Recently, the World Gold Council (WGC) published their, Gold Market Commentary, When the wells run dry! In the report, WGC said, while much of the conversation over the past week has centred around tariffs, liquidity risk remains an important undercurrent. And we believe we may now be approaching a similar impasse to what markets experienced in 2022.
Quantitative tightening is slowing but there has been no mention of a resumption of quantitative easing. Indeed, the appetite might not be there given the high levels of debt and sticky inflation. In addition, constraints on government spending via the Department of Government Efficiency (DOGE) are stifling fiscal support. And the Fed’s Overnight Reverse Repo facility (ON RRP) is low, which provides less wiggle room for the Fed to manage liquidity issues.
This appears to be showing up in stats like order-book liquidity for equity futures and – as flagged in the Fed’s financial stability report in November – on-the-run bond liquidity. It may also be contributing to the year-to-date equity rout.
And the labour market is flirting with contraction as hours worked are in steep decline. Logically they lead an employment slowdown as companies reduce hours for staff before layoffs; statistically this also appears to be the case. But layoffs are also now on the rise and are likely to feed into payroll numbers in due course. To add to this, uncertainty surrounding tariffs has supercharged concerns about the resiliency of labour markets in the short and medium term.
Similar but different, should we see a similar drying up of liquidity, it’s likely to be different to 2022;
1: While inflation was rising more in 2022, it was driven by growth. This time around inflation is sticky while growth is faltering, resulting in a stagflationary environment. In this context, rates are unlikely to be going up from here and further weakening of the dollar is likely on waning US exceptionalism.
2: Central banks have been strong contributors to gold’s performance over the past three years and show few signs of letting up, adding fundamental support to prices. 3: US gold ETF investors had built up sizeable holdings in 2020 prior to the 2022 wobbles. But they have been sidelined until recently, suggesting capacity to keep adding.
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