Gold Poised to Climb on Fed’s Inflation Dilemma

BY PAUL WONG


Gold bullion1 regained some ground in October, climbing 1.50% for the month. 

Gold, however, remains underwater at -6.06% YTD through October 31, 2021. 

Gold mining equities3 also rebounded in October, up 8.15%, but are down 11.35% YTD as of October 31. 

Silver2 gained ground in October (7.81%) but is down 9.47% YTD.  


October in Review

Spot gold closed October at $1,783.38, gaining $26.43 for the month (or 1.50%). 

Gold managed to recover from the late September swoon that saw a positioning cleanse, which sent the entire precious metals complex into extreme oversold conditions. 

Most of the late September pressure originated from heavy selling in call options across the board (GLD ETF7 call options for gold, December futures calls for silver and GDX call options). 

The Federal Reserve ("Fed") taper signal at its September 22 Federal Open Marketing Committee Meeting (FOMC) coincided with the September quarterly options expiry, amplifying gold price swings. 

The liquidation of gold positions continued but slowed in October, and gold's positive divergent price action is a sign of selling exhaustion. 

We will expand on this point in the positioning data later in the commentary.

The Fed is likely to err on the side of growth with inflation than to risk a recession for a low inflation outcome.

Gold continues to feel pressure from the market's intense focus on pricing in the developed central banks' exits from the COVID-pandemic stimulus, despite the evident inflationary pressures and policy mistake risk. 

Global bond markets have aggressively raised their expectations for policy tightening, as surging energy prices and rampant supply chain issues have propelled inflation higher. 

The U.S. bond market has now moved up the date of pricing in the first hike for July 2022 despite tapering expected to end by June 2022. 

Still, this extreme hawkish view of Fed hikes may not force the desired Fed response.

The Fed continues to view this current inflation wave in transitory terms and is aware that cost-push inflation generally does not respond to rate hikes. 

The market is pricing in a policy mistake (tightening into a slowdown). 

The Fed's reaction function will stay primed to a growth outcome more than to inflation. 

In other words, the Fed is likely to err on the side of growth with inflation than to risk a recession for a low inflation outcome. 

If the Fed does not meet the market's expected hawkish response (more than mere tapering), it will likely pivot and seek out inflation protection assets (such as gold) if the Fed is willing to "run it hot." 

No matter how the bond market reacts in the short term, the Fed will begin the taper process and combined with the current fiscal deceleration, these two forces will lower the growth outlook.

Technical Chart Updates

Since the August 2020 peak, gold has been carving out a corrective pattern (red concave line below the downtrend line). 

Despite the many negative headlines, selling waves and temporarily broken support levels, there has been no sustained selling; instead, we have seen multiple mean-reverting trade events.


Figure 1. Gold Bullion: Carving Out a Corrective Base

Source: Bloomberg as of 10/30/2021. Spot gold is measured by the Bloomberg GOLDS Comdty Index. You cannot invest directly in an index. Past performance is no guarantee of future results. Included for illustrative purposes only. 


Figure 2. Silver Bullion: Holding the Channel

Source: Bloomberg as of 10/30/2021. Spot silver is measured by the Bloomberg SILV Comdty. You cannot invest directly in an index. Past performance is no guarantee of future results. Included for illustrative purposes only. 


Figure 3. Gold Equities: Recovered to Above Support

Source: Bloomberg as of 10/30/2021. Gold equities are measured by GDX. You cannot invest directly in an index. Past performance is no guarantee of future results. Included for illustrative purposes only. 


The Challenges Begin to Mount: Eyes on China and Energy

As we advance into the fourth quarter of 2021, there are no shortages of challenges facing markets. 

The ongoing global COVID pandemic continues while monetary and fiscal impulses have already turned lower and will continue to trend lower through at least mid-2022 — or until a risk event forces policymakers to reverse course back to stimulus. 

Personal and corporate taxes are set to rise, and inflation is at its highest level in decades and still climbing. 

Raw material shortages, labor shortages and supply chain disruptions are expected to last well into 2022. 

Topping these headwinds, however, are the numerous challenges facing China and the burgeoning global energy crisis; we see these challenges as having the most significant potential for tail-type risks.

Let's address China. 

The risk of a severe, extended property-led slowdown in China is rising. 

China's position as the second-largest and fastest-growing major economy over the past two decades means that the global economy is inextricably linked to China. 

A smooth decoupling is unlikely. 

China's current regulatory tightening cycle is beyond anything seen in the past in its breadth, severity and duration. 

The crackdown in the property market continues to slow growth and raise the potential for systemic risks. 

The China property market is one of the largest asset classes globally, accounting for approximately 20% of China's gross domestic product (GDP) and about two-thirds of its household assets. 

China appears committed to deleveraging its property market, sacrificing short-term growth, while hoping to avoid tripping any systematic risk event that would endanger a hard landing. 

Other significant growth headwinds for China include a further power crunch (more global supply chain disruptions), a zero-tolerance COVID policy (more lockdowns) and numerous social goals (curbing inequality and environmental targets). 

Our view is that a shock event followed by a flood of stimulus is on the table.

An Energy Crisis Feels Close at Hand

Surging global prices across the entire energy chain (natural gas, coal, liquefied natural gas (LNG), electricity, oil, etc.) are among the primary sources of a stagflation threat. 

Surging energy prices add to high inflationary pressures, while power outages and high prices or demand destruction drag on growth. 

Years of under-investment in energy combined with ESG (environmental, social and governance) investment restrictions, geopolitics and other ideological limits have created the conditions for an energy crisis. 

