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.

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Markets are unusually jittery for August

There are many one-offs occurring this week in the markets.

Equity markets this week are finding it tough sledding, as stocks can’t find a direction as currency markets are taking the yen back to 101 level, meaning the Japanese currency is getting stronger against other currencies.

This strengthening is generally negative for stocks due to the carry trade, where you buy US stocks with yen to lever up your position.

On Tuesday, the Bank of England came up short as bondholders did not want to part with their longer-duration paper and central banker Mark Carney could not buy enough bonds to cover its allotted purchases for its QE operation. Again this has never happen before.

Precious metals are moving higher this week independent of currency moves. Wednesday pre-market saw silver up 2.5% or $0.50. Gold was only up 0.8% or $12. But if gold makes the same percentage jump as silver you are looking at a spike of nearly $40, which would get some notice at the Fed.

Some will attribute the one-offs as being driven by illiquid, low volume August markets as traders are away from their desks on vacation.

I don’t see that as being much of a factor anymore since most of the trading is done by high-frequency trader’s black boxes.

Let’s say I think this needs to be watched as we move through this month.

Ay, my precious (metal)

Silver takes the gold, breaking through the $20 an ounce mark on July 4th, rising over 5% on the day, only to be beaten back slightly overnight.

The precious metal has risen 48% this year, while gold is up 28% since Jan.1.

Gold is at all-time high in many currencies around the world.

This is a round about way of explaining how broken the world’s major economies really are. As I wrote last week the amount of “liquidity” injected into the markets on Monday And Tuesday post-Brexit, was not really spoken about.

Market pundits suggested that the equity reaction (bounce back) indicated that Brexit was a non-event.

This is hardly the case, with more than $1 trillion “liquidity” sloshing around, all that cash needed to find a home so global banking giants, who were the recipients of the central bank largess put it to work in the market.

This is the same mechanism used during the “booming” QE days. Trading desks got fat on easy profits as the cost of capital is nil.

Need further conviction on the broken economies, the US 10-year is hovering at 1.35%, with the 30-year at 2.15%. Pretty soon you’ll be able to make a profit off a new mortgage.

The rush to 1.3% on the 10-year versus a -.01% in Germany shows what the post-Brexit flight of capital out of the continent means for the troubled European Central Bank and the EU in general.

The post-Brexit ramifications will be ongoing and very difficult time for European banks, including Deutsche Bank, which is looking at hitting another 52-week low Tuesday in the US.

Fed stays pat, markets go flat

As I wrote yesterday the Fed was going to be stubborn and not recognize the weakness in the global economy, so the market reacted with a selloff.

In their statement the Fed did not see a reason to mention crude oil pricing as anything more than a transitory blip on the screen. It still maintained its thoughts that inflation developing.

In the Feds jabberwocky world, it believes as rates rise — by restricting capital — inflation will rise. In my economic text books it states that rising rates combat inflation.

But that was written before QE and its subsequent Fed actions perverted the markets.


The dollar strength/stocks weak model has been working well in 2016, with the correlation moving in equal but opposite directions.

As a result of this equation, gold prices have also benefited. Don’t tell the Fed but gold has quietly risen $60 this year.

I say don’t tell the Fed because rising gold is the bane of central bankers. It’s the barometer by way you can measure their effectiveness.

High gold prices mean the currency is less valued and if you see what gold goes for in some countries with double-digit inflation you would understand.

So the gold price is telling Yellen & Co. that they were off quite a bit with the Dec. rate rise.

 

Bitcoin soars as BRICS hit wall

Global forces are lining up against Janet Yellen and the Fed in her attempt to raise interest rates next week.

The Bank of England Thursday agreed to hold rates at 0.5% and continue its monthly easing at £375 billion.

The only commodity not crashing in terms that are in currencies other than US dollars is gold. It is a record highs when priced in BRICS currencies. Showing how these economies have been devastated by recessionary pricing and cratering trade imbalances.

Soaring gold prices are the bane of central bankers as it shows the alternative to their fiat currency is winning.

The dollar strength is keeping precious metal prices suppressed here.

A newish barometer on the health of world currencies may be bitcoin. The electronic cyrpto-currency is at a two-year high at $415 per btc.

What bitcoin allows is for a hedge and arbitrage against currency inflation by buying in your home currency and cashing in dollars.

This could be the very reason stories came out yesterday about an apparent arrest of an Australian, who allegedly invented the digital currency. Each time bitcoin begins to get pricing traction another negative story comes out to make people wary of its use.

Look for in the coming days of a big arrest on the order of Silk Road to re-enforce the “criminal” element into the equation.