Gold is recovering intraday from earlier corrective pressures stemming from this week’s revival of risk appetite. While stocks remain elevated, the dollar seems to have quickly lost upside momentum, which is helping to underpin the yellow metal.
The Treasury Department reported yesterday that the national debt quickly vaulted the $20 trillion mark last week, following the most recent suspension of the debt ceiling. This allowed Treasury to borrow once again with abandon; no longer dependent on the off-book “extraordinary measures” that had prevented a sovereign default for the past several months.
As focus shifts to next week’s FOMC meeting, the previous paragraph tells you everything you need to know about why rates need to remain low and why the long-term trend in the dollar will remain bearish. A September rate hike remains off the table and steady policy in December remains more likely than not.
As for the plan to normalize the balance sheet, that remains to be seen . . . It is most certainly a form of tightening, that many are anticipating will begin this year. However, it will most assuredly begin small and can be easily halted or even reversed if inflation remains weak and/or risks to growth intensify.
With political uncertainty in Washington elevated, economic help from the fiscal side is still very much in doubt. This will weigh on the decision making process of the FOMC as well.
The reality is that since the financial crisis, our central bank has been financing the national debt at rates that don’t truly reflect the risk. They seem to have some perhaps unfounded hope that growth will eventually reignite and and they will be able to walk-back the extraordinary accommodations that they instituted.
Are we really at that point? It doesn’t feel like it; and with the national debt on the rise again (believe me, the debt ceiling will be raised or suspended in December as well) one has to wonder who will buy all this new debt if not the Fed . . .