Bullish Investors and Bearish Central Banks

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Over the past month, several new developments have impacted the global markets. Most significant in this month’s compilation includes gold surpassing $1900/oz, the US economy and the looming debt ceiling crisis, Chinese Covid and population data figures being released and the effectiveness of the G7 cap on Russian oil.

Gold Price Outlook           

With the gold prices continuing to hover above $1900/oz this month, the yellow metal has defied the expectations of more bearish investors. Despite reassurances from both the FED and the ECB that interest rates would continue to be raised and kept above 4-5% until inflation comes down, investors are still highly sceptical.

Overall, there is a positive sentiment in the markets, and the more bullish investors expect rates to start being cut months ahead of the FED’s announced timeline. This has provided a major boost to gold as the expectations for the continuation of a zero positive yield environment is still predicted for the months ahead by some investors.

Currently, investors expect a 0.25% hike in rates from the FED on 1 February; however, some investors expect a 0.5% rate rise. However, even a 50 base point rate increase to 5% will not surpass the US core CPI, which stands at 5.7%, and is forecast to stay at a similar level next month. It appears that the yellow metal will not be outshined just yet.

US Economy and the Debt Ceiling Dilemma

The US once more faces another Debt Ceiling crisis, as the government is projected to hit the maximum amount of money it is allowed to borrow by the Congress. Ordinarily, the House of Representatives would raise the historically ceremonial ceiling to prevent a default. However, with the Republicans now in charge in the House, the Biden administration will have to agree to their demands for heavy spending cuts in order to not throw the country into economic turmoil due to a technical default.

The debt ceiling currently stands at $31.4tn, and according to Janet Yellen, can be sustained until June with special measures that are estimated to cost the US more than a billion dollars. The worst case scenario is that unless the two politically divided sides can agree by that deadline, the US runs the real risk of an artificially caused default which would be its first in history.

China’s Population and Covid Crises

It has been reported this month by China’s National Bureau of Statistics that for the first time since 1961, China’s population has declined by 850,000. The reversal of the one child policy in 2015 did not remedy the situation and Covid has certainly had a negative impact. The population is now expected to continue declining, and is projected to fall by 100 million by 2050.

This is consequential for the reason that China’s workforce appears to have entered into an even steeper downturn. The impacts of the decline will be felt in earnest in the coming years, threatening the country’s current status as the world’s factory with its cheap, young and inexhaustible labour force. The precipitous decline is projected to reduce China’s working age population from around 1 billion to only 700 million by the middle of this century.

As the Chinese Lunar New Year approaches, the Covid cases in the country are expected to sharply rise with an estimated 2 billion trips across the country made for the first time since the pandemic first began in Wuhan. The country’s fragile health system has come under further pressure with rural areas especially coming under threat. If the health situation gets out of control, it is most probable that we will see a significant impact on the Chinese economy.

The G7 Price Cap on Russian Oil

When the G7 and the EU introduced a $60 price cap on Russian oil in December last year, most economists and analysts were sceptical of its effectiveness. However, two months on, Russian oil is now even trading below the agreed price cap.  The reason for its efficacy is that almost all shipping insurance, which is a necessity for all vessels, is provided by US and European firms who are required to obey the new regulations.

One reason for the fall of prices below the price cap is that importing Russian oil has become even more difficult than it was already as the paperwork required has significantly increased, which has even resulted in a queue in the Turkish straits. It is also important to stress that the EU has banned all Russian crude oil imports, and the combination of both the G7 price cap and the embargo has caused Russian apps session oil to seriously suffer.

In addition to this the discount of Russian Ural and North Sea Brent, the latter being the international benchmark for oil, has significantly widened ever since the start of the war in Ukraine and currently stands at $35-$40. Last year according to the Kyiv School of Economics, the discounts deprived the Kremlin of an estimated $50bn, equivalent to 12% of its planned revenue.

This has in turn further weakened Russia’s hand and the funding of its armed forces in Ukraine. Finally, it is crucial to mention that the average cost of extracting one Ural oil barrel stands at around $40, which means that any price below that would mean Russia would record a net loss when selling its oil abroad. With hydrocarbon prices projected by some to fall further as around 1/3rd of the world economy is expected to enter recession later this year, Russia’s economic situation is strenuous to say the least.

Additional Short News:

South Africa is still struggling with maintaining a steady power supply as the country’s monopoly state-owned energy company Eskom is unable to meet demand. A highly disruptive process called load shedding is employed in which every day power is cut off to different regions for up to 10 hours. This affects everything from shops to major gold mines, which have seen their costs soar partly due to the practice.

Ukraine this month has mourned the loss of its Interior Minister and 13 others of the department. The helicopter carrying the group crashed due to adverse weather conditions onto a kindergarten, unfortunately causing additional fatalities.

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