Monthly Archives: July 2022
“’There has been more than enough blame for inflation to go around,’ said Mark Spindel, chief investment officer for MBB Capital Partners LLC. If unemployment rises, ‘constituents will scream and senators and House members will have to deflect blame, and that will find its way to Jay Powell.’”
USAGOLD note: And from there, if the past is any indicator, to Fed policy. If the Biden administration believes it has a problem in its core constituency with inflation, wait until the unemployment rate starts rising……
Cartoon courtesy of MichaelPRamirez.com
“The simple solution to preventing interest rates in the eurozone from diverging catastrophically, is for the ECB to just say it’ll print as much money as it likes to keep the yield on government debt issued by eurozone countries to within one percentage point (or whatever) of the lowest comparable rate paid by any member state. In other words, ‘we won’t let Italian government bonds yield more than a percentage point above German bunds’. There are potential economic issues here, of course. (Just ask the Bank of Japan how tricky fixing interest rates can be).”
USAGOLD note: In this very odd gold market configuration in which a declining euro plays largely in a rising dollar index (and hence downward pressure on the gold price), Stepek describes a situation in which gold demand is likely to soar in Europe while the price in dollars remains subdued. There may come a time, though, as we have suggested previously, when the gold market begins paying attention to the very real problem of stagflation and pushes the artificial dollar-gold trade to the back burner.
“The result of this is a central bank that continuously struggles to properly inform and influence economic agents, that consistently lags behind markets rather than leads them, and that could easily fall prey to the even more catastrophic policy mistake of returning to the 1970s trap of ‘stop-go’ policies.”
USAGOLD note: El-Erian criticizes the Fed for poor analysis. Beyond the poor analysis, in our view, policy seemingly too often needs to fit a political agenda – and let’s not pretend any longer that the Fed doesn’t have one.
“‘I think you’re seeing the Fed trying to walk the tightrope,” Hayes said on Yahoo Finance Live (video above). ‘They wanted to bring down demand, which they’ve certainly done, but they don’t want to destroy the economy.'”
USAGOLD note: Hayes points out that the Fed intended to withdraw $475 billion from the bond market in June but ended up buying about $3 billion in U.S. Treasuries instead, and reduced MBS holdings by only $75 billion. He says the central bank is “jawboning” to bring down inflation, but it “doesn’t want to push too hard.” As we have said in the past, it is important to make a distinction between what the Fed says and what it does. Something to think about as we kick-off Fed Week and the typical hoo-hah that accompanies it.
Gold continues post-Fed push to higher ground
Baker Steel says hawkish rate environment ‘priced in,’ momentum shifting to the upside
(USAGOLD – 7-29-2022) – Gold continued its post-Fed push to higher ground this morning as markets processed the prospect of a less hawkish monetary policy, and escalating stagflationary concerns. It is up $4 at $1763 and up almost $50 from pre-Fed meeting lows. Silver is level at $20.10 and up $1.70 from pre-meeting lows. Baker Steel, the British fund manager, sees gold at a turning point. The hawkish rate environment, it says, “appears to be priced-in” and momentum is now shifting to the upside.
“We are approaching,” it says in an analysis posted on LinkedIn, “an inflection point at which the scope for further rate hikes becomes less feasible, due to the severe impact on indebted businesses and consumers, and policymakers’ focus will likely shift towards protecting employment. We believe the hawkish rate hike programme is now largely priced into the gold sector, hence any shift in policy toward a more accommodative stance should prove a catalyst for the next bull market phase for gold, particularly as inflation, which we believe to be predominantly supply-side driven, is unlikely to be fully tamed by rate hikes.”
Gold and silver prices
Chart courtesy of TradingView.com
“The government hopes it will break the demand for dollars. Surging prices have sparked calls from state workers including teachers and nurses to be paid in the US currency. The 22-carat coin will be sold at the international bullion spot price including a 5% charge to cover production and delivery costs.”
USAGOLD note: Still don’t understand how issuing a gold coin fights inflation, but the Zimbabwe government continues to tout it as such. It obviously can act as a hedge for those who own it, but as a deterrent to the 191.6% inflation rate raging in Zimbabwe’s economy, we just don’t see it.
“The Fed has been cited for many failures in recent times, including the 1970s’ Great Inflation, the Subprime Crisis and the Great Recession. The Fed’s repeated characterization of inflation last year as ‘transitory’ was one of its biggest mistakes, and one with which we are still living.”
