The Federal Reserve's Job 1
Perhaps you think that the Fed's priorities are defined by its official mandate...price stability and full employment. Or, if you have been following the news, you may add the third mandate which has emerged in Chairman Powell's statements...continuing the current economic expansion. Or as a cynic, you might also add the preservation of the banking system because, after all, the commercial banks own the Fed.
The Phony Wealth Effect and Gold
Our contention is that gold is real wealth. Gold is its own final settlement and no one else's liability. What this means is simply that gold stands for itself, it does not depend upon the faith and good credit of any other person or thing...it is universally accepted as final settlement. It has been so for thousands of years.
Gold Has Broken Out
Our Prediction: A New All-Time High Gold Price in 2021
It Looks Normal But it Ain't
Buy equities and sell gold because the economy is strong and the Fed is supportive? Really? We think you should not be fooled by the reigning narrative.
The Logic Behind Buying Gold Now
In our view, the gold story is getting much simpler and much more urgent.
Fed Policy Turns in Favor of Gold
On January 30th, 2019, the Federal Reserve issued a statement confirming an abrupt about face. After five years of promising 'normalization' of monetary policy and a pre-set path that included eight rate hikes and the sale of hundreds of billions of dollars in assets, the Fed paused in mid stride, thereby opening the door for a new gold bull market. The Fed's path to monetary normalization reverted to flexible data-dependency almost overnight. Suddenly, rates could now go up or down and the balance sheet could shrink or grow.
The FOMC Opens the Door to a Higher Gold Price
Yesterday's FOMC statement and the subsequent news conference with Chairman Powell removed the last significant headwinds for gold. We think that a new bull market for gold is about to commence.
Signs of Stress in Credit Markets
Like passing a major accident on the highway, investors are fixated on the stock market. We urge you to pay at least equal attention to credit markets. QE (Fed purchases of assets) had its most important impact on credit markets...slashing interest rates, expanding credit, lowering credit standards, weakening covenants and encouraging excessive risk-taking in a reach for yield. We expect the most important impact of QT, the Fed sale of assets, will therefore also be seen in credit markets.
Markets Reject the Fed?
On Wednesday, the Fed raised the Fed Funds rate by a quarter point as expected. The FOMC statement was suitably 'dovish' by reducing the consensus forward guidance on future rate hikes from three to two. The Fed also signalled that its Quantitative Tightening program would continue on "autopilot" as planned. The response was not what the Fed expected. Stocks fell hard and bonds soared.
The Gold Market Is Turning (We Think)
As we have noted, markets are deep into what we have called the Tariff Trade based on the assumption that Trump would win his trade war with China and that he would do so before it had any serious negative impact on the US economy. The Tariff Trade was to go long certain US equities and the dollar and short the yuan, commodities and gold. The result? As many commentators have noted, the gold price has been tightly correlated to the Chinese yuan since the trade war was initiated by President Trump six months ago.