Gold approaches all-time high, oil rally continues

Gold stood out again, rallying within a few dollars of its August 2020 all-time high of $2,075, with supporters arguing that a peak in nominal and real interest rates would underpin a continuing bull market. Oil prices also continued to recover despite no news on next year’s production quota from OPEC. The Vix fear index continues to trade near multi-year lows, reflecting growing confidence that the economy can have a soft landing in 2024, with the Fed expected to cut rates by mid-year, even though it continues to insist that will not be the case.

TODAY’S MAJOR NEWS

Goodbye Charlie

Legendary investor Charlie Munger died on Tuesday, aged 99 (RIP). Charlie helped Warren Buffett build Berkshire Hathaway into an investment powerhouse. In tribute, we repeat one of his many famous quotes:

“ "It's not the bad ideas that do you in, it's the good ideas. " And you may say, "That can't be so. That's paradoxical. " What [Ben Graham] meant was that if a thing is a bad idea, it's hard to overdo. But where there is a good idea with a core of essential and important truth, you can't ignore it. And then it's so easy to overdo it. So, the good ideas are a wonderful way to suffer terribly if you overdo them.”

Wise words to invest in.

Beige book reports moderating growth and inflation

US economic activity showed no change to slight declines for most of the Federal Reserve's twelve districts since mid-October, according to today’s Beige Book report. While prices remained elevated, price increases moderated. “On balance, economic activity slowed since the previous report, with four Districts reporting modest growth, two indicating conditions were flat to slightly down, and six noting slight declines in activity.”

• Demand for business loans fell slightly, consumer delinquencies ticked up, commercial real estate activity continued to cool, labor demand eased, and price increases primarily moderated.
• Retail sales, including autos, remained mixed; on average, sales of discretionary items and durable goods, like furniture and appliances, declined as consumers showed more price sensitivity.
• Manufacturing activity was mixed, and manufacturers' outlooks weakened.
• Freight and shipping costs decreased for many while the price of various food products increased.
• Construction inputs like steel and lumber had stabilized or even declined
• Rising utilities and insurance costs were notable

US economy still running hot in Q3

The Fed can be forgiven for not knowing when to stop raising interest rates given the solid run of real economy data, confirmed in this morning’s second reading of third-quarter gross domestic product (GDP).

• GDP grew at an annualized rate of 5.2% in Q3, ahead of the expected 4.9%, and compared to 2.1% GDP growth in Q2
• Today’s upward revision for the Q3 GDP primarily reflects upward revisions to nonresidential fixed investment and state and local government spending, partially offset by a downward revision to consumer spending and downward revisions to imports
• Disposable personal income was revised up by $48.2 billion to $144 billion, while real disposable personal income rose 0.1%
• Personal savings totaled $815.4 billion in Q3, an upward revision of $51 billion
• The personal savings rate was revised up by 0.2% to 4.0%

US oil inventories about average

• US oil inventories are around average in the week ending November 24
• Commercial crude oil inventories (ex Strategic Petroleum Reserve) rose by 1.6 million to 449.7 million barrels, slightly above the five-year average for this time of the year
• Gasoline stocks increased by 1.8 million barrels during the week, 2% below seasonal levels
• Distillate stocks rose by 5.2 million barrels, 11% below levels typically seen at this time of year
• Ethanol stocks slipped to 21.4 million barrels, 7% below last year

Argentina’s inflation bomb?

Argentina’s central bank started offering dollar-linked Lediv notes to banks last week as part of its “Precios Justos” program to ensure the value of bank reserves. Locally, this is considered an “inflation bomb” that the outgoing administration is setting up for President-Elect Milei’s administration to deal with in his first year in office.

For the investment of 360 Argentine pesos today, the central bank will guarantee it will be worth USD$1 in 180 days. Lediv notes pay no interest, but they guarantee no loss of value. The program puts a lid on the inflationary effects of a devalued currency for the next six months. Still, inflation risks exploding when the money readjusts to reality six months from now. Milei must determine how to deactivate this inflation bomb in the months ahead. Watch for its impact on the Argentine peso.

TODAY’S MAJOR MARKETS

Russell 2000 up, other indices flat

• The Russell 2000 was again the standout index, rising by 1%, while the S&P 500 and Nasdaq were unchanged
• The Dax led foreign equity markets, up 1.1%, while the FTSE 100 and Nikkei 225 were off 0.3%
• The VIX, Wall Street’s fear index, held at 12.8

Nominal and real bond yields head lower

• 2- and 10-year yields edged lower, to 4.67% and 4.27%, respectively
• An interesting indication of likely inflation trends is provided by inflation-linked 10-year TIPS bonds, which fell back to 2.06% from a peak closer to 2.5%, suggesting that inflation will trend lower
• The dollar index was unchanged at 102.8
• Versus the dollar, Sterling, the Euro, and the Yen were unchanged

Gold closes on all-time highs

• Oil prices rallied by 2% to $77.9 per barrel despite a lack of clarity on whether we'll see more production cuts from OPEC+ when they eventually meet
• Gold prices continued to rise, up 0.3% to $2,067 per ounce (a few dollars off its $2,075 all-time high), while Silver rose 0.6% to $25.4 per ounce. If nominal rates have peaked, and real rates (TIPS yields) have likely also peaked, this is bullish for gold
• The grain and oilseed markets were mixed to higher

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]