Author Archives: Opinion

Update Thursday–Gold drops sharply on weak yuan fix

Yesterday in Myra Saefong’s MarketWatch afternoon gold market update:

“I do not believe that the trade wars at present are the dominant issue for gold and the dollar,” Michael Kosares, founder of gold broker USAGOLD, told MarketWatch. “Both, I believe, are still caught up in a syndrome dictated by dovish interest-rate policy across both oceans, while the U.S. continues to raise rates. That could all change in a heartbeat, though, if the inflation rate begins to run consistently higher than interest rates.”

This morning reports have surfaced that China’s central bank is aggressively pursuing its own version of a quantitative easing program. (Read here) Simultaneously it fixed the yuan top-shelf exchange rate lower signalling it was interested in a weaker yuan against the dollar and other currencies. The combination sent gold reeling overnight in Asian markets – down $14 at one point. Gold has staged a minor recovery in early U.S. trading and is now down $10 at $1217. Increasingly, currency traders are suggesting that the Fed may be forced to act.  In an editorial this morning, the Financial Times warns “The U.S. central bank must be prepared to halt or reverse rates. . . if financial stability is threatened.”

 

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Update Thursday–Gold drops sharply on weak Chinese yuan fix

Yesterday in Myra Saefong’s MarketWatch afternoon gold market update:

“I do not believe that the trade wars at present are the dominant issue for gold and the dollar,” Michael Kosares, founder of gold broker USAGOLD, told MarketWatch. “Both, I believe, are still caught up in a syndrome dictated by dovish interest-rate policy across both oceans, while the U.S. continues to raise rates. That could all change in a heartbeat, though, if the inflation rate begins to run consistently higher than interest rates.”

This morning reports have surfaced that China’s central bank is aggressively pursuing its own version of a quantitative easing program. (Read here)  Simultaneously it fixed the yuan top-shelf exchange rate lower signalling it was interested in a weaker yuan against the dollar and other currencies. The combination sent gold reeling overnight in Asian markets – down $14 at one point.  Gold has staged a minor recovery in early U.S. trading and is now down $10 at $1217.  Increasingly, currency traders are suggesting that the Fed may be forced to act.  In an editorial this morning, the Financial Times warns “The U.S. central bank must be prepared to halt or reverse rates. . . if financial stability is threatened.”

 

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Some speculation on yesterday’s selloff in the gold market

DAILY MARKET REPORT

We could not let the latest downside break in the gold price pass without a word or two. My first instinct is to point to the volumes on the COMEX yesterday and ask what on earth might have generated such an interest in gold on the short side? At precisely 9am yesterday, 5,458,000 ounces of gold were presented for sale on the exchange – a paper trade of over 170 metric tonnes. It was followed by another sale within the hour of another nearly 5,500,000 ounces, or another 170 metric tonnes, all toll 340 tonnes of paper gold dumped on a market that lacks a champion sufficient enough to oppose it – at least on the COMEX.

Are we to believe that thousands of commodity speculators the world over suddenly woke up Tuesday morning and decided to sell hundreds of tonnes of the metal on the basis of upcoming Congressional testimony on the part of the Fed chairman? And how could it have occurred before even knowing the nature of that testimony?

It is unlikely yesterday’s sell-off in gold occurred because thousands of investors suddenly lost faith in the safe haven qualities of the metal, as some in the press are wont to claim. More likely, it came the result of a small group, or perhaps even a single entity, deciding to short the market for its own purposes.

Of course, to the speculator in gold hoping to garner a profit, pointing out the nature of the problem is a poor salve for the wound inflicted. Know, though, that the short position taken today must be reconciled with a purchase farther down the road lest the profits be left on the table. That is why gold typically bounces back from these waterfall drops – though usually over a much more extended period of time than the original application of the short. For the paper speculator, the wound might have been debilitating if not fatal. For the well-capitalized investor, though, who holds the metal as a long-term safe haven in physical form, the wound – if a wound at all – is at worst superficial.

