

Source: Reuters

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Owen Li

Economic

India is likely to become the world's most populous nation this year, which presents an enormous opportunity for the country's economic growth — provided it can harness the potential of its large workforce, analysts say.

"The country will enjoy an abundant supply of labour and, consequently, should invite even more investments from foreign firms looking to cash-in on India's growing manufacturing capabilities," says Raghvendra Nath, managing director of Mumbai-based Ladderup Wealth Management.

"Additionally, rising domestic consumption should help the nation tide over any external shocks, a fact that was well demonstrated during the Covid-19 pandemic."

With a population of more than 1.4 billion, India is expected to surpass China in the coming months.

S&P Global forecasts that the South Asian country will overtake Germany and Japan to become the world's third-largest economy by 2030, with annual nominal gross domestic product growth projected to average 6.3 per cent.

Although India is feeling the heat from the global economic slowdown, its GDP is projected by the country's statistics ministry to grow by 7 per cent in the current financial year to the end of March, making it one of the world's fastest-growing economies.

Its population in a consumer-driven economy and having what is known as its "demographic dividend" — a large number of young people — will be a major factor in driving its expansion.

In many developed countries workforces are ageing rapidly as population growth slows globally.

The median age in India is 28.4 years, according to Worldometer. That compares to 38.3 years in the US, 38.4 years in China, and 40.5 years in the UK.

"For India, the main advantage of the young working-age population is that young people adapt fast and can keep pace with the continuing dramatic and constant technological change," says Vidya Mahambare, professor of economics at the Great Lakes Institute of Management in Chennai.

Saket Gaurav, chairman and managing director of Indian electronics and home appliances brand Elista, says that "India's large population is one of the most significant opportunities for domestic and international companies."

It's "a great growth opportunity for various companies, and especially, for value-driven companies like ours".

"As a large set of people can produce and consume more goods, it is expected to lead to more economic growth for the country," says Mr. Gaurav. "We consider India's population as an asset for the business rather than a liability."

But there is still much work to be done to ensure that India can fully reap the rewards of its large population. Jobs need to be created for the millions of Indians who are joining the workforce each year — and youth need to have the right skills to fill those roles.

The fact that unemployment is on the rise in India is a red flag. Unemployment rose to 8.30 per cent in December, which was its highest level in 16 months, according to data from think tank Centre for Monitoring Indian Economy.

"The drop in labour force participation, along with a high level of unemployment among youth, suggests insufficient job opportunities and skill mismatch," says Ms Mahambare.

Prime minister Narendra Modi's government is making efforts to expand the country's economy and create jobs, for example, through its flagship scheme Make in India, which aims to transform the county into a manufacturing centre.

"India is pushing hard to increase manufacturing growth and exports," says Ms Mahambare.

"The production-linked incentive scheme and other schemes under the Make in India campaign have attracted large-scale electronics, auto components and textile firms, among others. The information technology and emerging biotech and pharma sectors continue to hold good promise."

At the same time, the government's Skill India initiative is focused on ensuring that youth are better equipped to meet the needs of companies through measures such as training and partnerships with countries including Japan to co-operate on skill development initiatives.

Only 5 per cent of India's workforce is formally skilled, despite it being the largest and youngest in the world, according to the World Economic Forum.

"Labour alone cannot take our economy to the next level," says Poshak Agrawal, co-founder of Athena Education, which helps students to gain admission to highly rated universities through coaching.

"Despite the large population, the country lacks the workforce that is skilled to take up the newly evolved roles," Mr. Agrawal says.

"Recruitment becomes a challenge for various organisations because in Indian colleges, the education is more theory-centric, and there's a lack of experiential learning."

Ensuring that people have the right skills can play a major role in preventing millions of people sliding deeper into poverty, which is an issue that authorities are trying to address.

"I think the policymakers have been gearing towards easing of those challenges to quite an extent," says Upasna Bhardwaj, senior economist at Mumbai's Kotak Mahindra Bank.

"If you look at India's per capita income, it clearly is on the lower side, and that needs to be ramped up."

India's GDP per capita in 2021 stood at $2,256, according to the World Bank.

