The Federal Reserve could be launching another
round of money-printing in the next few weeks as problems in the
overnight lending markets re-emerge and force the central bank into more
aggressive action, according to a Credit Suisse analysis.
fourth version of quantitative easing — often referred to as
“money-printing” for the way the Fed uses digitally created money to buy
bonds from big financial institutions — would be needed by year’s end
to bridge a funding gap as banks scramble for scarce reserves, Zoltan
Pozsar, Credit Suisse’s managing director for investment strategy and
research, said in a note to clients.
“If we’re right about funding stresses, the Fed will be doing ‘QE4’ by year-end,” Pozsar wrote. “Treasury yields can spike into year-end, and the Fed will have to shift from buying bills to buying what’s on sale – coupons.”
That would mean a shift from purchasing short-term
Treasury debt and expanding into longer duration and more aggressive
balance sheet expansion.
The Fed is in the midst of a buying T-bills in a process that it has insisted is not QE but instead an effort to keep its benchmark overnight funds rate within the 1.5%-1.75% target range. In addition to the outright purchases, the Fed is conducting daily repurchase operations to stabilize the market.
of those efforts stem from mid-September tumult in the repo market, the
place where banks go to get overnight funding critical to their
operations. A Sept. 17 spike in rates amplified funding issues that
Pozsar said are not going away.
“The Fed’s liquidity operations
have not been sufficient to relax the constraints banks will face in the
upcoming year-end turn,” he said, adding that investors have become
complacent after an initial flare-up in 2018 turned out to be “benign”
and as “repo rates have been trading normally since the September
blowout” and amid the Fed’s efforts to keep reserves plenty.
“But these facts are less relevant than they seem,” Pozsar said.
fact, he warned of even potentially more dire consequences should
market dislocations and another spike in rates upset the carry trades
institutions employ, where lower-yielding currencies are used to buy
those with higher yields, with investors pocketing the difference.
carry makes the world go ’round, and reserves make carry possible … the
day we run out of reserves would be the day when the world would stop
spinning.” Pozsar said. “No, this is not an overstatement.”
Diagnosing the causes
The problems he identified are two fold — a Fed that raised rates too much and cut its bond holdings and balance sheet too quickly, coming at the same time as Basel III international banking guidelines made capital requirements more stringent.
to the balance sheet rundown, the Fed had been running what it
considered an “ample reserves” regime, where reserves a year ago had
been around $1.8 trillion. That number dropped close to $1.4 trillion in
September, and the Fed has wrestled since with what is the right
Pozsar specifically described the potential QE4 process as
helping “through the backdoor,” with the Fed buying back the bonds that
banks were forced to buy during the balance sheet rundown “and giving
back the reserves they gave up in the process.”
Poszar said the concept of excess reserves is now “an oxymoron” due to the new capital requirements.
His analysis, however, is fairly contrarian.
While there remain concerns on how the Fed calibrates the right level of reserves, most fixed income experts think the central bank’s market operations have kept the market running smoothly. Indeed, the funds rate for the past month has been trading at 1.55%, which is near the bottom end of the target range. The Fed usually is satisfied if the rate trades around the midpoint, which would be about 1.62%.
Still, he points out
that since the Fed reversed its balance sheet contraction and started
buying Treasury notes, actual reserves have grown little. The Fed’s
balance sheet since mid-September has expanded by nearly $300 billion to
$4.1 trillion; reserves in that time have expanded by about $110
A Bank for International Settlements analysis of the issue, released Monday, also warned of future funding problems and said the Fed’s diagnosis of the September tumult was incomplete. Central bank officials have attributed the upset to a surge of corporate tax payments and an unusually large Treasury auction settlement as sucking capital out of the system.
However, the BIS said hedge
funds and big banks contributed as well, with the former placing high
capital demands on the market while the latter did not provide liquidity
as the market became stressed.
The BIS did note that the Fed’s operations have “calmed markets.”
A report released at an industry gathering in Shanghai on Tuesday
shows significant cost reductions for batteries used in electric
vehicles, but cost parity with internal combustion engines are still
According to BloombergNEF, lithium-ion battery prices were priced
above $1,100 per kilowatt-hour in 2010, but have now fallen to just
$156/kWh. That’s a 87% reduction in real terms achieved — not just
through volume growth in the EV market but also through continued
penetration of high energy density cathodes.