Surging demand for energy products (especially LNG), along with operational supply issues, are creating eye-popping global price spikes.

We have seen natural gas trade at the rough equivalent of a $200 barrel of oil in the European Union (EU), while China is experiencing rolling blackouts and rationing. 

We are seemingly a cold winter away from the next energy shock event. 

The energy crisis is not going away soon since there is no quick supply fix after several years of underinvestment. 

And it won't come from demand destruction as no policymaker anywhere wants to take that path. 

As we transition away to greener energy sources, power crunches will be ongoing. 

Whether it is a geopolitical event or cold winter, our view is that the risk of a full-blown energy crisis capable of destabilizing financial markets and economies is close at hand.

Fed Dilemma: Inflation, Stagflation or Bad Inflation

Inflation continues to broaden out (especially via energy price increases), inconsistent with the Fed's "transitory" outlook. 

When the Fed set out over a year ago with AIT (average inflation targeting), it likely focused on inflation's "good reflation" aspect (i.e., full and inclusive employment and avoiding a descent into a Japan-style never-ending deflation). 

Also, the Fed probably saw any inflation overshoot(s) as mostly benign and likely to retreat as the COVID pandemic waned. 

Instead, we are witnessing big inflation overshoots in the areas most painful (energy, food and consumer goods) to the disadvantaged consumer groups that the Fed tried to help with AIT.

The stagflation scenario (below-trend growth with above-trend inflation) also continues to be a market concern. 

Historically, stagflationary periods have been the most challenging investment environments and have demonstrated the worst historical performance for equities (sales weak, costs up, margins down, high rates compress valuation multiples, etc.).

In today's modern market structure, stagflation brings new additional capital market risks. 

Namely, nobody (humans or machines) knows how to trade in a stagflationary market. Humans have seen nothing but a 40-year long secular bond bull market.

Virtually a vast majority of quant-type funds and their VaR (value at risk) rules were built and calibrated in the post-GFC (global financial crisis) slow-flation, low-volatility market regime, the antithesis of a stagflationary world.

Central Banks "Pushing on a String"

In the years after the GFC, central banks have pushed on a string (see Special Note) trying to reflate the real economy. 

Now the question pivots to, can central banks reign in real-world inflation caused by an extraneous shock without unduly damaging growth? 

If policymakers and politicians see inflation damaging growth and approval ratings, will policy pivot from pro-growth to anti-inflation?  

In a cost-push inflation environment, rate hikes cannot fix broken supply chains or increase supply across the energy chain; however, they can destroy demand.

Fed in a Quandary, Markets at an Inflection Point

That leaves the Fed in a quandary. 

Does the Fed a) remain ultra-accommodative and risk that prices spiral higher, or b) tighten to preempt inflationary pressures and exacerbate the slowdown? 

Neither scenario under the current market conditions is attractive. 

Under the first scenario (stay accommodative), the market will likely move to inflation protection assets, and bond yields will continue to rise, pressuring valuations. 

If growth recovers and outpaces yield increases, then conditions will stabilize. 

Thus far, the U.S. Treasury 2YR/10YR and 5YR/30YR bond yield curves are responding with an emphatic "no," as both curves continue to fall on growth concerns driven by fears of Fed policy mistakes.

The second scenario — (b) in which the market is pricing (aggressive tightening) —could exacerbate the current slowdown and affect market valuations and increase market volatility and risk. 

It would also be alarmingly close to regime change territory. 

The challenge with leaving a highly accommodative monetary policy in place is that money and assets are priced off the risk-free rate. 

With the risk-free rate at zero (or below) for such a long time, asset prices have long adapted and adjusted.

Even a slight increase in the Fed Funds rate or a small reduction in the Fed's balance sheet (see 2018 Fed action) could dramatically impact asset prices and may quickly lead to tighter financial conditions. 

There are enormous amounts of duration embedded in all markets and asset classes, a legacy of central bank extreme ultra-accommodative policy since the GFC. 

The risk of a Fed policy mistake is there (tightening into a slowdown), but so are deeper more embedded market risks. 

In this scenario, we epcet safe-haven assets like gold and other precious metals to quickly be re-priced and back into demand.

Precious Metals Positioning Update: Well Positioned for 2013…

As we head toward year-end, market expectations have come down dramatically on the global economic growth outlook. 

Inflation has been more than persistent with the bond market pricing in aggressive rate hikes and fears of a Fed policy mistake.

Throughout 2021, positioning in precious metals has been reduced significantly, to the point where it has likely fully discounted the Fed's coming taper/tightening action, essentially pricing in a 2013 replay of the gold sell-off. 

However, in 2013/14, there was no economic growth concern (yield curve was steepening) and there was low inflation risk.

The weaker precious metals prices since June of this year reflect a hyper-focus on the coming Fed taper/tightening but ignore the consequences of a Fed policy mistake and the building inflation risk. 

There are other growing right-tail risk events that are supportive for gold. 

For example, a cold winter could send energy prices soaring and stagflationary risk higher in an asymmetrical manner. 

And or a financial risk event in China could send global growth tumbling while bringing forward the prospect of another eventual round of global central bank stimulus, pulling forward inflation sentiment higher.

When the Fed's taper announcement finally arrives, it may turn out to be a "buy on the news" event for gold. While the bond market is experiencing a violent re-pricing in the short end due to uncertainty around taper/tightening, precious metals have already priced in taper/tightening. 

Figure 4 shows positioning data extracted from our custom Sprott Sentiment Indices. 

The data represents multiple sources of holdings for gold, silver and gold equities, which are then normalized over a rolling two-year period. 

