At the beginning of this week, the gold market got off to a good start.
On Monday, December 4, in early Asian trading, COMEX gold futures stood at the US$2,150/ounce mark, and spot gold rose to US$2,144/ounce, both continuing to hit record highs. As of press time, COMEX gold futures rose 2.81%, temporarily trading at US$2,148.4 per ounce, and once rose to US$2,152.3 per ounce.
And this could be the beginning of a rise in gold prices.
What’s the reason for the surge?
In today’s world, the rise and fall of many asset prices is actually a complex monetary phenomenon.
Rather than saying that the price of gold is rising sharply, it is better to say that the price of the US dollar is plummeting.
Because, at the same time, various assets are rising sharply in dollar terms. The RMB is also rising sharply, from the highest of 7.35 to 7.15; Bitcoin is also rising sharply, with one currency exceeding 40,000 US dollars today.
In the financial market, the price of an asset depends on investors’ expectations for the future. The sharp rise in gold prices reflects expectations for the future price of the U.S. dollar.
This expectation is that the Federal Reserve will soon end raising interest rates and begin to cut interest rates.
Although the Federal Reserve has not officially announced that it will end raising interest rates, let alone start to cut interest rates, the capital market will act based on expectations. They will judge based on the information they observe and believe that the interest rate raising cycle is over, so they sell in the market. The U.S. dollar buys gold, which drives up the price of gold.
Federal Reserve Chairman Jerome Powell said on December 1 that although the Fed has made progress on inflation recently, it is still “too early” to predict when it will start cutting interest rates.
He told an event in Atlanta, Georgia: “It is too early to conclude that our restrictive policies have achieved sufficient results or to speculate on when to relax them. We are also prepared to tighten policies further if the time is right. .”
“The FOMC is moving forward cautiously after such strong and swift action as the risks of under-tightening and over-tightening become more balanced,” he added.
But investors in the market don’t see it that way.
According to data from the Chicago Mercantile Exchange Group, futures traders believe that the probability that the Federal Reserve will keep interest rates unchanged for the third consecutive time at the interest rate meeting held on the 12th and 13th is close to 98%.
Judging from the pricing of the interest rate market, the degree of dovish shift in market bets is undoubtedly astonishing. Over the past month, expectations for the Federal Reserve to cut interest rates over the next three years have caused a significant downward shift in the entire interest rate pricing curve.
At present, industry insiders have fully priced in the Federal Reserve’s interest rate cut in May next year, and the probability of betting on an interest rate cut in March next year has exceeded 50%.
This judgment is related to the global economy, including China’s economic development and asset pricing.
Is this business cycle over?
The business cycle is often interpreted as an inherent economic crisis in capitalist society and is one of the major insurmountable bugs of capitalism.
In fact, this is a completely wrong explanation. This round of business cycle just illustrates the essence of business cycle, that is: business cycle is caused by the government’s credit expansion-contraction method.
In the midst of the epidemic in 2020, the Federal Reserve began an unlimited quantitative easing policy, which means printing money in huge amounts, which brought about a global expansion of credit. This is the starting point of the business cycle. What the expansion period brings is false prosperity. Because purchasing power was increased out of nothing, and then monetary contraction and interest rate hikes started in mid-2022, global funds returned to the U.S. dollar, pushing the U.S. dollar exchange rate to strengthen, global investment was sluggish, and demand was sluggish.
In the market, it is possible for entrepreneurs to produce incorrectly. However, there is absolutely no chance that entrepreneurs all over the world will produce simultaneously and incorrectly at the same time. The only cause of business cycles is monetary expansion and contraction.
Only the factor of currency can affect global entrepreneurs and cause most companies around the world to enter into a process of wrong production, then overproduction, and finally layoffs.
The legal currencies of all countries can create such a business cycle domestically, but to create such a business cycle globally, only the US dollar can do it because it is the only world currency in the world.
There are many reasons for the current predicament of China’s economy. Among them, being in the global business cycle caused by the hyper-shrinkage of the US dollar is also one of the key reasons.
However, whether the Federal Reserve can end raising interest rates is really a difficult problem in the world.
Judging from the phenomenon, it is actually difficult to say whether inflation in the United States has been contained.
During this business cycle, many strange phenomena occurred in the United States. Housing prices in the United States have not suffered the same sharp decline as in China.
U.S. home prices have been rising since hitting bottom in January this year. Data from Standard & Poor’s Case-Shiller, an important U.S. house price index, showed on Tuesday that house prices in the country have risen for eight consecutive months, hitting a record high in September.
The U.S. national house price index increased 0.7% month-on-month in September after seasonally adjusting, marking the eighth consecutive month of growth for the index. The house price index rose by 3.9% year-on-year in September, higher than the 2.5% increase in August.
So far this year, U.S. home prices nationwide are up 6.1%, well above the median full-year gain in the index’s more than 35 years of data.
Although there has been a significant decline in transaction volume, it is very abnormal for U.S. housing prices to remain high after raising interest rates for such a long time.
In addition to real estate, U.S. securities asset prices have not fallen much.
However, the market has generally believed that the US economy has reached a soft landing and inflation is about to end. I think it’s too early to say that this business cycle is over.
Hidden worries about the world economy
If we go back to 2019, we can hardly imagine the world today.
At that time, there was no epidemic, the disruption to globalization was not that serious, the Russia-Ukraine war did not break out, the Palestinian-Israeli conflict did not exist, and the Federal Reserve did not print money in huge amounts.
In the past three years, the world has changed too much, and China has also changed too much. In one sentence, globalization has seriously degraded.
When people from all over the world are in a market and rely on each other and cooperate with each other, even if each country still has a lot of market controls, the power of prosperity is greater than the power of control. What we see is still a prosperous world.
However, when globalization seriously degrades, markets will be segmented, cooperation will be blocked, and exchanges will be suspended in many areas. At this time, the production capabilities of various countries will be severely hit.
The more powerful thing that destroys the power of production is the expansion and contraction of money. It leads enterprises to the wrong production, and a large amount of capital that should be produced to meet consumer demand is directed to the wrong direction and wasted for no reason, thus reducing the capital for future economic expansion.
The power of this blow cannot be analyzed quantitatively. When this force becomes strong enough to overwhelm the new productive forces in the market, the world economy will enter a recession.
This is why inflation in the United States still exists despite the fact that the Federal Reserve has been raising interest rates for nearly two years.
The growth rate of M2 money supply for the past three quarters has been negative, which means that the amount of available money is shrinking rapidly. The only time in the past 110 years that the U.S. money supply has declined sharply was during the depths of the Great Depression in the early 1930s.
However, despite the reduction in the money supply across the United States, prices are still rising. Families across the United States are facing dire circumstances, with more and more people depleting their savings to pay for living expenses.
This fact shows that productivity in the United States and around the world has been severely hit. It is productivity that ultimately determines prices. Only when productivity increases day by day can prices be reduced.
Of course, I cannot draw a conclusion that the U.S. economy will definitely get worse next year. This is something only God can do.
Over-issuance of currency and blocking trade around the world are all anti-market measures and will inevitably have consequences, but God knows how serious the consequences will be.
I just think that the optimism in the market may be premature, and there is still a question mark as to whether this business cycle is over. It’s not surprising that the U.S. economy has entered a larger recession.
If the U.S. economy really has a soft landing, it will be a blessing for the world. In the era of global integration, no country can survive alone. When the United States sneezes, the whole world catches a cold. This is the current reality.
If China wants to reduce the degree of harm it suffers from the global business cycle, there is only one way, and that is to make the forces that are beneficial to production greater than the forces that destroy production. However, this is very difficult.