macro notes: japan, shutdowns and smug gold hoarding indian aunties

Gollum's precious metal (Gold)

As if my mum pestering me to invest in gold wasn't enough, prices decided to shoot up "to the moon", as r/WSB likes to call it, finally breaking the $4000 mark. To be quite fair, a lot of commodity desks across the street had called this one, but what's interesting is the pace and the fact that there's a lot of calls for a $6000 (50%!) target by late 2026. JP's desk had some interesting comments on this (marked the interesting sections in bold):

It took almost 35 years (since the US abandoned the gold standard) for gold to reach the $1000 mark (see helpful image below), 10 more years for $2000, and rose by 100% in just ~200 days.

We made this so structurally bullish call within the commodity sector heading into this year. Gold remained our top bullish pick for a short consecutive year. But as you pointed out, you know, like, just look at how fast this rally was happening and just some numbers there. So the US abandoned the gold standard in 1971, and then it takes about thirty eight years for gold to surpass this thousand dollar mark in March 2008 during the global financial crisis. So then the $2,000 milestone was reached in August 2020.
You know, clearly, the economic uncertainty around the COVID pandemic, but it was a twelve year journey, just to double from the value of thousand. So the timeline then has accelerated with less than five years needed to reach the third milestone that was March. Yes. 02/2025, gold prices broke through the $3,000 barrier. And in wine was the low of diminishing return, of course, as you just pointed out, the swift action from 3,000 to 4,000 this week occurred in just two hundred and seven days.
So it's you know, clearly, the line is you know, the the timeline is accelerating very fast. So our goal or our target the next target is the 6,000, target case for for late two thousand, 02/2008. So what is behind? So you're absolutely correct. The, you know, the original code that we made was the debasement rate because if you take a look, you know, over the two decades leading up to 02/2022, gold valuation was closely linked to The US real yield, as you absolutely correctly pointed out, and was institutional and retail investor investment flow serving as the primary driver of the price movement.
So the relationship between the US real yields and gold accounted for nearly 90% of the variation in the gold prices. Yes. And we we have been talking about that for, you know, many years already, 25 basis points move in The US real yield resulted in the $80 move in the gold price in the opposite direction. However, this relationship completely broke down in the 2022. In our view, that was the decision by the US Treasury to freeze $300,000,000,000 of sovereign Russian foreign reserves in early two thousand twenty two right after the Russia invades Ukraine.
This was a very successful move despite that only 5,000,000,000 of this 300,000,000,000 were located in United States. It upended the global financial order that had prevailed over the past fifty years, and it's structurally changed the demand for gold. So what happened at that time is that the second buyer of gold occurred, yes, the global central banks, which historically provided the floor to the gold price because they were buying low. They were selling high. They rarely propelled prices upwards, but they suddenly emerged as a powerful price in elastic, second source of demand.
And as you pointed out, that's the relationship between the real yields and gold completely broke down at that time. Similar to what we're having right now, we had the US real year treasury, moving up, you know, in that period 02/2022, early two thousand twenty three, but at the same time, we had a very strong move in the gold price as well. Right now for 02/2025, what we believe is that a third buyer is emerging. And so what we believe is that the foreign sovereign wealth funds and reserve managers or the foreign holders of The US assets appear to be reassessing the risk reward profile of holding US assets. And what we calculated is that even a modest reallocation, just 0.5%, yes, 50 basis points of the $60,000,000,000,000 in US assets held by foreign investors.
If that moves into gold, that would be enough to move the gold price from the current levels to about $6,000 by early late two thousand twenty eight or early two thousand twenty nine. And finally, what is the primary reason for that is the fact that gold supply has proven to be price and elastic. So very, very strange for commodities markets. Commodities markets, the price is there, supply is there. But what we're observing right now is that we have three major buyers of of gold.
Yes. Three major sources of demand, but there are effectively no significant sellers left. And so the main reason for that is gold market is very small.
...
All the gold ever mined in the history of humankind can fit on one soccer field to the depths of just one meter. That's it. So we have a lot of buyers.
We have no sellers, and we have a price in elastic supply. That's what moves the gold price.

Iron Lady's malleability (Takaichi)

Takaichi's surprise win tanked the Yen but rallied the Nikkei to record levels. Her position's quite up in the air, with Komeito, a long standing coalition partner of the LDP, intended to dissolve its coalition with LDP. This means that Takaiji now needs even more votes to become prime minister. There's definitely a lot of uncertainity there, but what's clear is that she can't be too attached to her ideal world of fiscal openness and lowered interest rates. Still seems like the BOJ will hike (almost definitely by the end of the year, if not October).

USD Pain Correlation ATH

The big pain trade of the week, with the DXY making the EUR bulls piss their pants. Despite the government shutdown still continuing (with major pain points coming up on first paychecks being missed), other issues in DM make it seem like the best of the worst. Although that's still up in the air with the return of the Great Tariff

Others

Looks like MXN and high USD beta currencies are projected to do well; AUD for example.

AI

The bubble talk is pretty mainstream now, but I found this tweet (well, a viral one) pretty interesting:

Favourite Tweets