According to the new energy research firm, by 2023, average prices
will be close to $100/kWh, considered by many to be the price point at
which electric vehicles reach parity with gas and diesel-powered
vehicles. However, prices vary depending on which markets and vehicle
James Frith, BNEF’s senior energy storage analyst and author of the
report, said further cost reductions by battery manufacturers would be
achieved through reduced manufacturing capex, new battery pack designs
and changing supply chains:
“According to our forecasts, by
2030 the battery market will be worth $116 billion annually, and this
doesn’t include investment in the supply chain. However, as cell and
pack prices are falling, purchasers will get more value for their money
than they do today.”
Gold prices will climb to $1,600 per ounce over the next year, Wall Street bank Goldman Sachs projects. It says that central banks are consuming a fifth of the global supply of the yellow metal.
“De-dollarization in central banks – demand from central banks for gold is biggest since the Nixon era, eating up 20 percent of global supply,” the head of global commodities research at Goldman, Jeff Currie, told Bloomberg. “I am going to like gold better than bonds because the bonds won’t reflect that de-dollarization.”
Citing “fear-driven demand” for the precious metal, Goldman
analysts said last week that investors should diversify their long-term
bond holdings with gold.
“Going long-term depends on what is
going to happen to global growth. The further out you go, the higher the
probability that the US is going to hit a recession. We have $1,600
holding out through 2021,” Goldman Sachs analyst Mikhail Sprogis told Kitco News. Gold was trading at $1463.30 per ounce on Tuesday.
Sprogis said that central bank gold demand will be driven by demand from Russia, Turkey, China, and other countries, including Poland.
Statistics showed that hedge funds and other large speculators boosted their bullish bets on the precious metal by 8.9 percent in the week ended December 3. That is the biggest gain since late September.
Gold miners look set to extend a deal spree after notching transactions worth a record $30.5 billion this year, according to data, the biggest M&A binge since bullion prices peaked nearly a decade ago.
Led by top producers Newmont Goldcorp Corp and Barrick Gold Corp,
miners are bulking up to replace dwindling reserves and win back
investors who in recent years shunned the sector because of
This year has seen 348 deals worth more than $30.5 billion, including net debt, according to Refinitiv Eikon data.
is up from $10.8 billion last year and surpasses a previous high of
$25.7 billion set in 2010, the data show. Gold topped $1,900 per ounce
in 2011 and currently trades around $1,484, after hitting a six-year
high in September.
2011 gold boom prompted buyers to overspend on acquisitions, leading to
billions in impairments when prices crashed in subsequent years. This
time, investors say acquirers are being more cautious.
reality of the market is that nobody is able to go and pay the lofty
premiums that we have seen in prior cycles because their own
shareholders won’t sanction it,” said Rob Crayfourd, fund manager for
CQS Natural Resources Growth.
The premiums linked to recent gold
transactions are far below those paid in the previous price boom, when
40% to 50% premiums were not uncommon.
Gold investor group
Paulson in September urged the smaller gold miners to seek nil-premium
mergers to eliminate duplication and lower costs.
paid no premium when it bought Africa’s Randgold last year while
Newmont offered an 18% premium when it snapped up Goldcorp to create the
world’s largest gold miner.
More deals are likely among
mid-tier miners, who face pressure from activist investors to lower
costs and financing constraints, said Peter Grosskopf, CEO of precious
metals-focused fund manager Sprott Inc..
In a flurry of deals
this week, Canada’s Endeavour Mining Corp made a $1.9 billion all-stock
takeover proposal for Africa-focused Centamin Plc.
A day earlier, China’s Zijin Mining Group Co Ltd struck a deal to buy Continental Gold Inc for $1.3 billion in cash.
In November, Kirkland Lake Gold Ltd. bid C$4.3 billion for Detour Gold while Australia’s Saracen Mineral Holdings Ltd. snapped up Barrick’s stake in Super Pit gold mine in Australia.
“That pendulum just started swinging and it’s got a lot further to go,” Grosskopf said, referring to more deals.
Resources Inc, Pure Gold Mining Inc, Roxgold Inc and Silvercrest Metals
Inc are among possible targets, according to industry sources.
Canadian miner Iamgold Corp has drawn interest from state-backed China Gold International Resources Corp Ltd.
Gold miners have also boosted returns to shareholders, with Barrick, Kirkland Lake Gold and Yamana Gold hiking payouts on the back of revenues boosted by higher gold prices.