Two cities are besieged. One by officials, activists and business leaders, while the second by bloodthirsty politicians. Will anyone escape? No one knows, but the gold coin has always helped bribe the guards to look the other way...

Just take a look at how it held value recently:

Gold Report from Davos

The 2020 World Economic Forum in Davos, Switzerland, has begun. What has happened there so far?

• Treasury Secretary Steven Mnuchin threatened retaliatory tariffs on automobile imports if the issue of digital tax wasn't resolved. The threat was effective as President Emmanuel Macron agreed to suspend a French tax on American technology giants in exchange for a postponement of threatened retaliatory tariffs on French goods by the Trump administration. Another conflict resolved, while big U.S. companies' profits saved - it's bad news for gold.
• President Trump again criticized the Fed for its monetary policy and called for negative interest rates. The White House's pressure on the U.S. central bank can prompt the Fed to be more dovish than hawkish, which is good for the yellow metal. The negative interest rates, if introduced, should be also be positive for gold, which likes the environment of low real interest rates.
• The IMF lowered its forecast of global economic growth for 2020 from 3.4 percent (which was forecasted in October 2019) to 3.3 percent and lowered its forecast for the following year from 3.6 to 3.4 percent. But these figures are still higher than 2.9 percent of the growth achieved in 2019, when the pace of global GDP growth was the lowest since the last financial crisis. What is important here is that the acceleration in the global growth is expected to be driven by the emerging markets. It means that we could see downward pressure on the U.S. dollar, which should be positive for the price of gold.
• The interesting discrepancy regarding the climate change emerged between the world of business and the world of leaders and the so-called experts. For the latter, climate change is the most eminent long-term risk the world faces. And for the first time, the Global Risks Report published by the World Economic Forum was dominated by the environment. Meanwhile, the survey by PwC showed that "climate change and environmental damage" were not even included by the CEOs in the first ten biggest threats to their companies' growth prospects. Their number one worry was overregulation, not environment. In short, the markets do not believe in climate catastrophe. Given that the pseudoecologists often exaggerate and the bleak warnings about the future have been historically so wide off the mark (it didn't start with Al Gore - remember the overpopulation hysteria or the acid rains scare?), it should not be surprising that the markets are skeptical. But if they are wrong - and sometimes the markets are wrong, and economic crises follow - we could see some painful adjustments in the future, which should be positive for the gold as the ultimate safe-haven asset.

Gold Report from Washington, D.C.

Meanwhile in Washington, D.C., the Trump impeachment process has begun. However, it hasn't brought anything special so far. Lead House impeachment manager Adam Schiff started the proceedings, talking two hours in the Senate. Then, Trump's defense team and the Democrats debated for more than 12 hours over the rules of the trial. The debate was intense, so Chief Justice John Roberts warned both teams about using rhetoric inappropriate for an impeachment trial. But let's be honest, the whole trial is a theatre. The Republicans seem to be united and the Senate is not going to convict Trump. According to the PredictIt, the odds for conviction are merely 9 percent. The markets do not forecast that Trump will resign before the end of his first term. So, unless the Republicans lose all their political instincts and convict the president they support, which is very unlikely, the impeachment trial should not materially affect the gold prices.

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Latest economic data were published last week, indicating that the U.S. economy remains on solid footing. Gold prices held up relatively well - but can it last?

Recent U.S. Economic Data Show General Health

Last week was full of economic reports. Let's analyze them. First, the CPI rose 0.2 percent in December, slightly below expectations and the 0.3-percent increase in November. But as the chart below shows, the CPI (and the core CPI as well) rose 2.3 percent over the whole 2019, which was the largest advance since the 3.0-percent rise in 2011. Yet inflation is still quite low by historical standards.

_{Chart 1: Annual percentage change in the US CPI (green line) and the core CPI (red line) from January 2015 to December 2019.}

The wholesale inflation measured by the PPI rose just 1.3 percent last year, half as much as it did in 2018. It means that inflationary pressures are limited in the U.S. economy. Moreover, the PCEPI, the Fed's preferred inflation gauge, rose just 1.5 percent over the twelve months ending in November. The muted inflation implies that it is unlikely the Fed will hike the federal funds rate anytime soon. Although gold likes high and accelerating inflation, the U.S. central bank keeping interest rates on hold is positive for the gold prices.

Second, the Fed's Beige Book shows that the U.S. economic activity continued to expand "modestly" over the last six weeks of 2019. What is important is that the expectations of the near-term outlook "remained modestly favorable". However, the Beige Book reports also job cuts in manufacturing, transportation and energy sectors, which is in line with the last report on the nonfarm payrolls.

Third, when it comes to the industrial sector, industrial productionfell 0.3 percent in December, the third decline in the past four months. In the whole last year, the output fell 1 percent. It shows that the sector is still weak, hurt by the trade wars, but excluding the motor vehicle sector, factory output rose 0.5 percent, so we could perhaps see revival in the near future.