Gold bullion holdings, in particular, have been wiped out. 

We are likely heading towards an inflection point in the market with precious metals positioning at washed-out levels. 

Our positioning data would indicate the potential upward price squeeze has become significant.


Figure 4. Sprott Sentiment Indices: Gold Bullion, Silver and Gold Equities Positioning

Source: Sprott Asset Management. Data as of 10/30/2021. You cannot invest directly in an index. Past performance is no guarantee of future results. Included for illustrative purposes only. 


Looking Under the Hood of Gold Positioning Sentiment

The positioning graphs in Figure 4 are an amalgamation of different sources of gold holdings, but sometimes the details become obscured for simplicity. 

Figure 5 is total open interest in GLD ETF calls minus puts, expressed in notional ounces for easier comparison. 

As a reminder, these are notional ounces; the market value will be determined by how far out of the money the strike prices are. 

We overlayed gold held in ETFs, the largest aggregation of gold ounces, to illustrate how potentially significant GLD calls can be. 

This measure has made new 10-year lows, lower than any point during the bear market in terms of speculative interest via options.


Figure 5. GLD ETF Calls Minus Puts Expressed as Notional Ounces

Source: Bloomberg as of 10/30/2021. You cannot invest directly in an index. Past performance is no guarantee of future results. Included for illustrative purposes only. 


Silver Positioning: The Devil's in the Details

Figure 6 shows the amount of silver in ounces, held in ETFs and held in CFTC (Commodity Futures Trading Commission)8 Net Non-Commercial and Managed Futures. 

Silver in ETFs (primarily retail and smaller funds) is remarkably steady, as seen in the blue line in Figure 6. 

Note the doubling of silver ounces in ETFs in 2020. 

Visually, it is clear that CFTC and managed futures account for virtually all trading volatility. 

Since 2016, note the increase in the amplitude of positioning swings as quantitative-types (mainly CTAs, or commodity trading advisor hedge funds) become dominant. 

The wild swings in CFTC positioning are most certainly not dictated by conventional fundamental drivers but by algorithmic metrics.

Though the number of silver ounces held in ETFs (1.06 billion ounces) is now about four times the long-term average of CFTC positioning (283 million ounces), the trading volatility remains unchanged. 

With more ounces held in ETFs (passives) reducing overall net liquidity, the more the tail is wagging the dog. 

It is not difficult to envision what would happen if everyone decided to buy silver at once.


Figure 6. Silver Held in ETFs and Silver Held in CFTC

Source: Bloomberg as of 10/30/2021. You cannot invest directly in an index. Past performance is no guarantee of future results. Included for illustrative purposes only. 


A Changing Landscape

The extraordinary monetary stimulus unleashed by the global central banks in response to the COVID pandemic is ending. 

The fiscal impulse has also peaked and will be trending lower. 

The worldwide surge in inflation has already pressured several developed central banks to taper/tighten very abruptly. 

The Fed appears set to begin its taper process this week at its November 2-3 FOMC meeting. 

Already, the U.S. bond market is pricing in a policy mistake (tightening into a slowdown). 

As I have noted, the Fed is in a quandary; it will either have to tighten conditions to head off inflation and risk slowing growth even further, or the Fed will remain accommodative to continue growth and risk broadening and pushing inflation. 

Either option will elevate market risk conditions.

Gold is likely to react positively to either scenario, with the higher inflation one being more immediate. 

Either way, precious metals positioning has been brought down to low enough levels that any upward pressure would see prices advance meaningfully. 

We believe that precious metals are set up for a squeeze higher and are simply awaiting a catalyst. 

Remember, catalysts speed up reactions, and there appear to be several sources of potential activation energy for gold.


Special Note:

In economics, "pushing on a string" specifically refers to a situation where expansionary monetary policy is ineffective at raising an economy out of a recession. Source: Investopedia.

While the phrase "pushing on a string" is often attributed to English economist John Maynard Keynes, there is no evidence he used it. However, this exact metaphor was used in U.S. Congressional testimony in 1935, when Federal Reserve Governor Marriner Eccles, echoing the phrase uttered by Congressman T. Alan Goldsborough, said there was little the Fed could do to stimulate the economy and end the Great Depression:

Governor Eccles: Under present circumstances, there is very little, if anything, that can be done.

Congressman T. Alan Goldsborough: You mean you cannot push a string?

Governor Eccles: That is a good way to put it, one cannot push a string. We are in the depths of a depression and... beyond creating an easy money situation through reduction of discount rates and through the creation of excess reserves, there is very little if anything that the reserve organization can do toward bringing about recovery.


1 Gold bullion is measured by the Bloomberg GOLDS Comdty Spot Price.

2 Silver bullion is measured by Bloomberg Silver (XAG Curncy) U.S. dollar spot rate.

3 The Solactive Gold Miners Custom Factors Index (Index Ticker: SOLGMCFT) aims to track the performance of larger-sized gold mining companies whose stocks are listed on Canadian and major U.S. exchanges.

4 VanEck Vectors® Gold Miners ETF (GDX®) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index (GDMNTR), which is intended to track the overall performance of companies involved in the gold mining industry. The SPDR Gold Shares ETF (GLD) is one of the largest gold ETFs.

5 The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.

6 The S&P 500 or Standard & Poor's 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.

7 The SPDR Gold Shares ETF (GLD) tracks the price of gold bullion in the over-the-counter (OTC) market.

8 CFTC markets refers to the Commodity Futures Trading Commission, an independent U.S. government agency that regulates the U.S. derivatives markets, including futures, options, and swaps.

