March 7, 2019
My principal thesis for “the low” in Gold has been a Fed policy reversal to interest rate cuts and QE, causing the dollar to tank and Gold (and everything else) to soar. Nothing has changed in that regard.
What has changed is that the central banks are already turning the monetary spigots back on—all but the Fed. This morning the ECB announced new stimulus measures just two months after they supposedly tapered their QE program to zero. Think about that. They turned off the monetary spigots for a proverbial five minutes, German and EU economic data continue down the sinkhole along with inflation, and the ECB does a 180 back to QE and likely NIRP too (both of which clearly don’t work, but what else can they do?). This is the definition of a “Ponzi scheme”. Without increasing cash inflows, it collapses. That is the EU and global markets today.
What’s ahead for the EU and, indeed, the world: Japanification? A zombie global economy for decades? Or possibly rampant stagflation, where prices soar and the economy just drifts along on life support until it becomes obvious that QE was never a cure, but has become poison and needs to be stopped. At that point, the central banks are rendered powerless, the system collapses, and we get a global monetary reset. Gold and Silver soar beyond belief under such circumstances.
Back to the present. The ECB is printing again. The Public Bank of China, or PBOC, has already started too. They printed 5% of their GDP in new loans in January alone (when the S&P and global stock markets desperately needed a boost), truly massive credit creation. The BoJ never stopped printing. And finally, the Fed did a “verbal” 180, pausing rate hikes for now, but continuing to reduce its balance sheet. They are trying to repeat what they did in 2016 after the historic sell-off in January that year, to enable further rate hikes down the road.
Why? In order to provide ammunition to deal with the crisis already unfolding. Yes, raising rates so they can cut them later. Makes as much sense as paying someone to borrow your money, also known as negative interest rates. This is how desperate the central bankers have become to keep this Ponzi scheme going, but they can’t fight Mother Nature, the economy, and markets forever. Time is running out. All of which is why Gold and Silver and other hard assets are the new “TINA” (there is no alternative) assets for what is to come. China and Russia have known this since at least the 2008 financial crisis led by the U.S., anticipating the U.S. would have to print dollars en masse to pay for its deficits and debts, especially the massive unfunded liabilities coming due in a big way next year.
Until then, the Fed is trying to squeeze in another rate hike or two and reduce its balance sheet a little further. The other central banks are helping them out in the meantime by printing currency again and buying dollars, and using dollars to buy U.S. assets, mainly stocks, in my opinion. The “carry trade” on steroids. This pushes the S&P higher, the Fed’s primary mandate, and enables further rate hikes. The other central banks are also printing to support their own markets and maintain confidence in the system at large. The risk of a widespread loss of confidence in central bank policies is growing, as it becomes increasingly transparent that these policies do absolutely nothing for the economy except create more debt and raise asset prices.
All of this global money printing pushes the dollar higher, which could weigh on Gold in the short-term. However, neither the U.S. nor the global economy can tolerate a stronger dollar. We saw that in August when emerging market currencies across the globe were in crisis mode, as the dollar rose and the risk of default on their huge dollar-denominated debt rose dramatically. These included the Russian Ruble, Turkish Lira, Indian Rupee, Brazilian Real, Argentine Peso, Singapore Dollar, Malaysian Ringgit, Taiwan Dollar, Thai Baht, Indonesian Rupiah, South African Rand, Hungarian Forint, and the Polish Zloty, to name just a few.
The domino effect would take over from there. Such defaults would hit European Banks first, and then the contagion would spread globally as bank after bank fell under the weight of widespread debt defaults, including U.S. banks, especially the big multinationals like JP Morgan and Citibank.
This all would have an indirect but profoundly destabilizing effect on the United States. A more direct effect of a stronger dollar would be on the dollar value of foreign revenues and earnings for U.S. multinationals (hitting the U.S. stock market) and the risk of deflation for a country with a massive trade deficit as import prices collapse. Such a deflation would also risk the solvency of the United States, as deficits and debts soar in real terms while economic growth and tax revenues fall.
So what happened next? Hey, presto! The dollar fell. Notably, this was the same month Gold bottomed. Eight months later, are these emerging market countries in a superior position now to weather a stronger dollar? Hell, no!
Simply put, the central banks cannot control all of the markets all of the time. There are just too many holes to plug and unexpected side effects from doing one thing: having foreign central banks print to prop up their markets and the U.S.’ too, and causing other negative impacts such as a stronger dollar as a result.They are trying to defy the laws of nature, the markets, and have been doing so for a very long time, but ultimately, that’s impossible. Mother Nature always wins in the end and this global Ponzi scheme is clearly drawing closer and closer to collapse as the central banks become increasingly desperate in their words and actions.
In conclusion, the dollar is likely to rise as every other central bank prints their currency into oblivion, and this could weigh on Gold in the short-term, but the US and the world cannot stand a stronger dollar for very long. The Fed will be forced to do its own dirty work and prop up US stocks and bonds and sacrifice the dollar in the process. This means a Fed policy reversal to rate cuts and QE is inevitable, as is a Gold price multiples higher from here. It’s only a matter of time now: months, not years.