But there are also encouraging signs from the "policy push that we're seeing … we look at the government's push towards digitisation, we look at government's push towards improvising the manufacturing base of the country," says Ms Bhardwaj.

However, such moves will not yield results overnight, she says.

India's wealth inequality is a clear challenge and is a situation that could be exacerbated as the country's population continues to grow. In the financial capital of Mumbai, high-rise luxury flats and expensive restaurants sit alongside slums, with families of some 10 people often crammed into rickety, single-room homes.

Wealth inequality has grown in India in recent decades, and the top 10 per cent of the population hold more than 60 per cent of the country's total wealth, figures from the World Inequality Database show. The lower 50 per cent of India have just 6 per cent of the nation's wealth.

"One of the biggest drawbacks of having a growing population is its negative impact on the per capita income and its growth," says Mr. Nath.

"Efforts will have to be made to uplift the weaker sections of the Indian society by improving literacy rates, providing access to quality health care and ensuring that they have easy access to financial services."

He says that "if these measures fall short of the required levels, we could have a widening wealth gap that could threaten India's growth story, reducing the country's chances of becoming the third-largest economy by 2030".

"Although [having 1.4 billion people] is beneficial for the nation's economic growth, harnessing its full potential is a significant challenge," says Rashid Ali, managing director of digital payments solutions company Ezeepay.

However, overall, the large population is an enormous opportunity for businesses like Ezeepay, which is focused on rural areas of India, where the majority of the country's citizens still live, he adds.

"India's large population provides many opportunities for businesses to capitalise on, given its vast consumer base. The rural youth population accounts for more than 65 per cent of the total population," Mr. Ali says. In turn, "we have actively generated employment opportunities, especially for the rural population".

"The anticipated population bulge has produced a demographic dividend, providing an unprecedented chance for economic development," he adds.

Source: The National News

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Alex

Economic

Retail sales and industrial production fell more than expected. With a recession on the horizon, silver may fly if the Fed stops the hikes!

It is closer and closer… wrapping itself slowly but decisively around the economy like an anaconda around its prey. I mean a recession, of course. The recent bunch of economic data leaves no doubt that the U.S. economy is losing momentum.

Retail sales fell 1.1% in December, following a downwardly revised drop of 1% in November. The decline was larger than expected, and it was the biggest decrease in 12 months. The fall is really disturbing as we are talking about the holiday shopping period. However, the sales were reduced in part because of the decline in prices.

Industrial production also surprised negatively, falling 0.7% in December. It followed a 0.6% decrease in November and was larger than expected. The decline was driven mainly by manufacturing output which fell 1.3% in December and moved down 2.5% at an annual rate in the fourth quarter. Higher interest rates and reduced purchasing power by inflation hurt demand for goods.

The latest edition of the Beige Book also doesn't inspire optimism. According to the report, five of the Fed's districts reported slight or modest increases in overall economic activity over the last several weeks, while six noted no change or slight declines from the previous reporting period, and one cited a significant decline.

Will Softer Data Prompt a More Dovish Fed?

The disinflationary pressure and widespread signs of weakening demand could encourage the Fed to further decelerate the pace of its interest rate hikes. This is what Patrick Harker, Philadelphia Fed President, suggested this week, saying that "he's ready for the U.S. central bank to move to a slower pace of interest rate rises amid some signs that hot inflation is cooling off". Dallas Fed President Lorie Logan expressed a similar view in her first major policy speech at the new post:

If you're on a road trip and you encounter foggy weather or a dangerous highway, it's a good idea to slow down. Likewise if you're a policymaker in today's complex economic and financial environment That's why I supported the (Fed's) decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting

Futures traders also bet on such a scenario, as they see a more than 95% chance of a 25 basis point hike in two weeks, according to the CME FedWatch Tool. The slowdown in hikes would be fundamentally positive for silver prices.

Implications for Silver

What does it all mean for the silver (and gold) outlook for 2023? Well, the falling inflation rate and weakening economic momentum imply that the Fed may become less aggressive in raising interest rates. Any signs of a more dovish monetary policy should be positive for silver and support the upward trend that started in November 2022 (see the chart below, courtesy of silverpriceforecast.com). What's more, as the U.S. economy is losing momentum, recession worries should intensify, which could also strengthen the safe-haven demand for the precious metals.

