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Valuing The Gold Price

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Valuing The Gold Price

Charles Gave
28 Mar 2024
Plenty of people say the value of gold is psychologically rooted in the mind of the beholder and the only objective way to measure it is with reference to extraction costs. It is true that such a production-cost approach may indicate the lower band for the gold price, however it says nothing about the upper band, for which there is no objective measure, argues Charles. In this piece, he suggests a different way of thinking about the problem.
From Headwinds To Tailwinds

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From Headwinds To Tailwinds

Cedric Gemehl
28 Mar 2024
The dark clouds that have hung over the eurozone’s economy for the last year and more are finally clearing. After a year of stagnation, the three main economic headwinds that held back growth in 2023 have abated, with two now turning into tailwinds. As a result a reacceleration in growth now looks probable in the second half of 2024.

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Video: Towards A World Of Trade Fragmentation

Yanmei Xie
27 Mar 2024
As China’s government has doubled down on industrial development as its driver of growth, economies elsewhere have grown increasingly concerned about their ability to compete as Chinese producers move rapidly up the value chain. In this short video interview, Yanmei Xie assesses the risks posed by rising protectionism, and identifies potential winners and losers.

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India Macro Update: Shifting Into Overdrive

Udith Sikand, Tom Miller
27 Mar 2024
India is cementing itself as a reliable engine of growth for the global economy, state Udith and Tom. Although headline GDP figures exaggerate the robustness of India’s growth, there is no denying the favorable tailwinds Private sector capital spending, bonds, and to a lesser extent the rupee, should offer upside in the near term. By contrast, the prospects for Indian stocks—where regulators are looking to curb signs of excess—are less rosy.

The global view

Valuing The Gold Price
Plenty of people say the value of gold is psychologically rooted in the mind of the beholder and the only objective way to measure it is with reference to extraction costs. It is true that such a production-cost approach may indicate the lower band for the gold price, however it says nothing about the upper band, for which there is no objective measure, argues Charles. In this piece, he suggests a different way of thinking about the problem.
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Meshing All The Moving Parts
There is a lot to take on board in the news right now, with crypto prices soaring, the Mag 7 stalling, the US dollar weakening, US inflation reaccelerating, the Bank of Japan looking to shift policy, gold in a renewed bull market...and fitting it all into one handy narrative is a tall ask. Louis attempts to tie it all together.
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Where Is All The Money Coming From?
It’s the big conundrum of the day: despite the Federal Reserve’s tightening, and the US Treasury’s ever-expanding debt issuance, risk assets—tech stocks, crypto, gold—are behaving as if the liquidity spigot will never run dry. Louis examines the sources of the liquidity propelling today’s bull markets, and concludes that the flow might dwindle in the coming months, leading to higher risk-asset volatility.
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Webinar: Asset Allocation For The Ages
In recent years, Charles Gave and Didier Darcet have headed an initiative in Paris to develop a more perfect form of asset allocation. In this webinar, they review how their asset allocation strategy works during phase changes in the economic environment, as now seems to be the case.
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Test Your Knowledge
Between 2015 and 2021, China signed infrastructure investment deals with South East Asian countries worth US$84bn. By the end of 2021, how much of this funding had actually been disbursed?
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Chart of the Week

Week 13, 2024
Typically, emerging-market currencies are more sensitive to swings in global risk sentiment than their developed-market counterparts. But this time around, EM currencies have maintained their stability relative to their DM peers. One important driver of this newfound resilience in EMs is improved policy credibility. EMs were ahead of the curve in addressing inflation in this cycle. Thanks to the early hawkish tilt, many EM central banks are already beginning to cut rates even though the Fed and other DM central banks are still waiting for a clearer sign to begin easing.
Open Chart

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Essential Reading: A Book For Every Week Of The Year

Gavekal is often asked for a recommended reading list. So, here it is: a book a week that everyone interested in the world of macro investing—whether hoary veteran or eager apprentice—can benefit from reading.