Fourth, retail sales increased 0.3 percent in December and 5.8 percent in the whole 2019, slightly above the average for the past 30 years. It shows that the consumer spending remains solid.

Last but not least, the privately-owned housing starts in December came at a seasonally adjusted annual rate of 1,608,000, which was 17 percent above November and 41 percent above December 2018. The new residential construction reached a 13-year high, but it was mainly because of the warmer-than-usual temperatures. The change in building permits, which are less sensitive to weather, was weaker.

Implications for Gold

Leaving the industrial production aside, last week's economic reports were generally positive, showing that the U.S. economy is still solid. It keeps looking like a goldilocks economy: inflation is low, the pace of economic growth is moderate, the retail sales and the housing market are solid. Theoretically, gold should suffer in face of positive economic news.

Indeed, as we have seen last week not only good economic reports, but also two important developments for the global economy. First, the potentially dangerous conflict between the U.S. and Iran deescalated as quickly as it appeared. Second, the U.S. and China signed the 'phase one' accord in their trade dispute. In consequence, the U.S. stock market reached a new all-time record.

So, one could reasonably expect the bearish trend in the gold market. However, the yellow metal held steady, which is a solid performance given the headwinds that occurred last week. Why was gold so resilient? One explanation might be that investors worry about the long-term consequences of the recent ultra-easy monetary policy. After all, even central bankers worry! Dallas Fed President Robert Kaplan said last week that the recent Fed's actions were contributing to elevated risk asset valuations as they have given investors green light to buy risky assets and this is a concern. Anyway, gold's resilience in face of headwinds might be a bullish sign.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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Last Thursday, the New York Fed added more than $80 billion in fresh temporary liquidity to the financial markets. Move over folks, nothing to see here - but what does it mean for gold prices?

Repo Crisis Is Not Over

Last week on Thursday, the New York Fed added $83.1 billion in temporary liquidity to financial markets. And banks' demand for liquidity flared up again on Tuesday. If you haven't heard of it, don't worry - almost no one did. After all, journalism is about covering important stories... with a pillow!

The Fed not only injected some fresh liquidity, but also noted that it "may keep adding temporary money to markets for longer than policy makers had expected in September," at least through April. So much for the normalization of monetary policy...

Please look at the chart below. It shows the Fed's balance sheet in 2019. Although the U.S. central bank has managed to shrink its assets a bit compared to the peak of $4.516 trillion from early 2015, the quantitative tightening has ended quickly.

_{Chart 1: Fed's balance sheet in 2019 in trillion of US dollars.}

Last September, in a response to the repo crisis, the Fed started again buying assets (but do not call it quantitative easing, this is, wink, wink, something different). Actually, the recent liquidity injections have already reversed all the tightening that occurred earlier in 2019. The Fed added more than $400 billion to its balance sheet, rasising it from the lows of $3.76 trillion up to $4.165 trillion at the end of December. And Thursday's move will add even more to the Fed's balance sheet!

What is important is that the liquidity shortage in the U.S. repo market was not a one-off event, but that it has become a structural problem. As the December report from the Bank of International Settlements explains,

U.S. repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors.

To simplify, there is too little cash and too many government bonds. Well, traders can thank President Trump who has increased significantly the fiscal deficit. As the Congressional Budget Office estimated last week, the federal deficit rose 12 percent in the first quarter of fiscal year 2020 compared to the same period last year. Larger deficit means more Treasuries coming into the market, putting an upward pressure on interest rates.

Implications for Gold

The additional cash injections from the Fed are fundamentally positive for the gold market. First, they act similarly to an additional interest rate cut. Second, they suggest that the financial market is less liquid and healthy that it might seem at first sight. They show that the liquidity shortage has not ended - and that it could trigger an important turmoil in 2020. Gold should shine then!

And let's not forget about the crazy fiscal policy. So, it might be the case that 2020 will be, after all, better for the gold prices than we previously thought. We expected less insane fiscal policy, but with such huge deficits, the macroeconomic outlook for gold looks more optimistic. However, it's a bit too early to radically change our view - we will return to this issue, as we always do, in the new edition of the Gold Market Overview. Stay tuned!

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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The nonfarm payrolls came below expectations in December. That's one month - but what about the full quarter and the year? What does a thorough examination of the jobs market mean for the gold prices?

December Payrolls Below Expectations

The U.S. created 145,000 jobs in December, following an increase of 256,000 in November (after a downward revision), as the chart below shows. The nonfarm payrolls came below expectations, as the analysts forecasted 165,000 new jobs. The gains were widespread, but with a leading role of retail trade (+41,200), leisure and hospitality (+40,000), and education and health services (+36,000). Manufacturing again cut jobs (-12,000), which means that industrial recession has not ended. Mining and transportation and warehousing also dismissed workers.

Chart 1: U.S. nonfarm payrolls (green bars, left axis, change in thousands of persons) and the unemployment rate (red line, right axis, %) from January 2015 to December 2019.