U.S. Economy is Losing Momentum. A Recession around the Corner?_1

Counterintuitively, the price of silver declined yesterday. But it could have been a normal correction (please remember that silver is partially an industrial metal) or a reaction to some hawkish comments of the Fed's Bullard and Mester about the need to move the federal funds rate above 5%. But these two hawks are not the voting members this year. Thus, don't pay attention to the market noise, but focus on the fundamental trends. And they are clear: the economy is slowing down, which will prompt the Fed to decelerate and later to even stop the rate hikes.

source:kitco.com

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Kevin Du

Cryptocurrency

Years of triple-digit gains had transformed cryptocurrency into a multitrillion-dollar market. By late 2021, there were about 100 crypto assets valued at a billion dollars or more. This asset class was like a vortex, sucking in capital and talent from everyone, everywhere.

The prevailing bet was that sooner or later, a new killer app would emerge. It would be the next Facebook, or even Google.

Enter Sam Bankman-Fried, a former Wall Street trader who launched crypto exchange FTX in 2019. Despite being a relatively new player, FTX swiftly became the second-biggest trading venue, thanks to its popular and exotic leveraged financial instruments.

In May, as the bear market set in, Korean crypto developer Do Kwon declared that 95% of cryptocurrency projects were "going to die". Barely a week later, his brainchild — the Terra protocol — collapsed, wiping out US$40 billion of market value.

If there was someone who couldn't take a hint, it was Bankman-Fried. Days after Kwon's ill-timed interview, he told the Financial Times (FT) that "the Bitcoin network is not a payments network and it is not a scaling network".

If Bitcoin had no future as a payments network, which cryptocurrency did?

From 'killer app' to 'Bitcoin killer'

What the FT story failed to mention was that Bankman-Fried had made massive investments in Solana, a new blockchain protocol. "It is one of the only chains that has a real plausible path forward," he had said in an earlier interview with crypto news website Decrypt.

Bankman-Fried's comments sparked outrage, particularly among Bitcoin's most ardent fans. After all, he was said to have made his fortune by riding the decade-long surge in global Bitcoin demand.

But for nearly everyone else, Bankman-Fried was a one-way rocket ship to the proverbial "moon". Solana was founded in 2020. In less than two years, its market value crossed US$80 billion. If it was on the path to hit a trillion dollars in market capitalisation, it was going to get there in a fraction of the time it took Bitcoin.

Effectively, some industry players came to view crypto as a zero-sum game. The grand prize was no longer merely a "killer app" — it would be an "Ethereum killer" or "Bitcoin killer".

Bankman-Fried was involved with Solana from the very beginning. His investment fund, Alameda Research, was an early backer of the start-up that launched the blockchain protocol. He built Serum, a crypto exchange, on the Solana blockchain. Buyers of the Serum token could get a discount on trading fees. FTX listed Serum and Solana tokens on its exchange, giving both projects credibility and access to the increasingly vibrant crypto market.

Solana's developers also sold their tokens to Alameda and FTX. Some reports peg Alameda and FTX's share of Solana's tokens at about 11% — a stake worth billions of dollars at one point.

But for Bankman-Fried, Solana was only the first rodeo. He backed and created numerous other tokens across the crypto ecosystem. Key among them was FTT, most widely used on FTX's crypto exchange. As was the case with Serum, holding FTTs unlocked a discount for trading on FTX.

But Bankman-Fried had bigger plans for FTT. Reportedly, FTT was meant to underpin an entire "ecosystem", including a bank and stock-trading app.

So, when FTX invested in other companies, it gave them FTTs. And as the story goes, Alameda used FTTs as collateral — borrowing money against FTTs to use for its own trading activities.

The kicker was that Alameda just so happened to be the market maker for FTT. That meant, as per The New York Times article, Alameda "had the ability to set the price of the token". Incredible as it sounds, it worked. Until it didn't.

When the bear market hit crypto, Bitcoin's newest rivals were hit hard. The biggest blow-up was the Terra protocol, launched in 2019. Terra's going bust took down major crypto hedge funds, including Three Arrows Capital. Companies such as BlockFi and Voyager Digital, which had lent money to the hedge funds, went under.