US economy & markets

Searching For Growth Drivers
What could spur another US growth surge in 2024? Kai Xian identifies four potential drivers, with two of them are likely to cause an inflationary boom, while the other two would probably help extend the current disinflationary boom.
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Dovish Guidance On Rates And QT
The Federal Reserve provided fresh policy guidance yesterday and investors liked what they heard. The S&P 500, Nasdaq, and gold prices all broke to all-time highs. Crypto-currencies bounced. The price of Treasury bills and notes ticked up, while the DXY dollar index ticked down. But there are threats to this outlook and other reasons to temper excitement.
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The Drying Out Of The RRP
Since April 1, 2023, the value of the Fed’s securities book has fallen -11%, due to persistent quantitative tightening, while the S&P 500 has risen 28%. So where has the liquidity helping to push the market higher come from? One source has been the Fed’s reverse repo facility which has been a gusher for the best part of a year. In this piece, Will asks what the effect will be as the facility starts to run dry.
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Why Did US Equities Rally On An Upside Inflation Surprise?
These days, you would expect investors to be hypersensitive to inflation data. Interest rates are elevated, equity valuations are stretched, and the Federal Reserve is saying it will cut rates only if the inflation data support cuts. Yet February’s CPI release surprised to the upside on Tuesday, and the S&P 500 rallied 1.1% to a new all-time high, led by tech stocks. Why did the market brush off this “bad” CPI print? Will reviews the possibilities.
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Webinar: Animal Spirits In The Emerging Markets

Udith Sikand, Thomas Gatley, Arthur Kroeber
22 Mar 2024
While US tech stocks have been getting all the publicity, capital has quietly been flowing into emerging market investments over recent months. To gauge market prospects over the rest of 2024, Udith Sikand examined the macroeconomic outlook for the major emerging markets ex-China, while Thomas Gatley assessed the chances of a revival of animal spirits in the Middle Kingdom.

Emerging markets

Webinar: Animal Spirits In The Emerging Markets
While US tech stocks have been getting all the publicity, capital has quietly been flowing into emerging market investments over recent months. To gauge market prospects over the rest of 2024, Udith Sikand examined the macroeconomic outlook for the major emerging markets ex-China, while Thomas Gatley assessed the chances of a revival of animal spirits in the Middle Kingdom.
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EM Debt Market Issuance Cranks Up
Heightened US bond market volatility has often coincided with emerging-market assets incurring higher risk premiums. That was then. This cycle has differed since emerging markets have survived the most aggressive Fed tightening cycle in a generation with minimal fuss. So what accounts for EMs’ apparent new-found resilience?
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The China-EM Equity Decoupling
Global investors have long treated Chinese and other emerging-market equities as a single asset class. Those days may now be over. Thomas and Udith examine why declining US treasury yields and a weakening dollar have spurred capital flows into emerging markets, but foreign investors continue to pull money out of Chinese equity markets.
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The Near Term Challenge For EMs
Emerging markets have generally avoided the economic volatility that comes with a Federal Reserve tightening cycle. Having stuck to orthodox fiscal and monetary policies, such economies have improved macro prospects and can potentially benefit from an asset price rerating. In the medium term, this outcome is likely but in the near term EMs may not offer a safe harbor in a potentially brewing global storm.
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Latest video

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Video: Towards A World Of Trade Fragmentation

Yanmei Xie
27 Mar 2024
As China’s government has doubled down on industrial development as its driver of growth, economies elsewhere have grown increasingly concerned about their ability to compete as Chinese producers move rapidly up the value chain. In this short video interview, Yanmei Xie assesses the risks posed by rising protectionism, and identifies potential winners and losers.

Middle East

India Flexes Its Muscles In The Middle East
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Video: Gulf States In Transition
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China Misses A Trick In The Middle East
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The Long And Short Of Energy Risk
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China’s Red Sea Calculus
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The Middle Eastern Kink In Global Supply Chains
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India chartbook

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India Macro Update: Shifting Into Overdrive

Udith Sikand, Tom Miller
27 Mar 2024
India is cementing itself as a reliable engine of growth for the global economy, state Udith and Tom. Although headline GDP figures exaggerate the robustness of India’s growth, there is no denying the favorable tailwinds Private sector capital spending, bonds, and to a lesser extent the rupee, should offer upside in the near term. By contrast, the prospects for Indian stocks—where regulators are looking to curb signs of excess—are less rosy.

China chartbook

Gavekal Dragonomics

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Macro Update: Another Supply-Side Stimulus

Andrew Batson, Dragonomics Team
26 Jan 2024
China managed to avoid entering a full-on deflationary spiral in 2023, but prices are still falling, growth is fragile and confidence is poor. Hopes for 2024 are pinned mostly on the government’s promises of more supply-side stimulus, yet this strategy poses its own challenges. In our latest quarterly chartbook, the Dragonomics team diagnoses the current economic difficulties and analyzes the implications of the response.