Covid success of mRNA vaccines opens way to a new generation of drugs

Personalised cancer treatments are among those being developed using a technology once distrusted by big pharma

Nikou Asgari in New York 

© FT montage; Min Yu (Eli and Edythe Broad Center for Regenerative Medicine and Stem Cell Research at USC),USC Norris Comprehensive Cancer Center, Pancreatic Desmoplasia | Pancreatic cancer cells


In 2017, Vinod Balachandran published a paper in the science journal Nature explaining an interesting phenomenon that he had discovered in a tiny number of pancreatic cancer survivors. 

T-cells circulating in their blood had developed the ability to identify, remember and fight back against proteins in the deadly tumours.

The surgeon, from New York’s Memorial Sloan Kettering Cancer Center, likened it to “auto-vaccination”. 

Balachandran described how actual vaccines using messenger RNA molecules could be used to replicate the response and give more patients the ability to defend themselves against the often fatal tumours.

His research caught the eye of a then little-known scientist, Ugur Sahin, chief executive of German biotechnology company BioNTech, who was so intrigued by the findings that he invited Balachandran’s team to Mainz. 

Over dinner at Heiliggeist, a nearly 800-year-old church-turned-restaurant on the banks of the river Rhine, and joined by scientists from Swiss pharmaceutical company Genentech, the group discussed the potential of mRNA vaccines to treat pancreatic cancer.

The pioneering BioNTech/Pfizer mRNA vaccine has helped to dramatically reduce deaths from Covid-19 © Bloomberg


“It was beautiful,” says Balachandran about the restaurant that once served as a hospital, and the conversation: “The purpose and the mission was common between us.”

Survival rates among pancreatic cancer patients are low. 

Only 10 per cent survive longer than five years, according to the American Cancer Society, making it one of the deadliest forms of the disease. 

By comparison, 90 per cent of breast cancer patients survive over the same period of time.

Two years of research followed the dinner and in December 2019, 20 patients were enrolled in the first clinical trial assessing mRNA vaccines in pancreatic cancer sufferers. 

With the world about to learn of a novel coronavirus, BioNTech and others would soon pivot their mRNA work to create a vaccine against Covid-19.

While the mRNA vaccines made by BioNTech/Pfizer and Moderna have become synonymous with helping to dramatically reduce deaths from Covid-19, Balachandran is among a growing group of scientists using the medical technology to investigate treatments for other illnesses.

Proponents of mRNA argue that combating Covid-19 is just the start and that its wider adoption heralds a revolution in modern medicine. 

Cures for some forms of cancer are among several areas being explored. 

Pharmaceutical companies are now turning their attention to the power of mRNA to tackle a range of illnesses from flu to heart disease and HIV. 

Very early vaccine trials are also under way for the Zika virus, yellow fever and rare diseases such as methylmalonic acidemia, where the body is unable to break down proteins.

“Five years ago there was hesitation from the larger companies about investing in this space,” says Michael Choy, head of life sciences at Boston Consulting Group. 

“Having so many people receive the mRNA product [for Covid] has made a big difference.”


Covid changes everything

The success of the Covid-19 vaccines has transformed the scientific and commercial view of the technology. 

No mRNA-based product had ever been approved by regulators until the crisis, and despite years of research the technology was regarded by some in the industry as difficult to commercialise.

“It is often a combination between medical need and feasibility,” says Sahin, about how the company has chosen the illnesses to target.

BioNTech’s focus has always been on creating individualised vaccines tailored to attack specific cancers, an approach that Sahin, an oncologist, believes will revolutionise the treatment of the disease. 

The company has begun drug trials to treat colorectal, breast, skin and other cancers.

Other drugmakers including Moderna are also studying personalised cancer vaccines using mRNA. 

They hope to treat diseases that are among the leading causes of death worldwide while also tapping into the multibillion-dollar oncology market. 

Sales of cancer therapeutics are forecast to hit $250bn by 2024, up from $143bn in 2019, according to McKinsey.

“The motivation for this individualised cancer vaccine is that every tumour is different,” Sahin says, adding that even patients with the same cancer type do not have identical tumours, meaning a personalised treatment is likely to be more effective than a one-size-fits-all approach.

Therapeutic cancer vaccines aim to stimulate an immune response against existing tumours, rather than preventing disease like a flu shot. 

They are tailored to the specific mutations in a patient’s tumour. 

Scientists remove tissue from the tumour through a biopsy and then sequence the mutations found in the cancer cells. 

The findings are compared to the DNA in a patient’s blood and algorithms are used to predict which specific proteins will elicit the strongest immune response. 

These proteins are then encoded — 20 of them, by both BioNTech and Moderna — into an mRNA molecule that forms the essence of the cancer vaccine.

Once injected, the instructions carried on the mRNA vaccine tell the body’s cells to express certain proteins which train the immune system to recognise the mutations on the cancer cells as foreign agents, and then attack and destroy those cells. 

“We started in 2014 and the time from tumour sample to vaccine was about three months but now with automation . . . it takes less than six weeks,” Sahin says.

Existing cancer vaccines primarily target the virus causing the cancer, rather than the tumour itself. 

In the US, the non-mRNA HPV vaccine is given to children as young as nine in order to protect against cervical cancer, which can be caused by the human papillomavirus.

Pancreatic cancer’s poor survival rate may be drastically improved by mRNA vaccines © Alamy Stock Photo

No more ‘dabbling’

Beyond cancer, mRNA trials are under way for various infectious diseases. 

Influenza vaccine studies are expected to produce results most quickly. 

