A great Monday to you as investors assess defiant speech from China’s President Xi.

In brief (TL:DR)

• U.S. stocks closed lower on Monday with the Dow Jones Industrial Average (-1.34), the S&P 500 (-2.37%) and the Nasdaq Composite (-3.08%) all down.

• Asian stocks opened lower in a cautious open to the week following further weakness on Wall Street and a defiant message to the world from China’s Communist Party congress.

• Benchmark U.S. 10-year Treasury yields fell on basis point to 4.01% Friday (yields fall when bond prices rise). 

• The dollar eased against its Group-of-10 counterparts, providing a touch of respite to harried currency markets. 

• Oil clawed back some losses after a weekly slump with November 2022 contracts for WTI Crude Oil (Nymex) (+0.93%) at US$86.41 as fears over an economic slowdown continue to weigh on the outlook for demand.

• Gold rose on weakness in the US dollar with December 2022 contracts for Gold (Comex) (+0.70%) at US$1,660.40.

• Bitcoin (+0.47%) rose to US$19,262, stayed rigidly tied to US$19,000 into the Oct. 16 weekly close as analysts warned that volatility was long overdue.

In today's issue...

1. Can Gold Ever Go Digital?

2. Chinese President Xi Jinping Does Little to Convince Investors its Business as Usual

3. NFTs are on sale, should you be biting?

Market Overview

The outlook for consumer prices in the US continues to fuel bets that the Federal Reserve may make jumbo rate hikes at its next two meetings, further challenging global growth. 

Fed officials in their latest comments suggested they were ready to hike rates higher than previously planned. 

Against this negative backdrop, investors have to contend with news from Beijing, where President Xi Jinping said China’s global power had increased while warning of “dangerous storms” ahead. There were few signs of any let up in the Covid-Zero campaign or housing market policies that are weighing on the economy.  

Asian markets were mixed on Monday with Tokyo's Nikkei 225 (-1.16%) and Sydney’s ASX 200 (-1.40%) down, while Hong Kong's Hang Seng Index (+0.15%) and Seoul's Kospi Index (+0.32%) were up slightly. 

1. Can Gold Ever Go Digital? 

• The World Gold Council, the main lobby group for miners of the metal, has a plan to make trading gold more liquid, starting with the US$500 billion in gold bars hidden beneath the City of London. 

• The new rules, in effect, make it more expensive for banks to hold bullion, compressing the already meager returns they make trading the commodity, and raising concerns the market will shrink. 

It may be somewhat ironic but the world’s most recognizable physical asset is attempting to go digital, or at least it’s market is. 

Retail investors have long struggled to access the gold market directly because like many physical commodities, it’s subject to different standards in different places.

For most of the past two decades, the market for gold, which includes some US$500 billion worth of physical bullion stored in various locations, has been rolling along with little change. 

But now, the World Gold Council, the main lobby group for miners of the metal, has a plan to make trading gold more liquid, starting with the US$500 billion in gold bars hidden beneath the City of London. 

The World Gold Council is trying to push through changes that they hope will significantly increase demand, including a database using blockchain technology to keep track of almost every gold bar in the world and create a digital token backed by physical gold that can be more easily traded. 

Gold “backed” tokens are not new, but the World Gold Council will add a degree of legitimacy and accessibility to the asset class hitherto inconceivable. 

With the hope that digitization will make a wider range of investors comfortable holding the precious metal, the World Gold Council is starting with a program to ensure the integrity of gold bars, run with the London Bullion Market Association, which uses blockchain technology to monitor supplies. 

Pilots involving 30 participants including miners, refiners, and banks have just concluded, the main challenge will be how to persuade the market’s bigger players to embrace a project that risks eroding their dominance.

Nevertheless, as previous attempts to make even small changes to the market have fallen flat, market players are skeptical the proposed overhaul will get off the ground, especially one as revolutionary as blockchain technology. 

The new rules, in effect, make it more expensive for banks to hold bullion, compressing the already meager returns they make trading the commodity, and raising concerns the market will shrink.

2. Chinese President Xi Jinping Does Little to Convince Investors its Business as Usual 

• Chinese President Xi Jinping signaled no change in direction for two main risk factors dragging down China’s economy – strict Covid rules and tight housing market policies. 

• Although there were no direct references to new policies, Xi offered an optimistic vision of China’s long-term growth. 