As is always the case in financial markets, for every action there is an equal and opposite reaction. The reaction in this case will come in the form of stronger demand for the physical metal from buyers – including nation states, major financial institutions and individual investors – who understand the real nature of what just transpired and how to take advantage of it. It is interesting to note as posted here yesterday (and just below) that 17% of fund managers polled by Bank of America Merrill Lynch see gold as a bargain at these prices – a record number.

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Some speculation on yesterday’s sell-off in the gold market

DAILY MARKET REPORT

We could not let the latest downside break in the gold price pass without a word or two.  My first instinct is to point to the volumes on the COMEX yesterday and ask what on earth might have generated such an interest in gold on the short side?  At precisely 9am yesterday, 5,458,000 ounces of gold were presented for sale on the exchange – a paper trade of over 170 metric tonnes.  It was followed by another sale within the hour of another nearly 5,500,000 ounces, or another 170 metric tonnes, all toll 340 tonnes of paper gold dumped on a market that lacks a champion sufficient enough to oppose it – at least on the COMEX.

Are we to believe that thousands of commodity speculators the world over suddenly woke up Tuesday morning and decided to sell hundreds of tonnes of the metal on the basis of upcoming Congressional testimony on the part of the Fed chairman?  And how could it have occurred before even knowing the nature of that testimony?

It is unlikely yesterday’s sell-off in gold occurred because thousands of investors suddenly lost faith in the safe haven qualities of the metal, as some in the press are wont to claim.  More likely, it came the result of a small group, or perhaps even a single entity, deciding to short the market for its own purposes.

Of course, to the speculator in gold hoping to garner a profit, pointing out the nature of the problem is a poor salve for the wound inflicted.  Know, though, that the short position taken today must be reconciled with a purchase farther down the road lest the profits be left on the table.  That is why gold typically bounces back from these waterfall drops – though usually over a much more extended period of time than the original application of the short.  For the paper speculator, the wound might have been debilitating if not fatal.  For the well-capitalized investor, though, who holds the metal as a long-term safe haven in physical form, the wound – if a wound at all – is at worst superficial.

As is always the case in financial markets, for every action there is an equal and opposite reaction.  The reaction in this case will come in the form of stronger demand for the physical metal from buyers – including nation states, major financial institutions and individual investors – who understand the real nature of what just transpired and how to take advantage of it. It is interesting to note as posted here yesterday (and just below) that 17% of fund managers polled by Bank of America Merrill Lynch see gold as a bargain at these prices – a record number.

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Gold’s seasonality. . . The best time to buy gold is when everything is quiet.

USAGOLD note:  The reality of gold’s seasonality is evident in this chart.  In the past, there has been a clear change of direction in sentiment annually at the 185-195 day mark – midway in the year.  Today, July 16, is the 196th day of 2018.  Much has been written about gold’s seasonality as well as the annual summer doldrums.  We thought it might be interesting to show the phenomena in a chart.  The best time to buy gold is when everything is quiet.  Presented with thanks to Jason Goepfert at SentimenTrader.

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Gold has not entered a new bear market

Scrap Register/7-12-2018

“Given that the peaks in the gross short position tend not to last, it does look as if the market is setting itself up for a period of short-covering again, although the short position may still have further to climb before it peaks,” the analysts [at ScotiaMocatta] said. “The low level of the gross long position would also mean there is plenty of room for fresh buying too.”

USAGOLD note:  Opinion from one of the banks that sets the London Daily Gold Fix . . . .

