The document discusses how the Federal Reserve is becoming increasingly hawkish on monetary policy and is expected to begin tapering asset purchases sooner than anticipated, which will be bearish for gold prices. It also notes that inflation remains high based on rising shipping container rates and services sector PMIs, contradicting the view that inflation is transitory. While gold has seen a recent upswing, the document argues this is likely a head fake and that gold remains in a medium-term downtrend as the tapering clock ticks closer to an announcement.

1. Gold: The Tapering Clock
Is Ticking

2. Points To Be Covered Today:
• Gold: The Tapering Clock Is Ticking
• US Treasury Market Daily
• A Flattening Of The U.S. Yield Curve
• Container Rates Refuse To Back Off
• What Can The Services PMI Tell Us?
• The PMs Remain Upbeat

3. Gold: The Tapering Clock Is Ticking
• With the FED increasingly hawkish and the USDX rising from the ashes, don’t be
fooled by the recent upswing in gold. The bears are getting ready.
• With the reflation trade getting cut off at the knees, the only asset class not
feeling the pain is U.S. equities.
• However, while shorts capitulate and send the U.S. 10-Year Treasury higher (and
the yield lower), the flattening of the U.S. yield curve screams of a potential
recession. However, while the development is bullish for the USD Index and
bearish for the PMs, investors are putting the cart before the horse.
• To explain, while the U.S. 10-Year Treasury yield languishes in its depressed
state, J.P. Morgan told clients on Jul. 6 that the Treasury benchmark is roughly
three standard deviations below its model-implied fair value.
• For context, J.P. Morgan believes that the U.S. 10-Year Treasury yield should
trade at roughly 1.60%, and, given the three-sigma underperformance, standard
normal probabilities imply a roughly 99.9% chance that the Treasury benchmark
will move higher over the medium term.

4. US Treasury Market Daily

5. A Flattening Of The U.S. Yield Curve
• However, while the bond market ‘wants what it wants’, it’s important to remember
that a flattening of the U.S. yield curve has the same effect on the PMs.
• For example, while I’ve been warning for months that the U.S. Federal Reserve
(FED) will likely taper its asset purchases much sooner than investors expect, the
minority view is now the consensus.
• And with that, the hawkish shift reduces inflation expectations, reduces growth
expectations and often results in lower long-term interest rates.
• However, while the U.S. 10-Year Treasury yield still remains significantly
undervalued in our view, ‘the ghost of tapering past’ has investors aiming to front-
run a September reveal.
• As evidence, the FED released the minutes from its Jun. 15/16 policy meeting on
Jul. 7. An excerpt from the report read:
• “Various participants mentioned that they expected the conditions for beginning to
reduce the pace of asset purchases to be met somewhat earlier than they had
anticipated at previous meetings in light of in-coming data.”

6. The Container War
• But with long-term yields signaling the death of inflation, is a
regime shift already underway? Well, I warned previously that
inflationary pressures are unlikely to abate anytime soon:
• I wrote:
• With the U.S. Census Bureau revealing on Jun. 8 that U.S.
imports from China (goods) totaled nearly $38 billion in April,
more and more data signals that the U.S. economy will continue
to feel the inflationary burn. Shipping costs are also exploding at
an unprecedented rate.

7. Container Rates Refuse To Back Off

8. Container Rates Refuse To Back Off - I
• To explain, the lines above track the shipping costs to-and-from
various regions. If you analyze the dark blue line sandwiched in
the middle ($6.5K), average shipping costs continue to
skyrocket.
• Moreover, if you’re shipping from Shanghai to Rotterdam, New
York or Genca, global businesses are nowhere near solving
these “transitory” issues.
• And providing another update on Jun. 28, the situation has
only worsened.

9. Container Rates , YIKES

10. Container Rates , YIKES - I
• To explain, if you compare the first chart to the one directly
above, you can see that the composite container rate (the dark
blue line) has increased from $6.5K to $8.1K in only two
weeks.
• What’s more, shipping from Shanghai to Rotterdam (the gold
line) has increased from $10.5K to $12.0k, while Shanghai to
New York (the gray line) has risen from $7.6K to $11.2K. As a
result, does it seem like inflationary pressures are a thing of the
past?
• To that point, with the old adage implying that ‘the third time’s
the charm,’ the surge lives on.

