Gold firms as markets log business as usual response to Fed conclave
Asia kicks off its annual end-of-year gold buying spree with solid August

(USAGOLD – 9/23/2021) – Gold firmed in the follow-up to yesterday’s Fed conclave, the dollar weakened and bond yields pushed higher. In short, this morning’s market snapshot is not substantially different from countless others over the course of the past two years. For Fed Chairman Powell, the business as usual response signals a job well done – a happy ending to another grueling Fed Week. Gold is up $5 at $1774. Silver is level at $22.76. For those with an interest in sorting through the details on yesterday’s meeting, we recommend John Auther’s Bloomberg column this morning: Tapirs are less scary for markets than black swans.

The annual end-of-year gold buying season in Asia is off to a solid start, according to Sharps Pixley’s Lawrie Williams. Swiss exports to India last month, he says in a report posted yesterday, were up 250% over August 2020 while exports to China doubled. Though China’s demand appears somewhat restrained, the surge from very low pandemic numbers last August reflects something of a return to normality. The two countries together, he says, are likely to consume 60% to 70% of the world’s mine production in 2021. “Altogether Asian and Middle Eastern nations,” he adds, “received 98.4 tonnes, or 83.5% of Swiss gold exports in August serving to emphasize the overall demand destinations of gold bullion from Western nations to Eastern ones where it is mostly held in stronger hands and thus less prone to being put back into the global gold supply mix.” Swiss refiners are the chief source of physical gold bullion going to Asia.

Chart of the Day

overlay chart showing gold and the return on the 10 year inflation indexed security

Sources: St. Louis Federal Reserve [FRED], Federal Reserve Board of Governors, ICE Benchmark Administration

Chart note: As you can see in this chart, declining real rates have had a direct effect on the price of gold, particularly noticeable in the period after the 2007-2008 credit collapse and the pandemic-induced economic crisis that began in early 2020. The inflation-indexed real rate of return on the 10-Year TIPS is fluctuating around the 1% level. With inflation on the rise, the negative real rate of return will accelerate unless the Fed and/or bond market pricing push yields higher at an equivalent rate.

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Why Evergrande has suddenly exploded into a potential global financial market crisis

MarketWatch/Vivien Lou Chen/9-20-2021

photograph of China Evergrande sign with Chinese characters

“It is the non-COVID, non-inflation risk that has been lurking in the global backdrop for months: A looming default by Chinese property developer Evergrande Group. On Monday, this somewhat obscure, overseas risk suddenly shook up financial markets from Asia to Europe and the U.S.…”

USAGOLD note: We should know soon if Monday’s retreat in stocks was a warning shot across the bow on Evergrande or a groundless knee-jerk reaction. Much depends on the Chinese government’s reaction to the meltdown, i.e., whether or not it will allow Evergrande to truly become China’s Lehman Brothers moment.


Image attribution: Chorzinghuam 2, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons [cropped]

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Notable Quotable

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“George Bernard Shaw famously observed that he knew three types of economists. Those who were brilliantly right. Those who were brilliantly wrong. And those who taught. Judging by her tenure at the Federal Reserve’s helm and her advocacy now as Treasury Secretary of a super-sized budget stimulus package, it would seem that Janet Yellen falls into Mr. Shaw’s brilliantly wrong category. For this, the country is likely to pay dearly.”

Desmond Lachman, economist
1945

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Foreign investors help prop up Treasury market as Fed considers retreat

Financial Times/Kate Duguid and Joe Rennison/9-20-2021

photgraph of Fed chairman Powell at computer screen“Foreign investors cannot get enough US government debt, which analysts say could help soften the blow when the Federal Reserve starts to cut back its own bond-buying programme this year.”

USAGOLD note: Though the Financial Times characterizes the foreign purchases as “a high level of demand,” they do not appear to be enough to offset in any meaningful way the large contribution made by the Fed each month. The Wall Street Journal recently reported that the Fed purchased nearly 75% of the federal debt issued since the pandemic began. Though the financial press might make considerable noise about tapering, the Fed will need to consider what happens to rates if its support is removed – even if done gradually.