Alameda emerged from the rubble seemingly unscathed. Bankman-Fried positioned it and FTX as white knights, promising to swoop in to rescue BlockFi and Voyager.

Surviving on customers' deposits during crypto winter

But Arthur Hayes, founder of crypto exchange Bitmex, suggests that Alameda escaped the carnage precisely because it had access to FTX's customer deposits. He believes that Alameda had bet heavily on "shitcoins" — a term used to describe crypto currencies with low liquidity and speculative asset valuations.

These "shitcoins" were used, presumably alongside FTTs, as collateral for loans. Unfortunately, the prolonged market downturn meant that the value of Alameda's "shitcoins" were increasingly worthless.

So, when crypto lenders tried to recall their loans to Alameda, the latter used FTX customer funds to make the payments, as reported by The New York Times. "The only reason we believed that Alameda was a sound entity was that credit always flowed from FTX depositors," says Hayes.

Desperate times led to desperate measures. Many in the crypto space allege that at some point in recent history, Bankman-Fried started using his political influence to attack rival trading platforms — a group that included decentralised crypto exchanges (DEXs) and Binance, the biggest crypto exchange.

Analysts at Citi peg the global market share of DEXs at 18.5%. Binance, a centralised exchange, controls about half of the global volume. FTX's share was about 10%.

Clearly for FTX, "taking out" the competition would boost its chances of survival.

For Binance CEO Changpeng Zhao, this was the final straw. The exchange said it would sell its entire stash of FTT, some of which it received when it invested in FTX in 2019. "We are not against anyone. But we won't support people who lobby against other industry players behind their backs," said Zhao.

Money only works when there is demand for it. The reverse is also true. Once Binance started dumping FTTs, Bankman-Fried's empire toppled like a house of cards.

Soon, it emerged that FTX had indeed dipped into customer funds — to the tune of US$10 billion — to prop up Alameda. Reportedly, just four people at FTX knew about this. One of Bankman-Fried's close aides had tweaked FTX's accounting software, hiding the transfer of customer money from FTX to Alameda.

Conflict of interest

What happened at FTX had little to do with crypto. It had everything to do with a conflict of interest and the failure of a centralised exchange to perform its role as custodian of user funds.

Recall MF Global, the derivatives brokerage spun out of global investment manager Man Group. In 2011, MF Global declared bankruptcy days after experiencing a nearly 50% collapse in its share price.

Like FTX and Alameda, MF Global had an investment arm that made risky bets, spooking the market. When investor sentiment turned sour, the brokerage swiftly imploded.

And like FTX, MF Global was accused of dipping into customer funds — over US$1.2 billion — to pay creditors and stave off a potential bankruptcy.

Questioned by a congressional panel in 2011, CEO Jon Corzine said, "I simply do not know where the money is." In recent weeks, Bankman-Fried has struck a similar chord. "I wasn't running Alameda, I didn't know exactly what [was] going on," he said in an interview. If he didn't know, who would?

The irony is that with Bankman-Fried, investors thought they were backing the creator of the next Bitcoin. Instead, they had bought into the complete opposite of everything the cryptocurrency stood for.

Bitcoin was created to replace trust in a central authority. FTX? It was the "personal fiefdom of Bankman-Fried", says James Bromley, a lawyer brought in to help oversee its legal troubles.

It should come as no surprise then, that since the implosion of FTX, DEX trading volumes have surged. Moreover, crypto investors are yanking their assets from centralised exchanges and placing them on "cold" wallets, where users — not third parties — control their funds.

"No wonder Bankman-Fried didn't like Bitcoin," said Catherine Wood, a long-time decentralised finance (DeFi) proponent and the first exchange-traded fund (ETF) manager to invest in Bitcoin. "It's transparent and decentralised. He couldn't control it."

Source: The Edge Malaysia

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Samantha Luan

Commodity

Few people think that in 2022 there will be such big shocks after 2 years of the pandemic that has caused many countries to close their borders, impose a series of blockade orders and disrupt global supply chains.

