Looks like the Fed overshot again with rate hikes

As I wrote Wednesday morning prior to Fed chief Jay Powell’s announcement of standing pat on Fed funds rate.

Stocks and the gold price took off on the news that the Fed statement took all the language out of their plan to look at raising rates, due to recessionary fears. The Fed is currently at 2.5% on the rate.

What does this mean? Well appears that Powell & Co. may have overshot — once again — restraining lending too much and may put the US economy into negative reading on growth.

As I wrote at the time, the December rate hike was not needed since the Fed had already taken much of the air out of the economy through pricking the asset bubble in stocks.

Now due to the government shutdown we will not get our first reading of fourth quarter growth, which would normally be out Thursday, until later on in the month. However the Fed probably had a good read on that GDP number, which is probably below 2% growth.

 

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The gold standard and the Fed

Fed chair Jay Powell is scheduled to give a press conference Wednesday after announcing that the central bank will hold rates steady as expected.

Powell’s comments and the language in the statement on future hikes will be what markets are looking at for direction.

We all have seen that the Fed has looked under every rock in the economy to find inflation and has come up empty. It is still trending below the 2% threshold that the Fed uses to assess its policies.

Yes Powell & Co. prick the asset bubble know as the stock market to curtail that inflationary aspect by jawboning future rate hikes much to President Trump’s ire.

When talking about the Fed it was very interesting that President Trump retweeted Tuesday a Laura Ingraham post (below).

The post links the US economy to the “Gold Standard”. The president replies, “So true and not even close.”

Trump hinted during the presidential campaign he would like to go back to a gold standard for the dollar, which would send gold prices soaring in order to sustain that move.

However, gold prices over the last 10 days have risen close to $30 an ounce and broken through the long-held sub-$1,300 mark.

We also have this drop from Dec.12, 2018 No. 2619 answering a query if we have the gold:

Yes.
Gold shall destroy FED.
Q

So we have multiple mentions of the Fed and gold from various sources. Might it be wise to pick up some of the “ancient relic” as so many modern pundits call gold?

Not advising either way, but gold appears to be having a moment. On Nov. 13, 2018 gold was trading at $1,213 an ounce. Today it is $1,318 an ounce.

Hmm.

While bitcoin had a great summer, gold prices also enjoyed the heat

While bitcoin has received all the headlines this summer as it marches towards $5,000, but the price of gold has been moving up most of the summer.

The precious metal has risen $150 an ounce since the beginning of July to trade at $1,360 on Friday morning.

On July 7, bitcoin was trading at $2,521 and gold was at $1,217. So bitcoin soared 46%, while gold rose 10.5% over the same period. A contributing factor to both assets is that the dollar index has weakened 4.7% over the summer.

The ancient relic’s acceleration recently has more ties to the weakening dollar index right now, but I believe as more currency traders pile into bitcoin trading the price movement correlation between the crypto and dollar will have a more of an impact.

I’m very interested in the moves in both bitcoin and gold over the next 6 weeks as the markets enter the fall and its historical liquidity tightening. I believe we will see $1.500 on gold and the $5,000 level will be the floor on the price of bitcoin in the coming weeks.

Bitcoin replacing gold as the perfect dollar hedge

What does gold, silver and cryptocurrencies have to do with the US dollar? They are all a flight from the greenback. A hedge against the falling dollar.

At the beginning of the year the dollar was trading at 93.6 on the currency markets. This morning it’s at 86.4. It is no coincidence that bitcoin was trading at $1,000 in early January and this morning — despite its recent $1,000 pullback — is at $2,780. Gold was $1,178 an ounce at the start of 2017, this morning is $1,262, but has posted recent highs over the $1,300 an ounce mark, despite the paper ETF market whipsawing prices.

These movements along with a flattening of the US bond yields are all anti-dollar moves.

Some will point to the Fed raising rates as the impetus for the moves, however that is the opposite move in the current environment. Raising rates should bring more confidence — no matter how misplaced that confidence may be — not the other way around.

According to the CFTC, short bets on the dollar by traders is the highest since early 2013, with hedge funds piling into 279,100 futures contract favoring the euro and Aussie dollar.

So these moves need to looked at far more closely than equities setting all-time highs, since the dollar weakness is a tool used by the Fed secretly to spur the inflation they so desperately need.

A bitcoin ETF will be death knell of true price discovery of cryptocurrencies

As I wrote for the New York Post on Sunday the brief recent history of bitcoin and its rise to $1,600 this year, despite having some setbacks early in 2017.

Many commenters cited bitcoin as a better “investment” than gold and silver because the cyrptocurrency cannot be manipulated like precious metals, through rehypothecation, or the selling the same bar of gold or silver  many times through paper trades in the ETFs.

While this is true right now, I have written that this is the primary reason the Securities and Exchange Commission is reopening its decision not to allow bitcoin’s use as an ETF backed asset.

Many supporters of the  cryptocurrencies are looking to the creation of an ETF as giving bitcoin the legitimacy it so craves. I believe if and when the SEC approves the use of bitcoin for an ETF it will be the death knell for the digital currencies price discovery freedoms.

While the feds may still have a sizeable stake in bitcoin through its prosecution of various organizations and the forfeiture of the digital currency after being found guilty for fraud or other capital crimes, the feds probably do not have enough to continue keeping the price of bitcoin in check.

This is why I believe the SEC has decided to take a second look at the BTC ETF to give the feds a mechanism to manipulate the price through papers trades.

Edited: I have added the below section on how the ETF would suppression pricing due to criticism by some.

When you have an ETF — or paper contracts that will far exceed the number of bitcoins in circulation — the ETF can short the BTC price or sell off the contracts without ever buying the underlining commodity, in this case BTC.

Both these actions will drive the price of BTC down as we have seen for the last 10 years in gold and silver prices.

As with all ETFs on commodities, the contract can be settled in US dollars. So there is no reason for the ETF to load up on BTC. It is a derivative product on the price only.