The surprisingly weak headline number was accompanied by downward revisions in November and October. Counting these, employment gains in these two months combined were 14,000 lower than previously reported. Consequently, the job gains have averaged 184,000 per month over the last three months, and 175,000 so far this year - still pretty good but significantly below the average monthly gain of 223,000 in 2018. In consequence, the payroll employment rose by 2.1 million in 2019, down from a gain of 2.7 million in 2018.

Although the pace of job creation has slowed down, the unemployment rate remained unchanged at 3.5, as the chart above shows. So, it is still at the 50-year low and does not send any recessionary warnings.

Last but not least, the low unemployment rate did not translate into significantly higher paychecks. The average hourly earnings for all employees on private nonfarm payrolls have increased only 2.9 percent over the last twelve months, following 3.1-percent rise in November. Actually, the pace of hourly wage growth fell below 3 percent for the first time since September 2018.

To sum up, although the December jobs report surprised the markets on the negative side, the U.S. labor market in 2019 was quite solid. While hiring has slowed, the unemployment decreased from 3.9 to 3.5 percent over the year, while the number of unemployed persons declined from 6.3 to 5.8 million. What is perhaps a bit astonishing is that the wage growth fell to 2.9 percent, which means that despite the ninth straight year of job creation and very low unemployment rate, the wage pressure is still moderate.

Implications for Gold

But the U.S. labor market is still doing relatively well, which - combined with the lack of strong wage pressure - should make the Fed to keep the interest rates unchanged in the foreseeable future. The fact that the U.S. central bank has no reason to hike the federal funds rate is positive for the gold prices. And indeed, the yellow metal rose on Friday, and weaker-than-expected U.S. jobs data could help here.

But beware! The resilience of the labor market also reduces the odds for a dovish move. Actually, some traders have started to price in the possibility of the interest rate hike by the end of 2020, which could harm gold. Indeed, the minutes from the last FOMC meeting indicate that the Fed officials become more optimistic about the U.S. economy in December as trade tensions with China eased, while the global economy stabilized somewhat. Thus,

while many saw the risks as tilted somewhat to the downside, some risks were seen to have eased over recent months. In particular, there were some tentative signs that trade tensions with China were easing, and the probability of a no-deal Brexit was judged to have lessened further. In addition, there were indications that the prospects for global economic growth may be stabilizing.

And the fresh remarks from the Fed officials have become even more optimistic since their last meeting. We do not expect them to return to a hawkish mode - especially in light of the liquidity crisis in the repo market - but the change in rhetoric should not be neglected by the gold investors.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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We didn't have to wait long for Iran's response. After the missile attack on U.S. bases in Iraq, gold briefly soared above $1,600. What should we expect next?

Iran Retaliates, Gold Rallies

On Tuesday, I wrote that "given that Soleimani was widely seen as the second most powerful figure in Iran, we should expect a response." And, indeed, it arrived before too long. On Wednesday, just hours after the funeral of the Iranian general, Iran launched a missile attack on two military bases in Iraq housing U.S. troops.

In the last edition of the Fundamental Gold Report, I also wrote "the elevated geopolitical risks may support the gold prices, at least in the short-term." Indeed, gold got support - and what a strong one! Please take a look at the chart below. As one can see, the price of gold spiked to above $1,610, the highest level since February 2013.

_{Chart 1: Gold prices from January 7 to January 9, 2020.}

However, the rally was not sustainable. When the dust settled, it turned out that there were no casualties, and gold returned below $1,600. Moreover, both countries sent signals that they did not go to war. Iran's foreign minister said that Iran had taken "proportional measures in self-defense" and didn't seek further escalation of the conflict. Some analysts speculate that the said Iranian officials even warned the U.S. the strikes were coming, as they did not want to kill Americans, but rather to appease Iranian citizens calling for revenge. Meanwhile, President Trump tweeted that "all is well" in the immediate aftermath of the attack. Later, he suggested that the U.S. is not planning to retaliate:

No Americans were harmed in last night's attack by the Iranian regime. We suffered no casualties. All of our soldiers are safe, and only minimal damage was sustained at our military bases (...) Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world (...) The fact that we have this great military and equipment, however, does not mean we have to use it. We do not want to use it. American strength, both military and economic, is the best deterrent.

The whole statement indicated an important de-escalation in the conflict, which created downward pressure for gold prices. The price of the yellow metal has already decreased below $1,550.

Implications for Gold

What does it all imply for the U.S.-Iran conflict and the future of gold? Well, although the tensions have been put on the back burner somewhat, it would be naïve to think that Iran is done retaliating. The recent attacks were just a first strike, or a symbolic response necessary to save face after Soleimani's death. But confrontation will almost certainly explode again at some point this year. So, gold could receive support then.

However, while not minimizing the importance of geopolitical risks for investing in precious metals, I am of the opinion that macroeconomic factors are far more impactful when investing long-term. The recent developments in Iraq do not change the fundamental outlook for gold. And it has deteriorated somewhat, at least when compared to 2019. Thus, while not being a bear, I expect that after a solid beginning of the year, gold may struggle somewhat.

If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

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