But the geopolitical turmoil caused by Russia's war in Ukraine and the energy crisis that followed it made the outlook for 2023 all the bleaker, pushing gold prices to an all-time high, surpassing the 2,000 marks. USD/troy ounce in March, as investors buy gold as a safe asset.

This is a development that has been predicted by gold experts before. However, the gold market is not so simple. Gold shined right in the year when interest rates were raised to curb inflation, causing institutional investors to sell gold and buy bonds because yields on government bonds were high and too attractive for them to miss.

Gold is currently trading at $1,780 per troy ounce, after the Fed raised interest rates from near zero to around 4.25-4.5%, including the most recent rate hike last week. The Bank of England and the European Central Bank (ECB) also raised interest rates. This pushed the gold metal price above the September low of $1,600 and the 2010s average of $1,350.

Christopher Louney, commodities strategist at RBC, calls this a "persistent tug-of-war" between the negative financial factors that are dragging gold prices down and gold's appeal as a safe-haven asset. in the context of risk or inflation.

But 2022 is coming to an end. What investors, including those looking to save, need to know what happens next. The Financial Times has reported notable signals in the gold market.

Redirect or not redirect?

For 2023, gold will go up or down depending on a range of factors ranging from central bank purchases to China's opening up of its economy, and geopolitical risks, including the war in Ukraine, the confrontation between the US and China over Taiwan, and tensions in the Middle East.

But the hottest debate right now is the interplay between inflation and central bank intervention.

"The biggest impact on gold prices is the Fed's interest rate policy and US real interest rates. It's all about the opportunity cost of owning gold," said Bernard Dahdah, veteran commodities analyst at Natixis, a French investment bank. "The big question is: will the Fed change course?"

Higher yields on US government bonds pushed the dollar higher, as investors sold bonds in other currencies to buy US Treasuries. This causes gold to no longer shine.

"It's one thing to hold gold when interest rates are zero, it's another to hold gold when interest rates are at 4%," said Giles Parkinson, managing director of global funds at Close Brothers Asset Management.

Investors are assessing the impact of the Fed's latest rate hike. Even if the Fed only raised interest rates by just 0.5 percentage points, followed by many increases of 0.75 percentage points, gold prices still fell after Fed Chairman Jerome Powell warned he could not guarantee that the Fed's forecast about the peak interest rate will not change again.

However, there is consensus in US markets that the Fed will start cutting rates in the second half of 2023. Paul Wong, chief market strategist at Sprott, an asset manager specializing in precious metals, said Gold as a safe-haven asset is attractive because of the risk of recession and financial instability, and at a time when "interest rates could be higher and the dollar is too strong."

He said that the Fed signaled about slowing down the pace of interest rate hikes after seeing lower-than-expected inflation figures. The US consumer price index (CPI) in November was 7.1%, below the 7.3% forecast by economists, pushing gold prices above $1,800 thanks to market expectations that the Fed may apply softer policies to control inflation.

According to Wong, these shifts helped make precious metals the best asset group in November, outperforming equities, the dollar and US bonds.

However, there is also evidence to support the contrary argument that the Fed will continue to be tough in the fight against inflation, which is that the gap between short-term and long-term borrowing costs in the US has reached a wide point. within just over 40 years.

This month, the yield on the 2-year U.S. Treasury note was at 4.2%, while the 10-year Treasury yield was at 3.4%, bringing the gap between the two yields to a close. 0.84 percentage points.

Giovanni Staunovo, an analyst at Swiss bank UBS, said that "it's too early to predict a Fed move" and "it's not yet time to buy gold". But he added: "We believe that in 2023, there will be a period when investors are interested in buying gold, when the market starts to sniff out that the Fed will cut rates."

Debt crisis and persistent inflation

Gold lovers have highlighted concerns that the situation could be worse than the Fed's expectations. Gold has proven its worth in previous economic downturns, delivering returns in five of the seven recessions that have occurred since 1973, including the 2008 global financial crisis and the shock caused by the COVID-19 pandemic, according to the World Gold Council, an industry organization.

Gold lovers believe that the huge debt piles around the world could force central banks to reverse monetary policy sooner than planned.