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Apoplithorismosphobia

Mises Institute/Mark Thornton/7-2018

“Apoplithorismosphobia (ay-pope-lit-horris-mos-foe-be-ah) is the fear of deflation. Or, more correctly, the fear that an economy would ‘suffer’ from falling prices, or a general decline in the prices of goods and ser vices. It is a fear that has gripped some economists, journalists, and policymakers with a blinding strength as powerful as faith. Evidence seems to suggest that the phobia develops from the inability to understand the causes of the Great Depression and a more general failure to distinguish between what Bastiat called “the seen” (e.g., deflation) from ‘the unseen’ (e.g., the causes of contraction and unemployment). Under the influence of this phobia, victims develop an unfounded faith in the ability of monetary and fiscal policy. In extreme cases it leads to the support of powerful policy ‘weapons’ to combat deflation—the equivalent of using economic weapons of mass destruction. As shown in the case of Japan, this behavior is counterproductive and should be considered a danger to society. The purpose of this paper is to describe and diagnose this phobia and to present a treatment to counteract its effects.”

USAGOLD note:  Deflation, believe it or not, can have its positive effects. . . . . .an argument to let-the-economy-be-the-economy from an Austrian economist and a clever writer.  Of course, doing so in a fiat money economy elevates the need for a gold hedge to an even loftier position (though the author never mentions the metal in his presentation).

 

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US debt explosion and Weimar II

GoldSwitzerland/Egon von Gruyerz/7-11-2018

“Can investors really be that wrong? Global risk is today greater than ever in history and at the same time the great majority of investors show no fear at all. There are so many potential catalysts that could shake the world economy out of its sweet dreams into a living nightmare that it is impossible to forecast where the trigger will come from. It could be a debt collapse in Japan, China, USA, Eurozone or emerging markets. Or it could be a currency collapse in any of those regions. Or it could be a stock market collapse, or it could be ……, or it could be……”

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Mark Mobius warns that the trade war is a prelude to the next financial crisis

MarketWatch/Shawn Langlois/7-11-2018

“There’s no question we’ll see a financial crisis sooner or later because we must remember we’re coming off from a period of cheap money. There’s going to be a real squeeze for many of these companies that depended upon cheap money to keep on going.” – Mark Mobius

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Dollar to go lower over the medium to long term – JP Morgan

FXStreet/Ross J. Burland/7-9-2018

“Looking ahead, a worsening fiscal deficit and structural trade deficit in the U.S., coupled with slower growth in 2019 due to fading fiscal stimulus, should push the dollar lower over the medium to long term. Meanwhile, growth outside of the U.S. and commodity demand are both poised to remain healthy. This backdrop suggests that there may be an opportunity in commodities going forward, particularly those parts of the market that have shown an elevated sensitivity to changes in the U.S. dollar.”

 

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In the future gold will play dominant role in a multicurrency reserve system

World Gold Council/Andrew Sheng/7-2018

“Capital flows from emerging markets to developed countries have occurred because central banks and private investors have sought the liquidity and superior credit ratings only offered by the dominant reserve currency markets. The inherent weakness of this ‘non-system’ is clear, however, which may explain why many emerging market central banks are increasing their allocation to gold. It is liquid and has neither credit nor default risk.”

USAGOLD note:  Nation states line their portfolios with gold for the same reason private investors do – for long-term asset preservation and as a protection against currency failure.

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Holiday trading lull flashes red for financiers

Financial Times/Gillian Tett/7-5-2018

“Instead the big issue in summer is that the ability to buy and sell assets — or the level of ‘liquidity’ — typically declines during the holiday lull. That can cause asset prices to go haywire if a nasty surprise hits. Just think of what happened in August 2007 or August 1997.”

USAGOLD note:  Tett goes on to dissect Bank for International Settlements’ warnings as published in what she call a “sobering economic report.”

 

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U.S. stocks face grim decade of low returns: Morningstar

Investopedia/Matthew Johnston/7-9-2018

“In the words of Dan Kemp, Morningstar’s chief investment officer for Europe, the Middle East and Africa, “Our expectations at the moment is that you won’t have any real return from U.S. equities over the next 10 years . . . .”