USAGOLD note: Pointed criticism of the central bank from former Wharton finance professor Kenneth H. Thomas. He lists four reasons for its “poor record of performance” and they go to the heart of what’s wrong with the Fed. Highly recommended.
“There is no institution in the United States that has such a high public standing and such a poor record of performance.” – Milton Friedman
“Today, there is a spreading awareness that our monetary situation is rather rotten. Leaving things up to central bankers, who are obviously making it up as they go along, has not worked out very well.”
USAGOLD note: Lewis goes on to say that we have two choices – a continuation of the PhD (or egghead) standard or a return to the gold standard – and he favors the latter. As we have said so often in the past, the prospects of returning the gold standard anytime soon are virtually non-existent. In all likelihood though, the “make-it-up-as-you-go-along system” (as Lewis calls it) will be in place for a long time to come with the next chapter of that saga to be unveiled later this week. Lewis mentions that “the monetary history boils down to two great eras” – sound money prior to 1971, fiat money after. Here is what that history looks like on a chart:
“A desire by Beijing to avoid ‘the risk of possible conflict’ with Washington could have contributed to China cutting its holding of US government debt to below US$1 trillion for the first time in over 12 years, analysts said.”
USAGOLD note: Reports in western publications did not put China’s reduced holdings of U.S. Treasuries in this context, so we were a bit surprised when we came across this SCMP article. We pass it along as a matter of interest noting that Tang’s byline includes Bejing as the point of origin. The article quotes Tan Yaling, head of the Beijing-based China Forex Investment Research Institute, as saying that China “could shift its attention to gold” as an alternative.
“The American economy shrank an annualized 0.9% on quarter in Q2 2022, following a 1.6% drop in Q1 and technically entering a recession, the advance estimate showed. Most investors were expecting a 0.5% growth although some were betting on a negative reading. Inventories and business investment were the main drags. Inventories declined mostly at general merchandise stores as well as motor vehicle dealers. Residential investment sank 14%, structures 11.7% and equipment 2.7%. At the same time, PCE slowed and grew 1%, with spending on goods falling 4.4% and government consumption went down 1.9%, partially reflecting the sale of crude oil from the Strategic Petroleum Reserve. On the other hand, net trade made a positive contribution for the first time in two years, as exports jumped 18%, led by industrial supplies, materials and travel and imports were up 3.1%. Fed Chair Powell recently said he did not believe the US was in a recession and pointed to strength in the economy.”
United States GDP growth rate
USAGOLD note: Gold and silver added to earlier gains upon release of this report.
Gold reverses course as Fed hints at ‘likely’ slowdown in rate increases
Lombardi Letter says yield curve inversions historically indicate follow-up gold rallies
(USAGOLD – 7/28/2022) – Gold reversed course yesterday after the Fed delivered as expected on the rate hike, and chairman Powell hinted that “it likely will become appropriate to slow the pace of increases” down the road. This morning, it is up $6 at $1742.50 and up $27 from pre-meeting lows. Silver is up 27¢ at $19.42 and almost $1 from pre-meeting lows. Over the past few days, Wall Street has been caught up in the steepening yield curve inversion as a recession indicator. Lombardi Letter’s Moe Zulfiqar says a recession is not the only thing it indicates.
“Historically speaking,” he writes in an analysis posted yesterday, “if you buy gold when the yield curve inverts and hold that gold for 36 months (three years), you’ll make a solid return. At some point during this period, there will be a wild swing in gold prices, and those who are patient could reap rewards. This has worked like clockwork.” He says that the last three times we had yield curve inversions, “the price of gold jumped 30%,” which would put it in the $2200-$2300 range.
Source: St. Louis Federal Reserve [FRED]
“To prosper, investors now need a tightrope walker’s surefootedness and a gymnast’s suppleness. Perhaps with short-term rates heading for 3%, Wu-Tang Clan’s 1994 hit ‘CREAM (Cash Rules Everything Around Me)’ provides useful guidance.”
USAGOLD note: Not a pretty picture… Das points to a flock of chickens coming home to roost in which the best outcome is to “muddle through” and the worst is “the arrival of the long-delayed financial market reckoning and its crushing reset.” Greening up might be a useful strategy, but as Das points out, inflation will remain a problem. Maybe converting some of that green to gold will strengthen the safety net.
“Investors slashed their exposure to risk assets to levels not seen even during the global financial crisis in a sign of full capitulation amid a ‘dire’ economic outlook, according to Bank of America Corp.’s monthly fund manager survey.”