Europe's economy

From Headwinds To Tailwinds
The dark clouds that have hung over the eurozone’s economy for the last year and more are finally clearing. After a year of stagnation, the three main economic headwinds that held back growth in 2023 have abated, with two now turning into tailwinds. As a result a reacceleration in growth now looks probable in the second half of 2024.
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This Swiss Dove Is No Canary
This week has seen a barrage of evidence that central banks in rich economies are tilting into easing mode. The Swiss National Bank lowered its policy rate to 1.5% and suggested more cuts will follow at its meetings in June and September. The question is whether where the Swiss just went, others will quickly follow, spurring a faster-than expected global easing cycle as inflationary forces fade.
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Sabotaging Your Successor, Tory-Style
By scrapping tax privileges for “non-dom” wealthy foreign residents and cutting payroll taxes, the UK’s Conservative government has sought to paralyze its probable Labour successor’s fiscal policy by stealing its main revenue-raising measure and devoting the funds to tax cuts rather than spending increases, argues Anatole. A Labour government could evade this fiscal straitjacket, but may lack the good sense to make the necessary reforms.
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Introducing The S Club 7
Nothing better captures the market’s imagination or more neatly encapsulates a current investment theme than a nifty nickname or acronym. Just consider the focus on the “Magnificent 7,” as a useful shorthand for the concentration of US equity market performance among a handful of megacap stocks seen as leaders of the artificial intelligence boom. Not to be outdone in this department, Cedric introduces the “S Club 7.”
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Oil & commodities

Trump 2
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The Long And Short Of Energy Risk
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China’s Red Sea Calculus
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Video: The Middle Eastern Conflict Metastasizes
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When Yields And Energy Prices Rise At The Same Time
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The Bear Markets Of 2023: The Last Shall Be The First?
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China tech

Big Tech’s Rearguard Action
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TikTok, Big Tech And Risk Premiums
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Video: The Importance Of TikTok
The Coming Price War In Chips
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Geopolitical Uncertainty And Record Valuations On Semi Stocks
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An Unusual Friday
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The Inflation Question

Why Did US Equities Rally On An Upside Inflation Surprise?
These days, you would expect investors to be hypersensitive to inflation data. Interest rates are elevated, equity valuations are stretched, and the Federal Reserve is saying it will cut rates only if the inflation data support cuts. Yet February’s CPI release surprised to the upside on Tuesday, and the S&P 500 rallied 1.1% to a new all-time high, led by tech stocks. Why did the market brush off this “bad” CPI print? Will reviews the possibilities.
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What Happened To My “Inflation Shock”?
Last Wednesday Anatole wrote that “investors should prepare for a shock” when the US PCE inflation data for January was published the following day. He was right about inflation, but very wrong about the shock. He then suggests six broad explanations for the market’s indifference to this adverse inflation data, each implying a different investment conclusion.
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Housing And Another US Inflation Shock
Investors should prepare for a shock on Thursday when the US BEA publishes its monthly PCE index, the gauge used by the Federal Reserve for its 2% “price stability” target. If the consensus turns out to be right, as Anatole believes it will—because much of the PCE information was already released in the CPI and PPI figures two weeks ago—bonds all over the world will probably suffer a big selloff.
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Webinar: Reading The Market’s Conflicting Signals
So far in 2024, yields have rebounded on stronger-than-expected growth and inflation, along with heavy issuance by the US Treasury. Yet the rally in equities has continued undismayed, with especially strong gains in big US growth stocks. With the bond market and equity market sending conflicting signals, Anatole and Louis examined the macro and market scenarios for the rest of the year and drew conclusions for asset allocation.
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From the archives: oldies but goodies

Deficit Deniers Of The World Unite
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Deficit Deniers Of The World Unite

Anatole Kaletsky
In our politically correct age the pressure to bow down before certain popularly accepted and apparently proven “truths” can be overwhelming. In the aftermath of the US elections, two such nostrums are unnecessarily vexing investors—the urgency of deficit reduction and fear of higher taxes. I believe that both of these obsessions will soon be forgotten.
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Are We Entering into Revolutionary Times?
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Are We Entering into Revolutionary Times?

Louis-Vincent Gave
The role of a society’s elite is to rise to the challenges of the times, and find solutions fitting to those times, even if this involves a radical break with the past. But the modus operandi for most leaders is to try and maintain the status quo. But if the problems are large enough, this does not work, and the same challenges reappear until either a solution is found, the elite is replaced by a new elite, or the country, system or civilization disappears.
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The High Cost Of Free Money
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The High Cost Of Free Money

Charles Gave
Perhaps the most famous economic law is the one that there is no such thing as a free lunch. By keeping US short rates at abnormally low levels beyond the financial crisis and as growth bounces back beyond the dreams of the wildest optimists, the Fed increasingly seems to be trying to ‘feed the US economy for nothing’. This is worrying, for extended periods of cheap money typically come back with a hefty price tag.
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