An infectious disease such as Covid or flu mutates over time and so vaccines must be updated annually for new strains. 

Existing flu vaccinations use inactivated versions of the virus and provide between 40 per cent and 60 per cent protection because from the time the vaccine is made to when it is administered, the virus has often already mutated.

It is hoped that mRNA, which can be adapted more quickly, will dramatically increase the efficacy of seasonal flu jabs. 

Continuing its partnership with BioNTech, Pfizer in September started trials of an mRNA flu vaccine for adults aged between 65 and 85, one of the groups most vulnerable to the illness.

“The lowest hanging fruit is in viral vaccines because we have this clear proof of concept,” says Philip Dormitzer, chief scientific officer of Pfizer. 

“But we don’t think that’s the endpoint.”

He adds that the company was already working with BioNTech on developing a flu shot when Covid hit “so we obviously switched to work on a Covid-19 vaccine using very much the technology that we were preparing for the flu vaccine. 

As bandwidth opens up, we are now going back to working on the flu vaccine.”

Pfizer’s flu jab is its only other mRNA collaboration with BioNTech so far. 

“I think we are capable of going alone for everything but that doesn’t necessarily mean that’s what we’ll choose to do,” says Dormitzer. 

The company has yet to reveal which other areas it plans to target with mRNA but Dormitzer says rare diseases, protein replacement and gene editing “are all of interest”.

Future mRNA vaccines may be able to treat Covid-19, flu and respiratory syncytial virus in one jab © NurPhoto via Getty Images


“There may be companies who say ‘we have 20 vaccines in our pipeline. You’re not going to see that approach coming from Pfizer,” he adds.

By contrast, at Moderna’s annual research and development day in September, the company laid out its mRNA plans — all 34 of them, in six different areas of medicine. 

The 11-year-old biotech group, whose stock market ticker is MRNA, is spending about half of its energy on tackling respiratory viruses and other infectious diseases, according to Stephen Hoge, its president, and the other half on cancer vaccines, rare diseases and gene therapy.

“It’s tragic that we’re going to have about 4m Covid deaths this year,” says Hoge, “but every year, there are about 4m deaths from respiratory viruses. 

The difference is that it is just in smaller buckets . . . half a million here, 100,000 there, and it totals up to a terrifying number every year.”

The Massachusetts-based company aims to create a pan-respiratory vaccine that would provide combined immunity from Covid-19, flu and other infections such as respiratory syncytial virus — a common disease that can cause lung infections — in one jab. 

“Nobody wants to be a pin cushion,” adds Hoge. 

“We can actually get this into one needle.”

Each of Moderna’s respiratory vaccines must be individually assessed before a combination is made. 

The company started trials of its flu shot in July while its vaccine for cytomegalovirus, a disease that has no vaccine and can cause birth defects in babies, is in phase 2 trials and still some way from regulatory approval.

Responding to criticism that Moderna — whose Covid vaccine is its only approved drug to date — is aiming too high with 34 programmes, Hoge argues that although some pharmaceutical companies are “dabbling” in mRNA now that its effectiveness has been proven by the Covid vaccines, Moderna is all in.

Success is not guaranteed

The scientific and commercial success of the two mRNA Covid-19 vaccines has spurred a rush of investment into the sector. New mRNA treatments are expected to begin entering the market from 2025, according to research by Boston Consulting Group. Revenues are expected to peak at $23bn in 2035, with prophylactic and therapeutic cancer vaccines comprising 50 and 30 per cent of sales respectively.


New York surgeon Vinod Balachandran pinpointed T-cells in pancreatic cancer survivors that fought back against tumours . . .  © Ethan Kavet

. . . His research caught the eye of Ugur Sahin and Ozlem Tureci, founders of German biotech company BioNTech © Getty Images


Julia Angeles, investment manager at Baillie Gifford, an early investor in Moderna, believes that mRNA is set to revolutionise many aspects of medicine. 

Baillie Gifford is the biggest single investor in Moderna with a 11.4 per cent stake and is the fourth largest shareholder of German mRNA-focused company CureVac, underscoring the group’s faith in the future of the method.

“I genuinely think that Moderna is going to be the first biotech company to reach a $1tn valuation,” says Angeles, of a company currently valued at $124bn. 

“In five years it is likely . . . because no one has the breadth and depth of technology that Moderna has.”

Some might dismiss that as investor hype, but other companies are priming to compete.

French pharmaceutical group Sanofi stopped trials of its own mRNA Covid jab in October, saying that it was too late to enter a market dominated by BioNTech/Pfizer and Moderna. 

However, the company has committed to the potential of the technology by setting up an mRNA centre to develop vaccines into which it will invest €400m a year. 

Sanofi also bought its partner Translate Bio for $3.2bn in August, hoping to capitalise on its mRNA therapeutics in areas including cystic fibrosis and lung disease.

US drugmaker Merck is also on the prowl for acquisitions, eyeing up several mRNA therapeutics companies; while in the UK, AstraZeneca struck its first RNA deal in September, partnering with VaxEquity to develop up to 26 drugs.

Yet, despite the optimism and Covid-era breakthroughs, it will take years before trials in some areas start producing results and for drugs to be approved. 

Regulators around the world accelerated their approval processes during the pandemic because of the urgent need for a vaccine, a speed that is unlikely to be replicated for other medicines.

Hoge says Moderna’s respiratory syncytial virus vaccine, which is set to move to phase 2 trials, could be ready in three years, if the data is successful. 

But he acknowledges that “the Covid pandemic was a unique circumstance”.