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Market Overview

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Market Data by TradingView
Delayed data except FOREX

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Sidestep the debt ceiling logjam by minting a $1 trillion platinum coin

Market Insider/Andy Kiersz and Joseph Zeballos-Roig/9-20-2021

image of platinum Pt periodic table, platinum backdrop“But the conundrum could have a coin-size solution. A loophole in the law that prescribes the types of coins that can legally be minted in the US theoretically allows the Treasury Department to mint a $1 trillion platinum coin, deposit it at the Federal Reserve, and then continue paying its bills as normal.”

USAGOLD note: So all we have to do is mint about 30 of these miracle coins and we have the national debt paid. Mint another 30 and the government suddenly accrues untold wealth. One wonders why the Treasury Department didn’t summon the miraculous long ago.…… All said, as It turns out, the Treasury Department, in fact, did reject the idea back in 2013 saying that instead of the quick fix, Congress should get its act together, raise the debt ceiling, and avoid a federal government bond market default.

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Investor frustrations about gold

Myrmikan Capital/Daniel Oliver/9-14-2021

photo of President Biden at the podium prress conference“[I]nvestors are understandably frustrated that gold is not already much, much higher. There seem but two likely possibilities: gold is simply digesting its recent run from $1,500/oz only eighteen months ago and will soon launch higher, or gold is telegraphing a looming dollar liquidity crisis.… The third possibility is that Myrmikan’s thesis is simply incorrect: the government can run rising deficits without limit, the stock market can accelerate higher forever, wealth concentration can continue with no societal or political effects, the U.S. empire can decline with no material consequences for Americans or our markets.”

USAGOLD note: Myrmikan reflects on why gold can’t seem to get out of its own way. How could it remain stuck in a range while the Biden administration’s anything-goes, free-wheeling economic policies progress without any check whatsoever? Ultimately, it says, it will become unstuck and trade for “multi-thousands per ounce” as investors launch what Ludwig von Mises called “the flight into real values.”

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Supply chain issues add to stagflationary winds

Financial Times/Mohamed El-Erian

Repost from 9-16-2021

photograph of a yellow caution flag in the breeze“Hearing that I was flying to the UK, a friend of mine sent me a picture of a partially empty supermarket shelf with a simple message: ‘You’ll be coming back to Soviet-era shelves.'”

USAGOLD note: El-Erian has been a consistently reliable interpreter of events from the beginning of the pandemic until now. He believes that what we are experiencing at the present in terms of supply disruptions and consequent price inflation is not a “one-off dynamic” but something suggesting “longer-term forces are also in play.”

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Nobelist, senior democrat economist Stiglitz says Fed’s Powell should go

NewsMax/Thomson-Reuters

Repost from 9-16-2021

photo showing Jerome Powell and Lael Brainard during Fed Board of Governors meeting“People have given Powell a lot of kudos because he has supported the economy through the pandemic…On one hand I agree with that. On the other hand that is a bare minimum for qualification. Almost anybody reasonable would have done something similar.” – Joseph Stiglitz, Columbia University

USAGOLD note: We have said all along that Powell is not a shoo-in…… Stiglitz goes on to say that Lael Brainard is the “one obvious candidate out there” as a replacement. As we mentioned in a previous post, she is the second most dovish governor at the Fed behind Neel Kashkari. Powell is rated dovish but more toward the middle of the pack.

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Forget the suburbs, the ‘exurbs’ are the place to be

BusinessInsider/Ben Winck

Repost from 8-3-2021

graphic image of a country home amidst a country landscape

“Think, less suburb, more rural; fewer sidewalks, more country roads; fewer mega malls, more strip malls. These areas — characterized by more affordable housing and greater distance from cities — emerged as the districts du jour for well-to-do Americans during the Great Migration of the pandemic.”

USAGOLD note: The pandemic greatly changed American society. In an odd way, though, what it really accomplished was to shake a large portion of the citizenry out of its complacency, i.e., awakened it to a myriad of lifestyle possibilities. Where one lives and works and how one lives and works are two social arrangements now undergoing radical change. This article does a good job of outlining how and why it is happening – a trend many feel has been a long-time coming.