 

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Inflation and deflation: Keep your portfolio safe

Investopedia/Lisa Smith/7-6-2018

“Sometimes it’s hard to tell whether inflation or deflation is the bigger threat. When you can’t tell what to do, plan for both. A diversified portfolio that includes allocation to investments that fare well during inflationary periods and investments that fare well during deflationary periods can provide a measure of protection regardless of what happens in the economy.”

USAGOLD note: A gold diversification can go a long way in protecting against either or both and all the hybrids in between. Please see: Black Swans, Yellow Gold – How gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation.

 

 

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Precious metals price outlook: BUY NOW

Streetwise Reports/Michael Ballanger/7-5-2018

“The strategy for my personal portfolio has three basic objectives, and they are as follows:

1. Focus on preservation of capital
2. Focus on preservation of capital
3. Refer to points 1 and 2.

That is most certainly an old and very corny joke but I simply cannot overemphasize the need for prudence and caution in all areas of investment selection.”

USAGOLD note:  Ballanger is recommending gold purchases in July as a seasonal opportunity. “You want to be sellin’ when they’re yellin’ and buyin’ when they’re cryin’. . .”, he says.  The link is also worth visiting for his take on algo-trading.

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Buying gold and dumping stocks is a no-brainer this summer

TheNational/Peter Cooper/7-8-2018

“To my mind there has never been a better time to sell US shares and buy bullion, nor a more obvious winning strategy. The global financial crisis was at first a curse and then a blessing for gold. Initially bullion prices were pulled down as the Titanic hit the iceberg. But then over the following 18 months precious metals rallied the most of any major asset class.”

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Price of gold fundamental weekly forecast

Falling yields, weaker dollar underpinning gold prices

Yahoo/James Hyerczyk/7-7-2018

“A recession signal itself may not be enough to derail the Fed’s plans to raise interest rates two more times this year, but it could mean they cut back to just one. This would likely lead to an extension of the rally in gold.”

 

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There are fears about an oil spike above $150

Bloomberg/Ben Sharples/7-6-2018

“Companies have been compelled to focus on boosting returns and shareholder distributions at the expense of capital expenditures aimed at finding new supplies, analysts including Neil Beveridge wrote in a note Friday. That’s causing reserves at major producers to fall and the industry’s reinvestment ratio to plunge to the lowest in a generation, paving the way for oil prices to surpass records reached last decade, according to [Sanford C. Bernstein & Company.]”

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Gold: 6 reasons a bottom could be near and why prices may go substantially higher

Seeking Alpha/Victor Dergunov/7-5-2018

“Despite the declines, the backdrop for gold remains very constructive. There is plenty of inflation in the U.S. economy, rates are still relatively low, and the Fed may not be as hawkish as is perceived. In addition, the dollar is bouncing up against major resistance, the gold to silver ratio is at an extreme level, and there are several other signals that suggest higher gold prices are likely going forward. Overall, it appears that gold/GLD is near a bottom, is likely to rebound from current levels, and could go significantly higher into year-end and beyond.”

 

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The most dangerous market ever

USAWatchdog/Greg Hunter/7-4-2018

Michael Pento interview – Pento Portfolio Strategies

“The U.S. is not an island. The U.S. is not going to have 4% GDP growth while the rest of the world implodes. . . . I look at the data, and data says this is the most dangerous market ever. This is the most precarious GDP on a global basis that we have ever had. Global central banks have never before printed $12 trillion. . . . We have never before had that happen, and the reason why they did it is to take sovereign debt into zero and negative territory so we can go on this inflation quest so asset prices don’t implode. That is all turned on its head. They have reached their inflation and it’s starting to unwind, and this whole thing is going to collapse. When it collapses, the primary beneficiary is going to be the gold market. . .” [emphasis added]

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Declare your own financial Independence Day

Investopedia/Stephen D. Simpson/7-4-2018

“Independence does not come simply because people demand it or decide they want it. It is important to take that first step and make a declaration of what you want, why you want it and what you are prepared to do to get it. Decide what financial independence means to you. Once those decisions are in place, come up with a clear plan that outlines what you need, what you want, what you have today and what you can do to move towards independence (this includes the budgeting, cost-cutting and investment plans). Last and not least, stick to that plan and keep the goal in sight.”

