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Painted Into A Corner - Craig Hemke (02/04/2019)

FOMC - Federal Open Market Committee with trending figures in the background

April 02, 2019

Fed Chairman Powell and his FOMC have successfully painted themselves into a corner. This is something we've warned our readers was coming for years, and now here we are.

https://www.tfmetalsreport.com/blog/9089/more-trou...

In its reaction to the most recent reversal of Fed policy, the U.S. bond market is now signaling that rate cuts are inevitable and, frankly, imminent. How do we know this? Check the charts and the yield "curve".

In the hours leading up to the March 20 FOMC statement, bond yields were steady in anticipation of what Chairman Powell might say later in the day regarding future interest rate policy. As the statement was released, the yield curve was:

Fed Funds: 2.25-2.50% for an "effective rate" of 2.40%
US 2-year note: 2.47%
US 10-year note: 2.62%

In the immediate aftermath and the days that followed, global cash rushed into U.S. bonds. The result was that by one week later, the curve was inverted:

Fed Funds: 2.25-2.50% for an "effective rate" of 2.40%
US 2-year note: 2.22%
US 10-year note: 2.37%

Rates have since gone back up a bit as short-term traders have booked some profits, but the damage has been done and the result is clear. Simply put, in order to restore nearly the same curve as seen in the hours before the March FOMC, the Fed now needs to CUT the Fed Funds rate, perhaps as soon as their next meeting that concludes on May 1.

By dropping the effective rate to 2.15%, The Fed can/will achieve the same spreads that were present before their "capitulation" last month.

Fed Funds: 2.00-2.25% for an "effective rate" of 2.15%
US 2-year note: 2.30%
US 10-year note: 2.48%

And with rates suddenly back to where they were in late 2017 and early 2018, nothing about the charts below suggests that further tightening is on the way. Instead, you can plainly see that the bond market has begun to anticipate this inevitable policy reversal.

And it's not just the U.S. that is seeing a move back toward lower interest rates. Check the chart below from Charlie Bilello. Note the amount of negative-yielding debt around the globe... an amount that now exceeds $10T again for the first time since 2017.

So, what does all this mean for gold investors?

Well, first of all, low and negative interest rates are ALWAYS a fundamental positive for physical gold ownership. Why? How many times have you heard the argument that physical gold is "dead money" because it "doesn't pay interest"? Well, when everything else pays zero or even extracts negative interest, that argument is rather easily defeated.

More important, though, is the notion that your Central Bank masters have, in fact, painted themselves into a corner through their delusions and deceptions regarding interest rate and balance sheet "normalization". Anyone not willfully blinded by equity market greed has seen this coming for years, and now here we are. Even members of the mainstream media are finally catching on to the scam. Note the use of the term "sold us":

It will take time and it won't be easy, but there is no doubt that gold prices are headed higher in the months ahead. This year and 2020 will unfold in a manner similar to 2010 and 2011… the most recent years of bullishness and price gains for the precious metals. Read more here:

https://www.sprottmoney.com/Blog/gold-and-silver-2...

What can you do to prepare for these events? The simplest step is to add some physical precious metal to your portfolio. And acquiring real, physical gold and silver is easy. It can be held at a trusted gold bullion storage company or in your own, personal safe. You can hold it in gold bullion coins or silver bullion bars. Take your pick. Just be sure you own some before confidence collapses, the dollar declines and The Fed begins its next course of rate cuts and quantitative easing.

Enjoy reading this article? Interested in precious metals? Find out why we are “The Most Trusted Name in Precious Metals”. Learn more about Sprott Money.

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Head shot of Craig Hemke

About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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