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Not your mother’s inflation: Why this is the time to invest in precious metals

Streetwise Reports/Kevin Smith and Tavi Costa

Repost from 8-2-2021

graphic image displaying rising inflation vector

“Interestingly, both of those regimes, along with today’s, share one thing in common: negative real interest rates. The 1940s was the most financially repressive environment yet in that respect. The Fed at least allowed interest rates to rise in the 1970s while inflation rose faster. From a market perspective, there was one important lesson from both periods: At times when investable assets yield less than inflation, owning tangible assets becomes imperative. Commodities were far-and-away the best performing asset class in both of those decades.”

USAGOLD note: In the 1940s, gold and silver were the money so there wasn’t any need to hedge the inflation by purchasing precious metals privately. The 1970s were a different story. Prices went vertical. Smith and Costa do a deep dive into both the 1940s and 1970s – the two eras analysts most frequently cite as eras comparable to our own. They warn that today’s environment is “far more extreme” than those two eras.

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Cramer says investors should be ‘keeping some cash,’ expects more market struggles in September

CNBC/Kevin Stankiewicz

Repost from 9-16-2021

photo image of stack of American gold eagle coins“CNBC’s Jim Cramer on Monday said investors should remain cautious about stocks in the near term, contending it’s better to hold cash then trying to figure out which part of the market will show strength in September.”

USAGOLD note: Cramer goes on to say that investors should own some gold too.

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Short and Sweet

Inflation a process not an event
But history shows runaway inflation can come suddenly and without warning

graphic image showing decline of the denarius over 200 y ears

Image courtesy of Visual Capitalist • • • Click to enlarge

We sometimes forget that inflation is a process rather than an event. One of the better-known examples of that axiom is the nearly two centuries-long debasement of Rome’s silver denarius. The Roman citizen who had the wisdom to hedge that process by going to gold at nearly any point along the way ended up preserving some portion, if not all, of his or her wealth. Those who did not suffered its debilitating effects. In the inflationary process, the line between cause and effect is not always a straight one, and its timing difficult to discern. History teaches us, though, that when runaway inflation does arrive, it comes suddenly, without notice, and with a vengeance. That is why it pays to view gold as a permanent and constantly maintained aspect of the investment portfolio. “A change of fortune,” Ben Franklin tells us, “hurts a wise Man no more than a change of the Moon.”
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(Related please see:  News & Views Special Report / March 2020 / Hedging the decline and fall of a currency – The baseline case for gold hasn’t changed much in 1700 years)

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Seven possible causes of the next financial crisis

Law & Liberty/Alex J. Pollock

Repost from 9-16-2021

cartoon showing gold as the go-to asset in times of uncertainty

“It has been well said that ‘The riskiest stuff is what you don’t see coming.’ Especially risky is what you don’t think is possible, but happens anyway … If the next financial crisis is again triggered by what we don’t see coming, the government reactions will once again be flying by the seat of their pants, making it up as they go along.”

USAGOLD note: Of course, the default reaction is to print money, bail out the system, and worry about the consequences later – in that order. Pollock points out that we have had a chain of crises in the 1980s, 1990s, 2000s, 2010s and in 2020. He goes on to list seven potential triggers for the next ……

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Gold stays in tight range ahead of Fed
Myrmikan Capital thinks new ‘liquidity crisis’ could evoke policy response, power gold

(USAGOLD – 9/22/2021) – Gold traded in a tight range overnight, a circumstance that carried over to this morning’s open in New York. Later today, the Fed will tell the world of its decision on tapering (hence rates). Speculation is all over the board on how the Fed will approach the litany of concerns now bedeviling the global economy. We should know considerably more by the time Fed Chairman Powell ends his press conference later this afternoon. The yellow metal is level at $1776. Silver is up another 24¢ at $22.78. The same psychology that gripped the gold market through the summer months has carried over to September, but Myrmikan Research’s Daniel Oliver thinks that all might be about to change.