At a speech opening the 20th Communist Party Congress in Beijing on Sunday, Chinese President Xi Jinping signaled no change in direction for two main risk factors dragging down China’s economy – strict Covid rules and tight housing market policies. 

Xi praised his own zero-Covid policies, his no-tolerance approach to containing infections, and his slogans on China’s property market, repeating prior language even as the sector experiences its longest-ever slump due to policies aimed at curbing debt and financial risks.

Many observers who were hoping that Xi’s impending coronation for an unprecedented third term in office, would pave the way for lighter touch pandemic measures and economic restrictions once his power was secured. 

But Xi’s speech seems to make no such concessions. 

Beijing’s aggressive lockdown policies whenever virus cases emerge has led to surging unemployment among young jobseekers and a slump in business and consumer confidence. 

Housing sales have fallen as well as homebuyers grow increasingly reluctant to borrow and property developers fail to deliver projects as scheduled.

Although Xi still asserted that economic development remains the Communist Party’s “top priority,” a sign the government will continue to prioritize GDP growth, there is little to suggest that Xi would stick to such promises, and instead place greater emphasis on national security. 

There were no less than 50 references to the Chinese word for “security” peppered throughout Xi’s speech, whereas “economy” was far lower on the agenda. 

Although there were no direct references to new policies, Xi offered an optimistic vision of China’s long-term growth, which he said would be fueled by a more skilled workforce, technological innovation and market reforms aimed at boosting productivity.

Beijing is also actively pursuing self-sufficiency in key areas such as chipmaking, with Washington increasingly looking to keep such strategic technology beyond the reach of the Chinese. 

China’s GDP growth this year will likely be much weaker than the official goal of around 5.5%, making it the biggest miss since the government began setting GDP targets in the early 1990s and hopes of a quick rebound in the world’s second largest economy remain tentative at best. 

3. NFTs are on sale, should you be biting?

• According to DappRadar, NFT sales plunged 67% in the third quarter and the average selling prices for NFTs have tumbled in recent months. 

• While average NFT transactions might be lower in dollar value, a large bulk of attention and value accrual still resides within the more expensive, well-known collections. 

NFTs or non-fungible tokens were all the rage until they weren’t. 

According to DappRadar, a website that tracks decentralized application usage, NFT sales plunged 67% in the third quarter and the average selling prices for NFTs have tumbled in recent months. 

OpenSea, the world’s biggest NFT marketplace, had a 38% market share in September, down from nearly 85% in March as other forums rise up to compete in what was once seen as a lucrative new market and asset class. 

While speculators and celebrities made an exodus, dedicated long-term believers in the various potential use cases for NFTs, and collectors, are betting that the plunge in prices will rekindle speculative demand.

On average, an Ethereum blockchain-based NFT fetched US$120 in October, compared with US$1,631 in early February, according to market data researcher NonFungible. 

On the Ronin blockchain used by Axie Infinity, average prices were down to US$16 in October as well, from US$69 in February. 

Making matters worse, there is mounting concern over whether NFTs are likely to be viewed as securities, in light of the U.S. Securities and Exchange Commission’s investigation of Yuga Labs, creators of the popular Bored Ape Yacht Club NFTs. 

According to blockchain analytics firm Nansen, mints of new NFTs reached all-time highs in the week of September 19, largely due to the debut of small NFT collections at low prices. 

However, Nansen suggests that the popularity of more affordable NFTs doesn’t automatically spell the demise of large, expensive collections.

An index of blue-chip NFTs like Bored Ape Yacht Club, Azuki, CryptoPunks and Doodles still often outperforms others. 

While average NFT transactions might be lower in dollar value, a large bulk of attention and value accrual still resides within the more expensive, well-known collections. 

Luxury brands have also been quick to embrace NFTs and a recent study by blockchain data service provider Coingecko has found that the apparel and luxury goods industry has the most brands launching NFTs since 2020. 

The value proposition of NFTs for luxury labels is perhaps more obvious than for other applications, given how NFTs with QR codes can be used to prove authenticity and NFTs can be blended with physical goods to create a physical-digital collectible blend. 

NFTs which are purely digital assets such as images however will remain somewhat speculative for now and the low prices may lure some punters but their long term value will be indeterminate especially against a backdrop of a rising dollar and central bank policy tightening.