“If people want to be . . . a little more conservative, or see a little more data before they make a decision, it could take a few years. But I hope faster than that,” he adds.

The likelihood of failure is incredibly high. Less than 10 per cent of drugs that enter phase 1 trials ever reach the market, according to research by the Washington-based Biotechnology Innovation Organization. Nearly 60 per cent of drugs which make it to phase 3 trials still fail.

David Braun, an oncologist focusing on kidney cancer at the Dana-Farber Cancer Institute in Boston, says it is a long road from Covid vaccine to personalised cancer jab. 

“Medicine has made this mistake many times in the past, going from enthusiasm and great ideas to overpromising,” he says.

“There’s a lot of promise for mRNA to be used beyond infectious disease but it’s a big leap.”

And mRNA vaccines do not always provide blockbuster results. 

German biotech CureVac abandoned its mRNA Covid vaccine on Tuesday after disappointing trial results showed only 48 per cent efficacy. 

The company has decided to focus on its mRNA Covid jab with GlaxoSmithKline instead. 

“It is an example that we don’t know everything we need to know yet about what makes these therapies work,” says BCG’s Choy.

Selecting the illnesses to target will be a crucial decision for new entrants to the mRNA market.

Philip Dormitzer, chief scientific officer of Pfizer; Julia Angeles, at Baillie Gifford, early investor in Moderna; Stephen Hoge, president of Moderna


“It does not make sense to replace, for example, a protein-based vaccine which is highly effective, has 95 per cent effectiveness, and try to make an mRNA,” says BioNTech’s Sahin. 

“The question here is what is going to be improved?”

Vaccines for chickenpox, shingles and MMR are unlikely to be replaced by mRNA-based treatments as they are effective and researchers are focusing on illnesses where patients’ outcomes can be improved.

But armed with the success of the Covid vaccines the industry’s top scientists are not short on big and bold ambitions.

Sahin points to the prospect of gene therapy to help repair damaged tissues and organs as a possible frontier that mRNA can help cross in the decades to come, potentially opening the way to delivering new gene therapies such as Crispr. 

“Organ repair will be an important topic for the future,” he says, “this is exciting.”

The real question about China for investors

Beijing’s policymaking process is the main issue, not political objectives

Logan Wright 

Bearish investors argue that President Xi Jinping has shifted China’s political focus towards ‘common prosperity’, but bullish investors believe Beijing’s commitments to economic growth remain unchanged © Andy Wong/AP


China’s crackdowns against the property sector and its technology giants have jolted financial markets, sparking a debate about whether or not China is still “investable”.

Longer-term bullish investors argue that Beijing’s commitments to economic growth and market liberalisation remain unchanged. 

They maintain recent actions such as tougher rules on property developer debt loads are efforts to reduce froth in the sector. 

Necessary adjustments in credit risk pricing will improve the functioning of China’s financial markets over time.

In contrast, bearish investors argue that under Xi Jinping China’s fundamental political objectives have changed and maintaining growth and liberalising capital markets are now less important to the country’s leadership than goals related to “common prosperity”. 

They claim this summer’s campaigns, including the attacks on technology firms and education and tutoring businesses, imply that China is increasingly unsafe for investors.

As interesting as this debate may be, it is the wrong one. 

The most important question now confronting markets concerns Beijing’s policymaking process, rather than political objectives — the means rather than the ends.

Combating contagion from the woes of Evergrande and other property developers spreading into the broader economy requires an effective countercyclical policy response. 

But that response has not been forthcoming so far and the reasons for Beijing’s inaction are unclear. 

Are China’s technocrats holding back because the current property market turmoil is part of a controlled effort to reduce risk? 

Or have new political factors prevented China’s technocrats from acting?

Despite an unprecedented credit expansion lasting more than a decade, China has not faced a debilitating financial crisis or a sharp slowdown in growth (apart from last year’s pandemic-related slump).

Stability cannot be easily explained by macroeconomic factors such as China’s high savings rate or the internal nature of its debt, nor by political factors such as the state’s administrative tools or Beijing’s lack of legal constraints.

Rather, Beijing’s obsession with political stability has generated a long record of authorities being credibly expected to respond to even minor episodes of financial stress in order to calm markets.

But the credibility of this expectation depends upon the policymaking process working as it has in the past. 

At some point, waiting too long to respond to the current property market turmoil will generate too much contagion and several factors will weaken China’s economy and financial system. 

They include the effects of falling property prices on household consumption, the impact of falling land sales on local government finances and the use of property as collateral for lending.

Beijing’s long-term objectives will not matter if the near-term tools of economic adjustment falter. 

Most economic analysts argue that Beijing will be forced to back down on controls targeting the property sector, given its importance to the economy.

But political analysts argue there is growing evidence that the leadership’s campaigns to reshape the economy are constraining the countercyclical responses that markets are accustomed to seeing.

As economic policy tools are newly infused with political significance, technocrats face fresh difficulties reversing course or balancing messages from leadership. 

Similarly, these analysts argue the centralisation of authority has weakened some of the balancing forces within the party-state system that might correct policy mistakes midstream. 

As a result, while the outcome of this debate is still uncertain, policy overshooting has become a far more significant risk.

In 2013, China’s central bank tried to reduce speculation in the interbank market by staying silent in the face of a sudden payment default. 

The banking system almost shut down in response, with short-term rates reaching 20 to 30 per cent. 

The central bank was forced to relent and inject liquidity, a precedent that facilitated the rapid expansion of the shadow banking system.

Beijing’s objectives were understandable, but the methods used created the opposite effect to what was intended. 

