Why gold’s correction may be over

[7 min read]

Dear Reader,

The much-anticipated US Federal Reserve Board meeting and accompanying statement and press conference occurred overnight.

I’m really not sure what all the anticipation was about. As far as I’m concerned, the result was a foregone conclusion. The Fed didn’t disappoint. The Financial Review reports:

‘Washington DC | The US Federal Reserve foresees the economy accelerating quickly this year but still expects to keep its benchmark interest rate pinned near zero through 2023, despite concerns in financial markets about potential higher inflation.’

As Chairman Powell said, the Fed will keep rates low even in the face of higher inflation. The plan is to let inflation run above 2% and get comfortable, it will stay there before even thinking about increasing official rates.

I know, I know. In the real world, inflation isn’t below 2%. There is asset price inflation that is off the charts and normal consumer price inflation that is hidden by falls in size and quality of goods and services. But central bankers don’t deal in real-world stuff. So you have to accept their definition of inflation if you want to play the game.

And their definition of inflation excludes ‘volatile’ food and energy prices. And until unemployment falls to low levels and puts pressure on wages, there is very little chance of ‘inflation’ getting out of hand.

The message here is that rates are staying low for years to come. And even when they do rise, it will be on the back of rising inflation. So the idea is to ensure that REAL rates (the nominal rate minus inflation) remains low or negative for a loooong time.

Remember, the world is swimming in debt. Most of it is government debt. The only way to get out of this debt hole is to inflate it away. You do that by holding real rates below zero for a very long time.

If you’re wondering how to play this market over the next few years, I highly encourage you to check out my ‘Life at Zero’ presentation. In it, I explain how you can invest sensibly (and not take crazy risks) in a market where interest rates will be at zero for years to come.

Click here to view the presentation. I even give away a free stock tip!

The Fed also said it will continue with its $120 billion per month of government bond and mortgage security purchases. That’s nearly US$1.5 trillion of indirect government financing per year right there.

Surely all this ‘money’ will lead to an ‘inflation’ rate well above 2% and interest rates will have to rise faster than expected?

Well, no.

You see, the problem is that the response to COVID dealt a fatal blow to the US economy. More money may have been pumped into the economy, but the velocity of that money has slowed to record lows.

You can see that in the chart below:

That’s what a broken economy looks like. Good luck generating sustainable inflation in it!

In case there was any confusion, the market liked the Fed’s announcement. At the close the Dow was up 0.6%, the S&P 500 0.3%, while the NASDAQ advanced 0.4%.

The 10-year bond yield increased a few basis points to 1.645%. Just on that, there was a question at the press conference from CNBC’s Steve Liesman about whether the Fed was contemplating yield curve control.

Powell obviously knew the question was coming. In response, he read a scripted answer that didn’t answer the question. Rather, he just said that the Fed was happy with its US$120 billion per month asset purchasing program.

In other words, there will be no specific targeting of bond yields at this stage. That tells you the Fed isn’t too concerned by yields trading at 1.65%. And why would they be? Yields are still very low, and a healthy economy should be able to handle much higher rates than that.

But, as I just said, the US economy is far from healthy. The Fed may not want to show any concern at this stage but should yields increase above 2% and head towards 2.5%, I doubt they will be so sanguine.

Despite the lack of action on the yield curve control front, gold liked the Fed’s statement too. It jumped over US$10 an ounce and now trades around US$1,744 an ounce.

Gold was responding to the fact that the Fed is all but saying it supports the idea of holding real rates low or negative for years to come.

It’s a good message for gold to hear. Average long-term REAL treasury yields have been rising this year. On the first trading day of the year, they were -0.50%. But they have since come down and on 12 March hit a high of 0.07%.

So they’ve moved ever so slightly into positive territory. That’s why the gold price has been under pressure this year. But gold has rallied off its lows over the past few weeks. I don’t know if that’s just a pause in the downtrend that began last year. But it could be that gold is seeing a future where the Fed is happy to let inflation rise and do nothing about it.

If that’s the case, gold’s correction may be over…

Cheers,

Greg Canavan,
Editor, The Rum Rebellion

A Big Con
By Bill Bonner

Last Thursday must go down in history as one of the US’ most important WTF days. That’s when the American Rescue Plan became law. It is so remarkable…so flat out preposterous…so clearly a big step towards the US’ rendezvous with disaster…

And yet…the president and all his minions are fanning out…explaining… justifying…excusing…taking credit…and claiming paternity…

…of a monster.

Bloomberg:

‘The White House wants to underscore to Americans that the legislation Biden championed — and was only supported by Democrats — is central to jump-starting an economy battered by a year of lockdowns and job losses set off by the coronavirus…

‘“What the president recognizes from his own experience is that when it’s a package of this size, you know, people don’t always know how they benefit and what it means for them,” White House Press Secretary Jen Psaki told reporters Monday. “He believes the American people deserve every high-level person from our administration out there explaining, discussing, taking input.”’

We sympathise with anyone trying to explain it. We couldn’t do it. It makes no sense…well, not in any other terms but old-fashioned political payola and economic folderol.

But even in those sordid terms, it is a brain buster. The election is over.

