The Bear Thesis on Gold Unwinds
As we have been saying for many months, the powerful anti-gold thesis ultimately depends on confidence in the Fed. Today, that confidence took a very serious hit.
The Bear Thesis on Gold Unwinds
As we have been saying for many months, the powerful anti-gold thesis ultimately depends on confidence in the Fed. Today, that confidence took a very serious hit.
The anti-gold thesis is that the Fed’s Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) have worked, the US economic recovery is reasonably strong and about to accelerate, the Fed will therefore raise rates, the dollar will soar and gold should be sold. Yesterday, the Fed statement and news conference effectively destroyed this thesis. Once again, the Fed downgraded the US economy as its projections once again proved too optimistic. Once again, the Fed failed to follow through with a hike in short term interest rates, as we predicted.
The Fed is beginning to resemble a failed institution. QE and ZIRP have not generated increased investment, higher consumption and faster economic growth. What they have done is destroy the value of savings and encourage speculation in financial assets. The economic models that have driven Fed policy are wrong, as we have said for many years, because they assume that economic performance can be improved by stimulating demand via ultra-loose monetary policy and credit expansion rather than savings and investment.
In our view, the Fed is now lost and confused. So are many investors. The stage has been set for western investors to return to gold as the only reliable asset for wealth protection. All that remains, we believe, is for investors to connect the dots. Debt levels are far too high to support economic expansion. Inventories are too high to support rising profits and retail sales are weak. Industrial production is falling. The global economy is slowing down. We think all the signs are in place for a recession. Financial assets are far too rich for this environment. Default risks are rising. As we have said for some time, the next shift in Fed monetary policy is more likely to be another round of QE than an end to ZIRP.