The world's debt-to-GDP ratio is currently at 247%, much higher than it was before 2007 (less than 200%), according to the International Monetary Fund (IMF). Borrowing to finance COVID-19 operations caused even greater debt during the global financial crisis and beyond.

Most of the debt is in USD. The currency's health inflated the debts of its borrowers, while paying interest was also more expensive because of the high interest rates.

Peter Marrone, President of Yamana Gold, a Canadian gold miner, said that central banks cannot keep interest rates high forever as the debt burden in poorer economies is steadily increasing, this is also what the World Bank (WB) warned this month.

"What happens to all that debt as the dollar appreciates, other currencies depreciate and interest rates go up?" Marrone said. "It simply cannot be maintained forever, and at some point central banks will have to recognize this."

Marrone also warned that there is a high risk of a return to "dramatic inflation" like the 1970s, because price pressures are being driven by systemic problems, such as labor shortages. and a lack of investment that monetary policy cannot address.

In fact, the price of gold actually hit its all-time high in 1980 when it crossed the $800 mark per troy ounce, according to Marrone. Adjusted for today's dollar value, this is close to $2,700 per troy ounce. Therefore, he thinks that the price of gold can still increase.

Robert Crayfourd, manager of CQS Natural Resources Growth & Income fund, said that "there is a possibility that things will fall apart. We believe gold is a relatively cheap hedge asset."

However, despite acknowledging gold's near-term appeal based on expectations the Fed will turn, some fund managers still downplay its long-term appeal.

Gold is currently facing a "generational headwind" due to a younger generation of Western investors not fully understanding it while being more interested in cryptocurrencies, adding that gold does not play a role. in the green transition, according to Nicky Shiels, head of metals strategy at MKS PAMP, a precious metals organization.

Gold also produces no income – while investors, especially large institutions, have more lucrative portfolios than ever before.

"The strength and also the weakness of gold is that it has no yield," Parkinson said. There are many assets, he adds, that still deliver high returns even during recessions.

This argument will be further strengthened if there is a case that inflation is contained without much consequences, and the economic recovery momentum of the US and Europe is solid. Such an environment, according to Mr. Dahdah, "would benefit assets other than gold."

Meanwhile, China's reopening of the economy in the post-COVID-19 period could also hurt the gold market, according to John Reade, chief market strategist at the World Gold Council (WGC). "Inflation could be a drag on gold, as the Fed will tighten policy more quickly. The reason may be due to China reopening."

Should or should not buy gold?

However, gold lovers have another rather solid point. One factor that will help gold shine is record levels of central bank buying. Central banks bought nearly 400 tonnes of gold in the third quarter – the largest amount since 2000, when this data began to be recorded – according to the WGC. The amount of gold that central banks bought in the first nine months of 2022 has surpassed any year since 1967.

Observers suspect that China and Russia are behind these purchases as they want to diversify their holdings after Western allies froze $300 billion of Russia's foreign exchange reserves. This was somewhat confirmed not too long ago when the People's Bank of China (PBoC) reported that its gold holdings increased by 32 tons in November.

In addition, the buying of gold by central banks comes at a time when many individual investors are starting to look to gold.

They started buying bullion and coins on concerns that inflation could last longer than professional fund managers expect, according to WGC data. And perhaps they are even more concerned about geopolitical risks, such as the war in Ukraine and tensions over Taiwan.

"Individual investors in the US seem to believe in the idea that investing in bullion and coins is a safe bet during periods of high inflation and economic contraction," said Alan Goldberg, analyst from BestBrokers, says.

Jewelry purchases have picked up as consumers in China and India returned to their daily lives after the COVID-19 pandemic in the third quarter of this year, while demand for bullion and coins was flat. highest since 2011, up 36% from last year.

In addition, gold could benefit from the crypto crisis, following the collapse of the FTX crypto exchange. "When crypto is in a state of exhaustion, we think gold will emerge as an asset that cannot lose its quality," Louney said.

But central banks and individual investors are not the whole market. The biggest financial investors – institutional investors – are still not convinced by the argument in favor of gold.

Gold exchange-traded funds (ETFs), dominated by institutional investors, have experienced multiple outflows for seven consecutive months. Some fund managers say the woes will only intensify towards the end of the year when portfolios are reassessed and the opportunity cost of holding gold could come into focus.