USAGOLD note: We emphasize that this is a survey of fund managers – those with the ability to make and move mountains – not the general public. The bear lurks……
“The mechanism under consideration could allow Turkey to use liras for energy imports, saving more of its foreign-exchange reserves, one of the officials said. Any payment made in the Turkish currency could later be used by Moscow to finance Russian purchases of goods and services from Turkish providers. Similarly, rubles would have to be part of any arrangement between the two nations, the official said.”
USAGOLD note: The problem for both countries in using the other’s currency for settlement is that, in both cases, the payee will be holding a currency subject to the other’s depreciation. Ultimately, that is why gold utilized in the same mannger is the better alternative. Neither is required to trust the other’s monetary policies. We would be surprised if the arrangement outlined in the snippet above went beyond the discussion stage. If gold is out of the question, a more likely alternative would be to use a trusted third-party currency. Earlier this week, Russia requested payment from India in UAE’s dirham for some recent oil shipments.
“Nobody knows what the terminal rate is going to be. We’re in an economy we’ve never seen before.” – Tim Duy, chief economist, SGH Macro Advisors
USAGOLD note: Though Duy has a point (these are unpredictable times), we see former Fed governor Larry Lindsay (also quoted in this article) as more in tune with what is required. He says the Fed will have to get the fed funds rate above the inflation rate before we have “significant disinflation.” That is in keeping with what we saw in the Volcker era. The following is self-explanatory. It shows the yawning gap between headline inflation and the current Fed funds rate.
US inflation rate and the Fed funds rate
Sources: St. Louis Federal Reserve [FRED], Bureaur of Labor Statistics
Gold edges higher as Fed winds up meeting with afternoon press conference
Ramirez takes aim at the prevalent view in Washington that all is well with the economy
(USAGOLD – 6/27/2022) – Gold edged higher in today’s early going as the Fed winds up its meeting later this afternoon with a press conference. It is up $5 at $1724.50. Silver is up 21¢ at $18.88. Financial markets are signaling no surprises from today’s meeting though we suspect the tone will remain subdued until the Fed chair steps away from the podium later this afternoon. We will cut this morning’s report short and post an update later today if anything of interest develops. We thought we would start your day in the proper manner – with a laugh. Pullitzer-prize-winning cartoonist Michael Ramirez takes aim at the prevalent view in Washington that all is well, i.e., we are not headed into a recession. Please see Nouriel Roubini’s views on the matter immediately below (or at this link if you are reading this on the DMR page)
Cartoon courtesy of MichaelPRamirez.com
“Government gold stocks have doubled in just a year. Gold is one of the most reliable and stable commodities on the international markets. And with the international instability of recent years caused by Covid and the war in Ukraine, among other factors, gold looks like a good bet for investment.”
USAGOLD note: Governments diversity their holdings for the same reasons people do.
“So what does this mean? Past performance is no guarantee of future results, but we could be looking at a pullback, if not this year then the next. More specifically, stocks and other risk assets may not have found a bottom yet. From its all-time high in early January, the S&P 500 has fallen 20%, but historically it’s dropped as much as 35% on average when a bear market coincides with a recession. Do with that information as you wish, but I believe it’s wise and prudent to have exposure to gold at this time, between 5% and 10% of your portfolio.”
USAGOLD note: We cited Holmes’ most recent gold analysis in yesterday’s DMR and report it here for those who may have missed it.
“Dubai, the Gulf’s financial and business centre, has emerged as a refuge for Russian wealth.”
USAGOLD note: Does Russia see the UAE’s dirham as a more stable reserve holding than India’s rupee? It will be interesting to see how economists explain this move on the monetary chess board.
“Naturally, betting on gains in the greenback has acquired a huge following, even among retail investors, gaining a cult-like status almost equal to the self-described ‘apes’ that cheerlead for meme stock AMC Entertainment Holdings Inc.”
USAGOLD note: So is the dollar in a mania? Dillian sees signs that it might be and worries that there will come a time when it falls out of favor. “That is what inevitably happens when sentiment gets extremely hot,” he says, “and it may be happening now.” With that in mind, one must also take into account the extraordinary leverage at work in the currency markets. The Office of Comptroller of the Currency reports notional derivative exposure in FX trading at $43.6 trillion – second only to interest rate derivatives. In other words, though it might seem far-fetched at this juncture, there is potential for a downside just as fearsome as the upside.