February 1, 2019
On July 5th last year, I wrote the following:
“Long-term—which starts when the Fed signals it is pausing its interest rate hikes and balance sheet reduction policies and reverting back towards QE and ZIRP, perhaps later this year—Gold is going to new highs, in my humble opinion.”
On July 19th, I wrote:
“On a final note, if we do get new all-time highs in the S&P followed by a stock market crash later this year—something I have predicted since February—and the Fed is forced to reverse policy, then Gold will truly take off from that point, in my humble opinion.”
On September 14th, I wrote an article entitled “When The U.S. Stock Market Crashes, Buy Gold”, in which I provide the detailed rationale for why I expected a stock market crash in the Fall and why everyone should buy Gold at that point.
I have repeatedly stated in the majority of my articles since July that my primary expectation for the bottom in Gold would be a crash in the stock market followed by a Fed policy reversal, which would signal THE LOW in Gold and the beginning of a substantial rally to follow, taking us up to new highs, i.e. above the 2016 high of 1377.
Well, we got the first leg of the crash right on schedule in October, when the S&P fell 20%. Then this week, much to my surprise and almost everyone else’s, the Fed capitulated to the markets and did a complete 180 on policy. Fed Chair Powell stated that although the economy remained strong, the current level of interest rates was appropriate, meaning that they would not be raising rates again any time soon. More importantly, he added that the balance sheet program that was running on auto pilot could now be used in addition to rate cuts in response to deteriorating economic and financial market conditions, and that it would end sooner than previously anticipated. If that were not enough, he finished by saying that the balance sheet could be increased again if necessary to deal with any future crisis, a clear indication of plans to return to “QE”.
It is no surprise that Gold has now rallied $164 off its low of 1167 back in August and hit 1331 yesterday. Given this surprise gift from the Fed, I believe Gold will break 1377 this year, rising to somewhere between 1400 to 1485. There is one caveat, however. The Fed’s reversal was a “verbal” 180. I posted the following tweet on January 7 th:
“This is a Bear market [in stocks] until the Fed ‘actually’ reverses course.”
As Chris Carolan put it on Wednesday:
“Halting QT will not rescue markets. Only QE can save them.”
The Fed basically told us that they would not be raising rates again, that the balance sheet reduction program would end sooner than expected, and the QE was back on the table when the next crisis hit. But they did not cut interest rates yet. They did not stop the balance sheet reduction program. They have not actually reversed to QE. Why is this important? Any Ponzi scheme can only survive with increasing cash inflows or liquidity. Stable is insufficient. Declining liquidity means collapse. The same goes for the stock market.
Lee Adler rightly pointed out the following, post the FOMC announcement this week (parenthetical commentary mine) ( https://suremoneyinvestor.com/2019/01/trump-and-wall-street-threatened-and-powell-became-chamberlain-for-peace-in-our-time/):
“For now, the $50 billion per month in [balance sheet] reductions will go on.” The Fed will continue to pull liquidity from the market, the same liquidity that is the lifeblood for stocks.
“The Fed did not pinpoint a target for the size of the Fed’s portfolio. They’re still trying to figure that out. But [Powell] did not dispute a widely discussed notion that it might be $3.5 trillion. The current size of the balance sheet is $3.98 trillion. That implies 10 more months of bloodletting at the current rate…
“During that 10 months, the markets will need to absorb an average of $100 billion per month or more of new Treasury supply…
“Until the Fed really does cut the bloodletting rate, and not just talk about it, it will continue to withdraw $50 billion per month from the banking system. With less cash available, for buyers of Treasury paper to be ready, willing, and able to bid for the new paper, they will need to sell assets ( stocks?) and require higher discount rates and yields on the new paper ( meaning higher bond yields).
“The Fed’s statements on Wednesday did not change any of those facts. The Fed will only be forced to finally reduce the bloodletting rate of its still bloated asset base in response to a weaker market. The damage comes first. Then the response ( i.e., Fed still needs a crash to justify an end to the balance sheet reduction program and likely rate cuts too).
“Moreover, a reduction in the pace of balance sheet shrinkage will not materially ease market conditions. It might give the market an initial psychological boost. But the law of supply and demand is still the law. So long as the Fed removes even $1 per month from the system while the US government is borrowing $100 billion per month, the supply of financial assets coming to market will continue to be greater than the market’s ability to absorb that supply at a stable price. Financial asset prices ultimately must decline ( i.e., the prices of stocks and bonds are likely to fall ).
“Furthermore, even at the point where the Fed declares that it has reached its balance sheet target size, the US Government, not the Fed, will still be the real problem! Because the market cannot absorb that much new supply every month without help from the central bank. Until the Fed restarts QE, financial asset prices should follow each intermittent rally with a decline to lower prices ( that is, until the Fed “actually” returns to QE, the risk of lower lows in stocks remain ).”
In summary, the Fed did a “verbal” 180, but until they actually reverse policy by cutting interest rates and reverting to QE, the risk of a third and final leg down in stocks remains, once this Wave B bear market rally is done. This could mean higher yields at the same time too.
So how does this affect Gold?
Gold has two choices. It can decide that QE is inevitable and therefore just go straight up to 1400+. This is the path it followed in October 2008, despite the fact that QE1 did not begin until March 2009.
Or it could decide to follow stocks down, as it did from March to October 2008 first.
Currently, Gold is extreme overbought (RSI>70), overbullish (DSI 80 matching peak on April 11, 2018 at 1369), after a $164 rally, and negatively divergent across all indicators. It could just continue higher, but the risk/reward favors a pullback, potentially as far as ~1250.
That said, whether we get a pullback or not, I believe we see new highs in Gold to >1400 this year.
From a longer-term perspective, I believe it is important to mention that Mike Maloney predicted that the U.S. would resort to helicopter money to prop up U.S. government finances, the economy and markets when all else failed, and that would mean sending Gold and Silver soaring to the stratosphere in terms of price.
Well, the U.S. establishment likes to use some interesting terms sometimes, such as the Federal Reserve instead of the U.S. central bank and QE instead of debt monetization (been around since at least World War 1). The latest is Modern Monetary Theory, or “MMT”. This is doing the rounds in Washington now, and the politicians like it because it is basically a blank check from the Fed to finance government spending without limitation… other than inflation. This is helicopter money. Mike was right, or will be.
If this nonsensical idea comes to fruition—and it is likely it will— the dollar will collapse, in my opinion, and hard assets, especially Gold and Silver, will explode higher. This is what China and Russia have been preparing for over the last decade by offloading dollars and treasuries and buying Gold. They knew that the U.S. would resort to printing the dollar into oblivion to finance its rising deficits, debt, and unfunded liabilities. MMT is the spark to light Gold’s fuse.
This is why I’ve been following the smart money since I started buying Gold and Silver in the second half of 2015, and as I’ve also said repeatedly (especially since October), if you don’t own any Gold or Silver yet, buy “some”. Whether we get a pullback or not in the short-term, precious metals are going multiples higher, thanks to QE, MMT, and the global monetary reset to follow.