USAGOLD note:  Too often, financial independence is equated with the acquisition of wealth.  That is only one part of the equation.  The other part has to do with protecting the wealth you have managed to acquire.  That’s where gold enters the picture. . .

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Gold’s true fundamentals turn bullish

Investing.com/Steve Saville/7-5-2018

“The upshot is that for the first time in more than 5 months the gold market has a ‘fundamental’ tail-wind, which is a prerequisite for a substantial rally. For reasons that I’ve mentioned in TSI commentaries I’m expecting a tradable 2-month rally from a July low rather than a substantial rally, but my expectations will change if the evidence changes.”

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Adrian Day sees supportive influences for gold in long term

Scrap Register/7-4-2018

“Gold is also in a seasonally weak period. Further out, however, these factors change. For starters, gold has traditionally risen in August and September after a weak July and negative May and June. Beyond that, the dollar is vulnerable, and the Fed may slow or even pause its tightening. A break in the stock market would also help gold.”

USAGOLD note:  Day also points out, as we have for the past several months, that institutions are already buying to hedge their exposure in other investment arenas.  Given the fact that they have ridden out the current downtrends as other downturns along the way, we have a hunch that there interest goes beyond the short run.

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Gold and the dog days of summer

Sharps Pixley/Ross Norman/7-3-2018

“The reduction in net longs has been the equivalent sale of 700 tonnes of gold that the market has absorbed during 2018 (down from about 712 tonnes to just 12 tonnes net long).  With the market in the dog days of mid-Summer doldrums it probably seems unlikely … but better a little early than a little late. This old dog might surprise us all yet.”

USAGOLD note:  Ross Norman passes along an interesting observation.  Gold is, and always has been, full of surprises, so it wouldn’t surprise if it surprised now. . . . .

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Seeking Alpha/Jay Taylor/7-3-2018

“When QE halts or slows, as it is just beginning to do, that will undercut the house of cards built on the prior monetary manipulations since at least 2010. Much unwinding, or more likely rapid unravelling, will occur in the wake of this shift. Assets that were most elevated due to this central bank false pricing will come undone (equities primarily), and probably more than just a return to some mean. There will be islands of stability in this turmoil. Gold will stand out – we have little doubt of that.”

USAGOLD note:  A good read.  Jay Taylor lays out the markers and fundamentals for a turnaround in the gold price.

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Gold to average $1,400 an ounce in Q4 2018; Silver to average $17.50: Bank of America

Scrap Register/7-3-2018

“Bank of America Merrill Lynch has reiterated their forecast for gold prices to average the fourth quarter around $1,400 an ounce. At the same time, the bank sees silver prices averaging $17.50 in the final three months of 2018.  . . . ‘We note that the business cycle is maturing and the ongoing uncertainty around trade is not helping at this junction,’ the analysts said in their report. ‘At the same time, inflation has been picking up (shorting Treasuries is one of the most crowded trades), a combination which may ultimately bring gold buyers back into the market.'”

 

 

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China’s president may be weaker than he appears

MarketWatch/George Friedman/7-2-2018

“Beneath the facade, China’s reality is far grimmer. Much of the population still lives in poverty. A significant component of the Chinese economic elite stand to suffer from Xi’s reforms. And China’s professors, diplomats, and local government officials, especially on the coast, are nervous about the direction in which Xi is steering the country.

Combined, these three groups could threaten Communist Party rule. To stop the threat from materializing, Xi must prevent a coalition from forming against him. This means a constant shifting of economic policy and political purges that aim to rectify China’s structural economic problems without creating revolutionary discontent. We therefore expect the government in Beijing and the opposition, such as it is, to undertake constant and apparently incoherent actions, popular demonstrations, inconsistent economic moves and threats against Beijing’s grip on the country.”