Given the political salience of China’s campaign against the property sector, a similar about-face is difficult to envision. 

But how and when Beijing responds to the market contagion is now more important than the leadership’s original objectives and will determine how investable China remains.


The writer is director of China markets research at Rhodium Group

Latin America's Monster Movie

Latin America has long suffered from left-wing populism, and now it is plagued by right-wing populism. Several upcoming elections will likely pit a right-wing King Kong against a left-wing Godzilla, promising to leave only destruction in their wake.

Andrés Velasco


SANTIAGO – Latin Americans have many talents. 

One is a remarkable ability to misgovern ourselves, as the pandemic has made clear. 

Six of the 20 countries with the most COVID-19 deaths per capita in the world are in Latin America. 

Peru tops the list. 

Brazil is eighth.

Yes, poverty, a shortage of hospital beds, and overcrowded housing all helped the virus spread, but those factors alone cannot explain why the region has done so badly. 

Many countries in Asia and Africa suffer from the same problems but had fewer deaths per capita. 

Even countries that vaccinated people early, like Chile – or which, like Uruguay, were held up as successes when the virus first hit – have ended up mediocre performers.

Latin America is once again getting ready to lead the world – this time, in post-pandemic economic failure. 

The region enjoyed a couple of quarters of vigorous recovery, fueled by high commodity prices, but the engine of growth is already sputtering in several countries. 

The International Monetary Fund expects Latin America to be the world’s slowest-growing region in 2022. 

Even worse, the losses look set to be permanent, with the IMF’s just-released report on the region concluding that it will probably never return to the path for per-capita income envisaged before the pandemic. 

By contrast, the Fund projects that advanced economies will soon converge to their pre-virus trajectories.

Standard economic growth theory maintains that poor countries should gradually catch up with the rich. 

Latin America is the exception that confirms the rule: for the foreseeable future, it will fall even further behind.

In the past, the region’s economy suffered whenever commodity prices fell. This time around, it will suffer during what looks like a commodity mini-boom. 

Part of the reason is that slow growth in productivity and income are longstanding problems. 

From the 1970s to the 1990s, Latin America missed the boat of export-oriented manufacturing that made East Asia rich. 

In the twenty-first century, it missed the boom in supply chains that benefited countries from Bulgaria to Vietnam. Mexico is tightly bound to North American supply chains. 

The large South American economies of Argentina, Brazil, and Colombia are not.

Economic scarring from the pandemic threatens to weaken long-term growth performance further. 

Thanks to the spectacularly selfish behavior of teachers’ unions, which refused to re-open schools long after workers in other sectors had returned to their jobs, Latin American pupils were kept away from the classroom for an average of 48 weeks during the pandemic. 

In other emerging and developing economies, the figure was only 30 weeks. 

Privileged kids with access to broadband kept learning from their homes; poor kids did not. 

The impact on Latin American productivity will last for decades – and make income inequality worse.

A collapse in investment is also pushing down growth. 

A recent survey in Chile revealed that 70% of companies have put their expansion plans on hold. 

The reasons are not hard to fathom. 

In the same week the survey was conducted, downtown Santiago was vandalized, while Chileans learned that a far-right candidate had joined an extreme left-winger atop opinion polls ahead of the presidential election on November 21.

Latin America has long suffered from left-wing populism. 

Nicolás Maduro in Venezuela, Rafael Correa in Ecuador, and the Kirchners (husband and widow) in Argentina have excelled at portraying themselves as the people’s only true representative – and then proceeding to weaken the democratic institutions that could hold them accountable for their disastrous policies. 

Now the region is also plagued by right-wing populism. 

Jair Bolsonaro in Brazil, some of Álvaro Uribe’s disciples in Colombia, and José Antonio Kast in Chile are reciting the same Trumpian script: law and order, anti-immigrant nationalism, and anti-woke cultural warfare. 

Chile, Brazil, and Colombia will soon hold presidential polls whose second rounds will likely pit a right-wing King Kong against a left-wing Godzilla. 

In the movie, the two monsters’ clash left only destruction. 

The same could well happen in Latin America.

Moreover, while the pandemic may be ending, the specter of a debt crisis looms. 

The good news is that most countries did not lose market access, so governments and firms could keep borrowing to get over the pandemic hump. 

The bad news is that they now have to live with the consequences. 

Much higher public and private debt, shortening maturities, and rising world interest rates are a toxic combination. 

In several countries – including Brazil and Argentina – government debt ratios are already worryingly high. Faster-than-expected monetary tightening by the US Federal Reserve could set the stage for the kinds of debt runs and rollover crises that have often beset the region.

Yet, for all its woes, Latin America can begin growing again if it seizes two opportunities. 

One is the re-shoring prompted by the pandemic and by rising tensions between China and the West. 

Guangdong’s loss could be Guadalajara’s gain. 

And if the more advanced South American economies improve their ports and roads, and manage to keep their finances reasonably stable, they could benefit as well. 

This is their second (and perhaps last) chance to catch the supply chain boat they first missed a generation ago.

Greater investment in green infrastructure could also help. 

Multilateral lenders will be looking to finance projects in any shade of green, and the region should take full advantage of it. 

The trick will be to increase investment while adding as little as possible to the region’s public-debt burden. In low-income countries, grants should play the central role. 

And for middle-income countries, equity inflows, private-public partnerships, and other kinds of innovative financing arrangements should take center stage.

According to the Inter-American Development Bank, Latin American governments can make room for green investment if they cut regressive expenditures. 

That is right, but easier said than done. 