Gold lovers think that everything will go well when the economic outlook stabilizes. But it's not stable. "Do you think the world in 2023 will be crazier or less crazy than 2022?" said Shaun Usmar, chief executive officer of Triple Flag Precious Metals, which specializes in precious metals.

Source: Vietnam

Risk Warnings and Disclaimers

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Thomas

The United States, China, Russia, and to some extent, Europe, are generally assessed as the four main geopolitical players in the world. Within this club, the U.S. and Europe are defenders of the so-called "rules-based liberal world order" and the two others are seen as contesting it. In the West, this is seen as a conflict between democracies and authoritarians. But the situation is not so simple.

For a long time, with the U.S. being de facto the global hegemon, this world order functioned under Washington's protection. This brought a lot of benefits, but even good things come to an end. Multipolarism is currently challenging this situation. A rules-based world order is very important for smaller states, but it needs to be upheld by larger powers. Multipolarism does not necessarily jeopardize the rules if a good balance exists. However, today we see increasing fragmentation. Power blocs are forming. Each appears to be dominated by one of the four main players. But this model is a simplification based on past roles. We must think outside the box.

Other powers are emerging

India will soon surpass China as the most populous nation in the world. It also has a fast-growing economy — around 7 percent annually. It is already the fifth-largest economy and could overtake Germany and Japan in a few years to rank third, behind only the U.S. and China. Its military is impressive. It has been a nuclear power for many years. Strategically its greatest challenge is managing confrontation with China. Both powers have been careful so far not to allow unrestrained escalation, although there are regular military confrontations along the Himalayan border. Those skirmishes are taking place in disputed areas in the Himalayas. But Beijing's rising influence over Pakistan as well as its increasing naval presence in the Indian Ocean also pose major challenges for India.

New Delhi is a clever player on the international scene. The U.S. is one of its main partners. Alongside Australia and Japan, both countries belong to the Quad security alliance to contain China. But the government in India does not assume that "the enemy of my enemy is my friend." It remains more pragmatic and does not directly antagonize either Moscow or Beijing.

India will increasingly replace China as the prime manufacturing exporter in the world, assuring the importance of the U.S. and Europe to its economic future.

India is very likely to join the group of major players soon. Russia, simply because of its size and strategic location, will remain a top-tier country, unless it disintegrates. The fate of Russia poses the biggest challenge for Europe.

Other looming challenges for the old continent are the Mediterranean Sea area and Africa. Maintaining its engagement in these locations is a major geopolitical issue for European capitals. Yet another priority is the transatlantic partnership along with Europe's need to establish its own defense and deterrence capabilities to enforce security and interests.

In the past, regional powers aligned with one of the two global powers. This will change as such countries begin to take their fate into their own hands to protect regional interests. This is a promising evolution. A good example is that of Turkey. Ankara defends its needs on its own, much better than it would if it depended on the concepts of Washington, London, Berlin or Paris.

Indonesia is the fourth most populous nation in the world. It faces the same dilemma as all other Southeast Asian countries. Challenged by an assertive China, it keeps security ties with Washington. However, Beijing is its largest trading partner and will remain so. This is generally true for all 10 members of the Association of Southeast Asian Nations. These countries are framing common policies in a healthy way. Both Washington and Beijing lobby in Jakarta, Manila, Kuala Lumpur and Hanoi for their interests. However, Southeast Asian countries will continue to avoid completely siding with one of the two superpowers.

Japan, an economic giant, is now also heavily investing in its military capabilities. It will increasingly follow its own interests.

These situations are just some important examples. There are more. Outstanding statesmanship is needed to balance competing influences and to show that international rules are ultimately advantageous for all and must be upheld. Certainly, organizations such as the G20 have proven to be a failure. The solutions proposed in the G20 forum increase control over individuals and businesses. These freedom-limiting measures find common interest because they allow larger countries to dominate.

Long-term strategies need to be developed. Pragmatism and realism will have to prevail. Ideally, this should be spearheaded by the democratic world. Statesmanship is now in short supply in Europe and the U.S. Unfortunately, we must be prepared for a very bumpy road ahead.

Source: GIS

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