USAGOLD note:  Fascinating opinion piece.  As we try to sort out China’s strategy in the trade war and attempt to decipher what is going on with the yuan, the comment about “incoherent actions” and “inconcistent economic moves and threats” strikes a chord.  George Friedman offered deep-thinking on global affairs for many years under the Stratfor banner and Geopolitical Futures now.

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Book Review: American Default – The Untold Story of FDR, the Supreme Court, and the Battle over Gold

Gartner Blog Network/Andrew White/7-2-2018

“The author tells a gripping story exploring justices, politicians and economist. He compares the US action and its impact to Argentina and other counties that have likewise defaulted in debts and depreciated their currency against a pegged or fixed exchange rate. In Argentina’s case it was to the US dollar; in the US case it was to gold. Most interesting of all is the last few chapters. The author asks if the depreciation can happen again. Knowing what we know about public debt on the US, as a % of GNP, and unfunded commitments of welfare programs, it seems that it is only a matter of when, not if. At what point in our future will our debts be too great that the market as a whole will lose faith in the ability of the dollar to provide some price stability compared to other alternative global currencies?”

USAGAOLD note:  Or compared to gold. In a fiat money system, like the one under which we function today, currency depreciation is an on-going process rather than a singular event, like Roosevelt’s devaluation. The history of gold since 1971 is testament to its use as a hedge against currency depreciation and provides a window to the future.

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Is the small investor always wrong?

Wealth Management.com/Brad Zigler/7-2-2018

“We find the correlations strong enough to allow the use of DSI [Daily Sentiment Index] as a leading indicator and as a timing tool,’ [Jake] Bernstein declares. He’s quick to point out that DSI isn’t the end-all, be-all of market indicators. ‘DSI is not perfect. However, it does have immense value as a warning system. Perfect or not, the DSI for gold has been sounding a klaxon for more than a month. Small traders have turned bearish on bullion in a big way. Just look at the DSI’s three-day moving average in the chart below. It submerged below 25 in early May and has been under water ever since.”

USAGOLD note: This is an interesting observation and indicator from Jake Bernstein.  For months we have been following the consistent global involvement in the gold market among funds and institutions  as buyers and wondered why private investors remained on the sidelines. Underneath it all, in our estimation, the chief driving factor to the complacency is not so much that the public is bearish on bullion. It is more the belief that modern trading systems will allow a quick exit from the stock market when that particular klaxon rings (as in, for example, a 1987-style market crash). . . . . and an equally quick entrance into the gold market.

Investors should consider that they may be able to get out of stocks, but at what price? And that they might be able to get into gold and silver, but once again – at what price? Modern online trading systems might end up working just fine, but the offered bid and ask prices might be something else again. Back offices will adjust quickly to failing market conditions. The institutions and funds through long experience are well aware of how quickly bids can drop during a general market breakdown and are planning accordingly.  The public, for better or worse, is oblivious putting their faith in technologies that in the end will fundamentally still mirror market conditions. . . .and in a New York nanosecond.

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Powell wants ‘real economy’ to guide Fed

Bloomberg/Craig Torres, Jeanna Smialek and Christopher Condon/6-28-2018

“Fed chair’s style is more like Greenspan than Bernanke, Yellen. Fed policy may be more nimble, but a little less predictable. . . For Powell, the first non-economist to hold the job in more than three decades, conceptual benchmarks can’t fully describe the complexity of the U.S. economy. So in this first five months, he’s brought a subtle but important change to the chairmanship at a key juncture in the business cycle: trust evidence as much as economic models.”

USAGOLD note:  An important departure from past Fed chairs. . . .It will also make his tenure more interesting for those of us who spend a lot of time attempting to figure out just what the central banks – and most importantly, the Fed – are up to.

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