Good morning. This week’s knowledge releases, culminating with jobs day on Friday, shall be intently scrutinised for hints of US financial slowing. The Atlanta Fed’s GDPNow fourth-quarter development tracker, which can incorporate all this knowledge because it is available in, now stands at a middling 1.2 per cent. As an over-under guess, the place will GDPNow finish the week? We’ll take the over, however the margin may very well be slim. All ideas welcome: robert.armstrong@ft.com and ethan.wu@ft.com.

Why gold is at a file excessive

Gold costs closed at all-time highs on Friday, which appears a bit bizarre. An important variable for gold costs, traditionally, is actual charges, the chance value for holding a yield-free metallic. Actual measurements range, however nevertheless you narrow it, we’re across the highest stage of actual charges since at the very least the monetary disaster. Why is gold gaining?

A part of the reply lies in ranges versus charges of change. Actual charges, utilizing yields on 10-year inflation-linked bonds (Ideas) as a proxy, are certainly excessive however have fallen practically 50bp because the peak in October. That appears to have cleared the runway for gold costs:

Latest strikes in Ideas yields elude straightforward rationalization. Financial resilience was a extensively cited cause for actual charges’ rise in September and October, so creeping indicators of slowdown might have spurred a reversal. Higher inflation information additionally may need curbed fears of extra future inflation volatility, one more reason why actual charges may very well be greater. Regardless of the cause, it’s excellent news for gold.

A second tailwind is coming from a weaker US greenback. Gold is basically priced in {dollars}, which means that USD weak spot provides non-US gold patrons extra buying energy. The US greenback index fell 3.5 per cent in November, a response to rising expectations for US price cuts and traditionally an omen of gold rallies:

These two explanations, a falling greenback and decrease actual charges, don’t really feel absolutely satisfying, nevertheless. They held true at varied factors earlier this yr, together with the flight to security after Silicon Valley Financial institution’s collapse, and no gold worth breakout adopted. One thing else is happening.

Gold is taken into account a geopolitical danger hedge, making the Israel-Gaza warfare an affordable guess. Within the week instantly after the Hamas assaults of October 7, gold costs leapt 6 per cent. However this, too, is just not dispositive. Extra just lately, the tail dangers of the battle — particularly the chance of a wider regional warfare that will slam international markets — seem to have waned. Iran, a key actor, has sought to forestall escalation, to offer only one instance. The World Gold Council’s mannequin of gold returns had an abnormally massive “residual” time period in October, suggesting {that a} massive, unmodelled shock (comparable to a warfare) had hit gold costs. The residual disappeared in November.

A last rationalization is a structural change in central financial institution demand for gold. Ukraine-related sanctions inspired EM reserve managers to nudge their portfolios away from US greenback property (largely Treasuries) in the direction of gold. Unhedged is sceptical that this spells the top of greenback hegemony, however even incremental adjustments within the greenback’s standing amongst central banks can matter to gold costs. Because the chart beneath from Absolute Technique Analysis reveals, central financial institution gold reserves within the Brics+ bloc had been already rising earlier than the Ukraine warfare. Central financial institution gold shopping for hit file ranges in 2022, and is on observe for a contemporary file this yr. Gold mining exercise, additionally on observe for a 2023 all-time excessive, is responding to greater demand.

Put collectively, these 4 elements pointing in the identical path seems like a extra full story. On the similar time, although, we battle to see the makings of an explosive gold rally. The metallic has tried and failed for 3 years to interrupt its ceiling of $2,050 or so. And the forces now boosting it could not have sufficient kick to maintain costs rising. Increased central financial institution demand is properly telegraphed, geopolitical danger has waned and it’s unclear how a lot additional actual charges must fall. Nonetheless, if you happen to’ve a bull case to tout, or if we’ve missed one thing horribly apparent, tell us. (Ethan Wu)

Non-public fairness’s insurance coverage subsidiaries

Final week, non-public fairness home KKR introduced that it was shopping for the third of International Atlantic it didn’t already personal, for $2.7bn. The FT story on the deal quoted KKR co-CEO Scott Nuttall saying the next: 

“We’re not doing this as a result of we’ve to, we’re doing it as a result of we need to and this has been a home-run funding,” mentioned Nuttall. He pointed to synergies KKR might garner with full possession, comparable to promoting non-public fairness funds it had designed for rich people to International Atlantic’s present shoppers. 

This remark struck me as barely off. Not the bit about GA being a home-run funding, which is true so far; the bit about promoting PE funds to insurance coverage shoppers. Huge non-public equity-cum-asset managers purchase insurance coverage firms (see additionally: Apollo/Athene, Brookfield/American Fairness) to not cross-sell, however to realize a supply of secure capital. 

The PE insurance coverage firm subsidiaries promote annuities, that’s, contracts by which people change a lump sum for a sure stage of earnings over a sure time frame, generally the remainder of the person’s life. The PE store then tries to earn extra from the cash than they must pay for it. It’s a ramification enterprise, like banking, though annuity withdrawals are, in idea, rarer than deposit withdrawals. For the annuity patrons, the essential level is that there are tax benefits to purchasing an funding product categorised, for vestigial causes, as insurance coverage. For the PE store, the essential factor is that an insurance coverage subsidiary provides them direct entry to retail traders’ capital, which usually they’re solely allowed to entry not directly, by way of massive pension funds. 

As with all massive structural shift in the best way funding property are held, invested and distributed, we must always ask whether or not the change decreases or will increase danger within the system. The non-public credit score trade usually factors out that they’re safer homeowners of credit score property than banks, as a result of they use much less leverage and since they don’t take deposits, which may run. “Each greenback that strikes out of the banking system reduces systemic danger,” Nuttall mentioned just lately. There may be a great deal of fact on this.

However whereas annuity premiums could also be extra secure than deposits beneath regular circumstances, they’ll run. Prospects can pull their premiums, at a penalty, and in the event that they change into satisfied that their annuity firm isn’t secure, that’s what they are going to do. That is what occurred to Government Life, then the biggest insurer in California, within the early Nineties: policyholders withdrew $4bn after the corporate introduced losses from junk bond investments, and the corporate collapsed. Annuity capital is just not everlasting capital. PE corporations elevating capital by promoting annuities have to fret about maturity mismatches. 

One attraction of the annuity enterprise for the massive PE corporations is that the capital raised will be put to work in credit score property that banks try to do away with anyway, in an period of excessive and rising capital necessities. These would possibly embody leveraged loans, franchise finance or plane leasing. However — as Steven Kelly of the Yale Program on Monetary Stability identified to me — as these property depart the banking system, regulators lose visibility on them. “Suppose we’ve a disaster, what can the regulators see? Who does the Fed lend cash to?” Kelly asks. And regulators might not see the disaster coming as rapidly as they’d had been the property held in banks, with their common marking of property. 

As Sonali Basak identified on Bloomberg final week, if the property are held inside insurance-company subsidiaries, insurance coverage regulators may have visibility, and there shall be some required disclosures. This could assist offset this danger. 

A extra distant danger that Kelly factors out is that particular person banks might change into overexposed to the non-public asset trade on the deposit aspect of their stability sheets, the best way Silicon Valley Financial institution was overexposed to the enterprise capital trade. Annuity-holder runs in opposition to PE corporations’ insurance coverage subsidiaries might result in sudden and heavy withdrawals from banks.

All of those dangers are distant proper now, and won’t crop up even in a nasty default cycle. However as retail capital flows to non-public asset managers, and people managers pull dangerous credit score property out of banks, systemic danger will stay within the monetary system, even when it takes new varieties.

One good learn

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