“…[I]nvestors are understandably frustrated that gold is not already much, much higher,” he says in a report published last week. “There seem but two likely possibilities: gold is simply digesting its recent run from $1,500/oz only eighteen months ago and will soon launch higher, or gold is telegraphing a looming dollar liquidity crisis.… The third possibility is that Myrmikan’s thesis is simply incorrect: the government can run rising deficits without limit, the stock market can accelerate higher forever, wealth concentration can continue with no societal or political effects, the U.S. empire can decline with no material consequences for Americans or our markets.” Gold, says Oliver, is for those skeptical of that assessment. He also sees the potential for a new “liquidity crisis” and a central bank response that “would power the gold price into the multi-thousand dollars per ounce.”

Charts of the Day

Federal Reserve Balance Sheet

bar chart showing Federal Reserve Balance sheet through 9-8-2021

European Central Bank Balance Sheet

bar chart showing the ECBs balance sheet through 9-8-2021

Bank of Japan Balance Sheet

bar chart showing the Bank Of Japan balance sheet

Peoples Bank of China Balance Sheet

bar chart showing Peoples Bank of China balance sheet

Charts courtesy of TradingEconomics.com • • • Click to enlarge

Chart note: For the record, the charts on quantitative easing in various economies from over the past two decades. The United States and Europe have been roughly equal in their zeal, while China has been the least aggressive central bank in response to the pandemic.

 

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Powell is fighting for the minds of the people

Bloomberg Opinion/Bill Dudley/9-20-2021

“If households and businesses trust officials’ judgment, they’ll expect consumer-price inflation to stay near the central bank’s 2% target in the long run. As a result, they’ll be less likely to demand and offer wage increases, which will help ensure that any surge in inflation proves temporary.”

USAGOLD note: How does the Fed go about abrogating the inflation process? In some respects, that ship has already sailed. The Fed prints money. Prices go up. Businesses respond by passing along those increases to consumers. Consumers respond by demanding higher pay. If either fails to act, they become inflation’s victim – and neither is foolish enough to accept that outcome. Ultimately, if the Fed wants to stop the inflationary process there is only one way to do it: Go back to square one. Stop the flood of money like Volcker did in the 1980s.

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Inflation fears rise sharply as confidence in Bank of England drops

Financial Times/Chris Giles/9-17-2021

“The findings come at a sensitive time with financial markets also expressing increasing doubt over the bank’s ability and willingness to control rising inflation and just ahead of next week’s meeting of the Monetary Policy Committee.”

USAGOLD note: A number of analysts have remarked the interest in gold is a function of the confidence investors have in the central bank. This is the first headline we have seen tying together inflation fears and declining confidence in a major central bank.

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No recovery until 2045

Daily Reckoning/James Rickards/9-14-2021

antique print of wolf at door from Little Red riding Hood“One study from the Federal Reserve Bank of San Francisco in collaboration with outside academics showed that of the 19 highest fatality pandemics since the Black Death in the mid-1300s, the average time needed to return to normal levels of interest rates, growth and employment is more than 30 years.”

USAGOLD note: Rickards is sticking with his assessment that disinflation and possibly deflation is the wolf at the door – not inflation. As most of our readers know, he is an advocate of gold ownership under such circumstances.

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Growth expectations vs positioning: mind the gap

World Gold Council/Louise Street/9-16-2021

cartoon showing a boat riding the rising tide“Yet, according to the survey, fewer portfolio managers are hedging their equity exposure against such a correction than at any time since January 2018. They may be prudent to use gold to help mitigate the potential risks of this approach. Thanks to its historical track record of negatively correlating to equities during sharp equity pullbacks, an allocation to gold has historically helped portfolios to weather such episodes.”

USAGOLD note: Though Street’s advice is meant for portfolio managers, it also applies to private investors. More than one survey has indicated that investors are well aware of the risks associated with overvalued stock markets. Too many though, believe they will have time to exit when they might not. Leon Cooperman, the famed seasoned asset manager, recently warned that when the market turns, “it’ll go down so quickly, your head’s gonna spin.” The better, more prudent approach is to diversify before the tide turns.

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