This is not the time to buy votes. This is the time to stab naïve voters in the back by not keeping your campaign promises. After all, politicians make absurd promises to get elected; few are fool enough to follow through on them.

But here is Joe Biden going coast to coast to remind voters that he actually did the dumbest thing he said he was going to do — passing one of the most ruinous laws in US history…wasting 10% of US GDP…one half of annual tax collections…in one reckless giveaway.

He should shut up and let the money do the talking. Because the more you try to make sense of it, the more senseless it becomes.

Conversation with the government

Just try to imagine an earnest White House aide gamely trying to explain it to an alert citizen.

‘Look, our $1.9 trillion American Rescue Plan…it gives you dollars,’ the admin guy might say. ‘You can use them to buy stuff. Then, the economy will boom. It will give you a fighting chance.’

‘A “fighting chance” of what? You sure you’re not just pulling a fast one…? You know, advertising that you’re the party that hands out free money?’

‘No…no…of course not.’

‘You talk about the money you’re giving ordinary people like me, but doesn’t most of the money go to special interests with lobbyists in Washington?’

‘Well, we tried to address many of the problems in our country…so, we’ve designated certain sums for the organisations and groups that need it.’

‘You mean, like bailing out union pension systems…and Amtrak? Isn’t that what you call a “boondoggle”?’

‘That would be a very cynical way to look at it…let’s focus on what’s really going on here. We’re giving every eligible American $1,400.’

‘Yeah…and I hear there are tax credits, too…together, they’re gonna be more than some families earn by working. You’re gonna change lives. But not necessarily for the better.

‘I read in the paper that this is supposed to reduce child poverty by a third. But I don’t see how buying a bigger screen TV, more liquor, or a new car helps the kids. They need stable, honest families…not families that win the lottery.’

Stimulate the economy

‘Well, it stimulates the economy…so there are more jobs…and more goods and services available.’

‘So people go out and spend this money, right? And that gets the economy all excited, right? But what happens when the free money stops? Doesn’t that get them unexcited?

‘Won’t you have to keep giving people free money…or all that excitement will come to an end, and the economy will be depressed again?’

‘No, no. Once we have stimulated the economy, it will grow on its own.’

‘But didn’t you stimulate it last year? And from what I heard, your stimulus was five times as much as the actual loss from the COVID-19 shutdowns.’

‘We are helping families through this difficult period.’

‘That sounds good. But I see people earning more than $100,000 a year. And they didn’t lose their jobs…they didn’t suffer at all from the COVID-19 crisis. They don’t need the money. What sense does it make to send them cheques?

‘If they’ve got a few kids, between last year’s giveaways and this one, they could get something like $20,000. Doesn’t seem fair. Doesn’t seem very smart, either.

‘Besides, $1.9 trillion is a lot of money. Isn’t that about half of your tax receipts…your income?’

‘Well, yes…’

‘You’re giving it away in one fell swoop? If I took half my income and blew it on a wild weekend in Las Vegas, I wouldn’t be doing my family much good.’

‘You don’t understand. This will allow you to increase spending…it will be good for the economy.’

Better off…broke?

‘Everybody is already spending like crazy, thanks to all that money you gave us last year. They say consumer spending is rising faster than any time in the last 10 years. Is that a good thing?

‘Maybe I’ve got it backwards, but I thought it was saving and investing that made people better off. I know in my own case, if I save and invest money, I’ll have more money…but if I spend it, I end up with less. This ain’t exactly rocket surgery.

‘And by the way…where did you get all that money? I thought you fellows were broke. Some guy on the news said your deficit is going to be around $3.3 trillion.

‘That would be like me earning $60,000 and spending $100,000, wouldn’t it? I couldn’t do that for long. I’d lose my house, my car, my business…’

‘Yes, but the government can never go broke.’

‘Why’s that?’

‘Because we can always create more money.’

‘How do you do that?’

‘Well, dollars represent real wealth — because you can use them to buy things. We have the power to create all the dollars we want. And they’re just like the dollars in your wallet.’

‘But I earned those dollars in my wallet. I put in septic systems for a living. What did you do for your dollars?’

‘You don’t understand. We are the government. We don’t have to do anything.’

‘I know what my dollars are worth. I do the work myself. Now people can flush their toilets without worrying about them backing up or overflowing. That’s worth something.

‘But if you don’t do anything to get your dollars…what are they worth? I mean, what have you got to show for them? Where’s the beef?’

Trust the government

‘I’m afraid we’re getting a little lost in the details of a complex, modern monetary system. Trust me, I’m from the government and I’m here to tell you that these new dollars are every bit as valuable as the old ones in your wallet.’

‘Hmmm…and you can create as many as you want?’

‘Yes…’

‘Well, why stop with a measly $1,400? Why not $2,000…or $20,000? And if you were right — that you can make people better off just by printing up more money — why didn’t someone think of this sooner?

‘The printing press was invented by Johannes Gutenberg in 1440. That’s almost 600 years ago. Since then, a lot of governments have tried printing up money to get themselves out of a jamb. I’ve never heard of any of them that made a success of it.

‘I’m gonna level with you. This whole thing smells like a con job to me.’

Regards,

Bill Bonner,
For The Rum Rebellion