ORLANDO, Florida, Sept 4 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. equity and bond prices rose on Thursday as soft U.S.

jobs data boosted hopes for an interest rate cut from the Fed

later this month. Whether that transpires could be determined by

Friday's critical August employment report.

More on that below. In my column today, I look at the

explosion of gold as a share of central banks' reserve assets,

which is now bigger than that of the euro and U.S. Treasuries.

Its footprint is growing. Fast.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Fed nominee Miran tells Senate panel he's 'not at

all'

Trump's puppet

2. 'Fed put' works for stocks but not long bonds:

Mike

Dolan

3. Trump takes tariffs fight to U.S. Supreme Court

4. Google ruling shows how tech can outpace

antitrust

enforcement

5. U.S. small-cap stocks break out, but for how

long?

Today's Key Market Moves

* STOCKS: China stumbles, Europe advances, Wall

Street

rises strongly and evenly: three main indexes and Russell 2000

all up 0.8-1.0%.

* SHARES/SECTORS: Consumer discretionary +2.25%,

utilities

is the only U.S. sector in the red, down -0.2%.

* FX: The dollar rises, up more than 0.5% against

ZAR,

NZD, SEK and NOK.

* BONDS: U.S. yields down 2-4 bps, curve bull

flattens

slightly ahead of jobs data. Long bond yields in Europe, Japan

also fall back from historic highs.

* COMMODITIES: Oil down another 1%. Gold breaks

7-day

winning streak, longest since March 2024.

Today's Talking Points:

* Central bank independence

Stephen Miran, U.S. President Donald Trump's nominee for the

Fed Board of Governors, testified before a Senate committee on

Thursday. Miran said the Fed's independence is "paramount", he

will act independently if confirmed, and he is "not at all"

Trump's puppet.

Trouble is, this may only be lip service. Trump's efforts to

fire Governor Lisa Cook, pressure Chair Jerome Powell and stuff

the Board with allies sympathetic to his low interest rate view

suggest politicization of the Fed is well underway. So far,

markets have only wobbled. But many observers fear they could

get a whole lot more volatile.

* Tarifflation

Are tariffs inflationary? So far, the evidence suggests

not. Goods price pressures may be heating up, but headline

inflation readings aren't, and inflation expectations aren't

becoming un-moored.

New York Fed John Williams said on Thursday he sees lower

risks to inflation from tariffs than he originally expected,

while Trump advisor and Fed nominee Miran said tariffs aren't

inflationary at all. Research by the Yale Budget Lab this week

is probably on the money - it's too early to say, and what's

more, it's complicated.

* Oil (price) spill?

Eight OPEC+ members are mulling an additional output hike as

the group seeks to regain market share. OPEC+, which pumps about

half of the world's oil, has reversed its strategy of production

cuts from April and has already raised quotas by about 2.5

million barrels per day.

Further increases should put prices under pressure, a

welcome relief for the many governments and central banks trying

to get inflation down.

Analysts at Goldman Sachs say the market is already

oversupplied, and moves like this from OPEC+ could deliver a big

enough glut to push Brent down towards $50 a barrel next year.

That would imply another 25% downside from here.

Gold's rise in central bank reserves appears unstoppable

Worries over inflation, deteriorating U.S. fiscal health,

Federal Reserve independence, and geopolitical instability are

raising questions about the stability of long-term Treasuries,

traditionally the world's safest asset. In response, many

central banks are turning back to that "barbarous relic", gold.

The fortunes of gold and government bonds have diverged

sharply this year, a split highlighted this week as the price of

bullion struck a new high and many long-dated bond yields hit

levels not seen in years or, in some cases, ever.

U.S. Treasuries haven't sold off nearly as sharply as

European or Japanese bonds, largely because U.S. debt still

enjoys solid underlying demand from central banks and other

official institutions managing foreign exchange reserves.

But Treasuries have essentially been "treading water" in

global reserve portfolios in recent years, while central banks'

gold holdings have mushroomed, thanks to accelerating demand and

soaring prices.

GOLD STANDARD

Gold has recently surpassed the euro to become the

second-largest global reserve asset after the U.S. dollar and,

for the first time since 1996, gold represents a bigger share of

central banks' reserves than Treasuries.

Central banks now hold 36,000 tons of gold, according to a

European Central Bank study, having hoovered up huge volumes

since the post-pandemic inflation spike and Russia's invasion of

Ukraine in 2022. They have increased their holdings by more than

1,000 metric tons in each of the last three years, a record pace

and double the average annual purchases in the preceding

decade.

With the price of gold currently above $3,500 an ounce - up

a whopping 35% so far this year - central banks' gold holdings

are now worth around $4.5 trillion. That's significantly more

than their $3.5 trillion stash of Treasuries.

Moreover, Treasuries' share of total reserves has been

shrinking in recent years. It is now only 23%, by some measures,

down from previous peaks of more than 30% in the 2010s, and

below gold's current 27% share.

CHANGED DAYS

The last time gold accounted for a greater share of global

reserves than Treasuries was 1996. That date is significant.

Many European countries sold gold aggressively in the late 1990s

ahead of the launch of the euro. Surprisingly, the biggest

seller was Britain, which wasn't even joining the single

currency union.

Gold slumped to around $250 an ounce in August 1999, down

40% from early 1996. This prompted central banks to adopt the

"Washington Agreement" that September to effectively cap their

sales.

In broad terms, the late 1990s was not a gold-friendly time.

It was a period of solid growth, low and stable inflation,

subdued macro volatility, and the rarest of rare occurrences - a

U.S. budget surplus.

Nearly three decades on, the global macro environment is

very different, one far more conducive to gold. Treasuries, in

relative terms, are struggling.

Tavi Costa, macro strategist at Crescat Capital, says there

are clear parallels between what we're seeing today and the

1970s when monetary instability, inflation, and geopolitical

shifts made gold a key strategic reserve asset for central

banks.

The fact that foreign central banks now hold more gold than

U.S. Treasuries is a "significant milestone" that signals a

deeper, longer-term, structural change in reserve management,

Costa argues. "What we are witnessing may well represent the

early stages of a major realignment in global reserve

composition."

Could gold recapture the eye-watering 75% share of central

banks' reserve assets it held in the late 1970s and early 1980s?

That's unlikely and would probably require a prolonged economic

crisis and years of double-digit inflation.

But what will stop the yellow metal's footprint from

expanding? That would probably require inflation pressures,

geopolitical risk and economic uncertainty to cool

significantly. From where we sit now, none of that seems likely

in the near term, meaning reserve managers will continue to load

up on gold.

You wouldn't bet against it.

What could move markets tomorrow?

* Japan household spending (July)

* UK retail sales (July)

* Germany manufacturing (July)

* Euro zone GDP (Q2, revised)

* Canada PMIs (August)

* Canada employment (August)

* U.S. nonfarm payrolls (August)

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