DMR–Gold quiet but dollar, stock market weakness might yet provoke a reaction


The gold market is quiet again this morning with the metal off $2 at $1188.  Silver is down 14¢ at $14.27. The tranquility in gold though stands in stark contrast to a sharp sell-off this morning in U.S. stocks led by the tech sector. Today’s sell-off makes it five sessions in a row that stocks have traded lower.  The bond market is also lower.  Not helping matters for Wall Street, Treasury Secretary Mnuchin upped the ante in U.S.-China trade talks by warning China against further devaluation of its currency.  He also stated that an understanding on the yuan will need to be part of any future trade deal. Those comments combined with new rumblings from the White House on Fed interest rate policy sent the dollar index down sharply. We might yet see a reaction in the gold market before the day is out.

Added note:  Further down the page, you will find an interesting article in the context of today’s sell-off in stocks.  The Coming Crash features the views of Fred Hickey, editor of The High Tech Strategist, who now recommends gold as a contrarian opportunity. 

Quote of the Day
“I spoke to bankers at the time who said that what happened was supposed to be impossible, it was like the tide going out everywhere on Earth simultaneously. People had lived through crises before – the sudden crash of October 1987, the emerging markets crises and the Russian crisis of the 1990s, the dotcom bubble – but what happened in those cases was that capital fled from one place to another. No one had ever lived through, and no one thought possible, a situation where all the credit simultaneously disappeared from everywhere and the entire system teetered on the brink. The first weekend of October 2008 was a point when people at the top of the global financial system genuinely thought, in the words of George W. Bush, ‘This sucker could go down.’ RBS, at one point the biggest bank in the world according to the size of its balance sheet, was within hours of collapsing. And by collapsing I mean cashpoint machines would have stopped working, and insolvencies would have spread from RBS to other banks – and no one alive knows what that would have looked like or how it would have ended.” – John Lanchester, After the Fall

Chart of the Day

Chart note 1: When the Federal Reserve bailed out the financial system by purchasing U.S. Treasuries and mortgage-backed securities, it included those items as assets on its balance sheet. Much of that capital was then redeposited with the Federal Reserve as excess reserves creating a liability on the central bank’s balance sheet. Now, the Fed with much fanfare is reducing the asset side of its balance sheet. What is often neglected in the analysis is that it is also reducing liabilities. The chart below is a big-picture representation of the Fed’s balance sheet reductions – both assets and liabilities. In 2016, Federal Reserve bailout-related assets were roughly $4.5 trillion. Bailout-related liabilities were about $2.5 trillion. At present, assets are $4.2 trillion and liabilities $1.8 trillion.

Chart note 2: Since the process began in 2016, liabilities have run off the Fed’s balance sheet at a much faster rate than assets signaling the central bank’s inflationary bias. Keeping in mind Milton Friedman’s widely accepted dictum that there is an 18 to 24 month lag between monetary stimulus and response, the first signs of inflation appear to be right on schedule. By September 2017 – two years from the initial draw downs – the inflation rate had climbed back to the 2% mark. As of the September Consumer Price Index release, it had reached 2.8%.

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