11. Container Rates Get No Reprieve

12. Container Rates Get No Reprieve - I
• To explain, the composite container rate has now
gone from $6.5K through $8.1K to $8.4K in less than
a month.
• And with shipping costs from China (Shanghai) leading
the charge, the FED’s “transitory” narrative still lacks
empirical credibility.
• To that point, can you guess which trading partner
accounts for 17.3% of U.S. imports?

13. Year – To - Date Imports

14. What Can The Services PMI Tell Us?
• As further evidence, the Institute for Supply Management (ISM) released its services PMI
on Jul. 6. And while the headline index declined from 64 in May (an all-time high) to 60.1
in June, inflation remained abundant:
• “Prices paid by service organizations for materials and services increased in June, with
the index registering 79.5 percent, 1.1 percentage points lower than May’s reading of 80.6
percent. 17 services industries reported an increase in prices paid during the month of
June [with] only [one] industry reporting a decrease.”
• In addition, ISM Chair Anthony Nieves added:
• “According to the Services PMI, 16 services industries [out of 18] reported growth. The
composite index indicated growth for the 13th consecutive month after a two-month
contraction in April and May 2020. The rate of expansion in the services sector remains
strong, despite the slight pullback in the rate of growth from the previous month’s all-time
high. Challenges with materials shortages, inflation, logistics and employment resources
continue to be an impediment to business conditions.”
• For context, the ISM requires written permission before redistributing any of its content,
and that’s why I quoted the findings rather than including a screenshot of the report.
However, if you want to review the source material, you can find it here.

15. IHS Market
• Likewise, IHS Market also released its U.S. services PMI on Jul. 6. An
excerpt from the report read:
• “Contributing to the robust rise in activity across the service sector was a
further marked increase in new business at the end of the second quarter.
• Alongside strong customer demand, firms attributed the upturn in new
sales to the acquisition of new clients.
• Although the rate of new business growth slipped to a three-month low, it
was still the third-fastest on record.”
• Furthermore, while oil prices have surged in 2021 so far, major companies
haven’t increased their capital investments.
• As a result, not only are U.S. crude oil inventories still ~6% below their
historical average (as of Jun. 30), but dormant supply could put upward
pressure on prices in the coming months.

16. The Gold Line
• To explain, the gold line above tracks the Brent price, while the
blue line above tracks major oil companies’ capital
expenditures.
• If you analyze the right side of the chart, you can see that
investments in drilling infrastructure have fallen off a cliff.
• And with demand likely to remain abundant as economies
reopen, fuel, gasoline and heating oil prices will likely remain
elevated.

17. The Swagger Of The USDX
• Finally, with the USD Index regaining its swagger and the EUR/USD
falling from grace, the cocktail of a hawkish FED and fundamental
underperformance is weighing heavily on the euro.
• Moreover, with growth differentials poised to widen in the coming
months, U.S. dollar strength could cast a dark shadow over the PMs.
• To explain, the various lines below track Bank of America’s quarterly
projections for G6 real GDP levels.
• If you focus your attention on the dark blue (U.S.) and light blue
(Eurozone) lines, you can see that the former is leading the pack,
while the latter is vying for the last place.
• On top of that, the U.S.’s projected outperformance of Japan,
Canada, and the U.K. is bullish for the USD/JPY and the USD/CAD
but bearish for the GBP/USD.

18. The Swagger Of The USDX - I

19. The PMs Remain Upbeat
• In conclusion, while the PMs remain upbeat, it’s likely another
case of ‘been there, done that.’
• For example, it was roughly four months ago that falling real
yields helped uplift gold before it eventually collapsed.
• And with a similar event unfolding once again, gold has
demonstrated rational (though, superficial) strength.
• However, with the clock ticking toward a taper announcement
and the USD Index rising from the ashes, the corrective
upswing is likely another head fake within gold’s medium-term
downtrend.

20. Gold: The Tapering Clock
Is Ticking

21. THANKS FOR LISTENING
Gold: The Tapering Clock Is Ticking