Powerful players often strongly desire undesirable expenditure. 

Regressive and eco-unfriendly energy subsidies are an example. 

Just ask politicians in Argentina and Ecuador who have struggled to eliminate them.

“Brazil is the country of the future and always will be,” goes the old adage. 

Nowadays, too many other poorly governed Latin American countries are courting the same destiny.


Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science. He is the author of numerous books and papers on international economics and development, and has served on the faculty at Harvard, Columbia, and New York Universities. 

Is an Energy Winter Coming to Europe?

Surging electricity prices in Europe have offered a preview of what awaits developed economies as they usher in new energy systems in pursuit of net-zero greenhouse-gas emissions. Short-term disruptions are not yet avoidable, but they can be mitigated with deft management.

Xavier Vives



BARCELONA – The European Green Deal aims to reduce Europe’s greenhouse-gas emissions to net zero by 2050, not least through decarbonization of the energy sector. 

But while Europe wants to be a global leader in the fight against climate change, the question is whether it can achieve its goal and at what cost. 

The task is formidable, and the obstacles are daunting.

The COVID-19 crisis demonstrated the scale of the changes that are needed to reduce carbon usage massively. 

Consumers and politicians want to avoid such a shock by phasing in stable supplies of cheap, green energy. 

Good policy and technological progress will bring that objective within reach; but, for now, there are trade-offs.

Because carbon must be taxed sufficiently to account for the negative climate externality it generates, the price of carbon-dioxide emissions must go up, which will make electricity more expensive. 

That, together with an increase in natural-gas prices, is why Europeans have experienced a recent surge in wholesale electricity prices. 

The political consequences of this development were foreshadowed in the 2018-19 gilets jaunes (yellow vests) revolt in France, which was a response to only a moderate increase in fuel taxes.

Europe must import most of the natural gas it needs. 

But to guarantee a secure supply, it puts itself at the mercy of countries like Russia and Algeria, which tend to use their gas resources geopolitically (against Ukraine and Morocco, respectively). 

Russia supplies one-third of the gas Europe needs and is pushing to activate Nord Stream 2, a pipeline to deliver supplies directly to Germany, bypassing Ukraine. 

Making matters worse, individual countries such as Germany or Spain, not the European Union, negotiate with suppliers. 

Exploiting these dynamics, Russia has demonstrated recently that it can influence the gas price by withholding supply.

The conflict between climate priorities and cheap, secure energy is growing. 

A country with coal reserves can always avail itself of those resources to secure its energy supply. 

A case in point is Germany, where coal-fired electricity generation represents about 30% of the power supply, owing to the government’s decision to phase out nuclear power following the 2011 Fukushima disaster in Japan.

The surge in gas and electricity prices this year makes clear that the energy transition will not be a smooth process. 

The challenges are enormous. Chief among them is overcoming the intermittency problem. 

To mitigate price volatility, renewables require a backup technology to fill in when wind or sun intensity is low. 

Natural gas usually serves this function – hence the spike in electricity prices – and that will remain the case at least until more efficient electricity storage facilities are in place.

In the EU’s wholesale electricity market, the price is determined by the last technology in the merit order of supply (that is, the sequence of preferred power plants). 

Typically, this backstop is a combined cycle turbine plant (gas) or a hydroelectric facility. 

The market is a pool where generators’ supply schedules are aggregated and aligned with demand to obtain the price at which all suppliers are remunerated.

Ideally, the price signal from a competitive market would give the right indication for investment by producers and consumption by users. 

But, in fact, there is no free entry for some technologies (such as nuclear and hydro), users are not necessarily responsive to prices, and the structure of supply is not competitive but oligopolistic.

But these factors alone are no reason to dump the pool, so the question is how to provide the right incentives for investment, particularly in renewables. 

Here, long-term contracts to supply electricity and procurement auctions may play a crucial role in improving the functioning of the pool and mitigating market power. 

Owing to substantial cost reductions over the past decade, renewables are now competitive and will flourish as long as fossil fuels are not subsidized and carbon is priced appropriately.

Investment depends on regulatory stability, and thus could be impaired by a hasty reaction to the current price spikes. 

Still, there are ideas worth considering. 

The Czech Republic, Greece, France, Spain, and Romania have proposed that the EU coordinate gas purchases and create a strategic reserve. 

That is an excellent idea, as it would both increase the EU’s bargaining position and improve supply security.

Other recent proposals must be carefully assessed to avoid any interference with price formation. 

Rather than trying to cap electricity prices, it is better to subsidize vulnerable consumers directly. 

The wholesale market must continue to provide a price signal for producers and consumers. 

The inevitable increase in the price of emissions rights (within the emissions trading system) should not be blamed on speculators; it most likely reflects the market’s anticipation of higher CO2 prices – a necessary component of the energy transition.

If Europe wants to liberate the fight against climate change from the politics of energy security, it first must achieve a balanced energy mix in an integrated market. 

That means it cannot ignore the potential contribution of nuclear technology, as the Intergovernmental Panel on Climate Change has pointed out.

Furthermore, a unified European energy policy for gas procurement and storage is necessary, as are investments to develop new technologies such as carbon capture and green hydrogen. 

But the EU cannot be naive. 

Climate change is a global problem. 

If Europe’s emissions reductions are offset in other parts of the world, there will have been no progress, and Europe will end up less competitive. 

A carbon border adjustment tax will be needed to address this concern.

The EU has a reputation for acting only when it is on the brink of disaster. 

We may well be in one of those moments. 

Winter is coming.


Xavier Vives is Professor of Economics and Finance at IESE Business School.