We spent all of yesterday bumping along dirt roads on our way from the ranch to a small seminar organized by our old friend Doug Casey.
One of the major topics: What’s ahead for the gold price?
Here, in advance, we give our view.
Gold took off like a rocket at the start of the year. But despite rising global political tensions, and the Fed’s continuing economic pretensions, this week, gold started to look more like a discarded booster engine falling back to Earth.
We don’t know why gold rose so rapidly, but we have a good idea of why it fell…
Liquidity Moves Markets
First, investors discounted the political tensions.
Who really cares if Crimea is a part of Russia? Nobody.
Second, what has changed at the Fed? It continued to taper QE at its recent policy meeting. But by moving away from a fixed unemployment target to more “qualitative” measures, it reserves the right to take the taper off the table any time it wants.
As author of A New Depression: Breakdown of the Paper Money Economy, Richard Duncan, puts it, “Forward guidance is very nice, but it is liquidity that moves the markets.”
The Fed is providing plenty of liquidity. But this liquidity is going into risk assets, not into “anti-risk” assets. Stocks are a risk asset. Gold is not.
Most investors are confident the Yellen Fed has matters under control. They see US stocks going up and ask themselves: What’s to worry?
With nothing to worry about, and the memory of a 180% gain in S&P 500 fresh in their minds, why would they want to buy gold?
Third, the worry that usually moves gold most is inflation. It was that worry that sent it up 20 times in the 1970s… when consumer price inflation rose over 10%.
Consumer price inflation is not something that people are worried about now. And for good reason.
It’s the Money Supply, Stupid
As any economics professor will tell you, the CPI goes up when the quantity and velocity of money increases faster than the output of goods and services.
QE increases the monetary base (the sum of hard currency in circulation and banks’ reserve balances with the Fed). But it’s money supply (which also includes bank deposits and retail money market mutual fund shares) that matters when it comes to inflation.
But increases in the money supply depend on the creation of new bank deposits through new bank lending. And although money supply is growing, banks aren’t lending enough to make for a worrying increase in the quantity of money.
Meanwhile, the average household income is lower than it was when the recession ended in 2009. So, the average American has less money to spend. And under pressure, he is more careful about spending it, too. This decreases the speed with which cash changes hands in the economy – the velocity of money – putting more downward pressure on consumer price inflation.
What Next?
Gold investors see all this. They know consumer price inflation is not a problem right now (at least as it’s officially measured). They must wake up in the morning… check the CPI reading (just over 1% right now)… and go back to sleep.
The time will come, of course, when the CPI gets up and does the boogaloo. But not now. Here is what we see ahead for gold prices:
1. The economy stays sluggish, but doesn’t go into reverse, and the Fed continues to taper.
2. US stocks fall, as the Fed removes its support, causing the Fed to end the taper.
3. US stocks recover, as the Fed wades in with more intervention, then fall more.
4. The Fed panics and introduces more aggressive (money from helicopters?) moves.
5. Gold soars.
More to come next week…
Regards,
Bill
Editor’s note: It may take a few years for the Fed to adopt more desperate monetary tactics… or it may happen much sooner than that. Fact is, “Economic Armageddon” is coming as a result of central bank meddling. The time to prepare is now. Follow this link to see how you can protect your savings.
Market Insight:
A Bearish Move for Gold
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Here’s a chart that shows that steep decline in the spot gold price…
As you can see from the area I’ve highlighted, gold has bearishly broken beneath its 50-day and 200-day moving averages.
In the space of just a week, the gold price fell 7%, to a six-week low… right after hitting a new high for 2014.
There are a number of possible reasons for the sudden fall in the gold price. But Janet Yellen’s comment last Friday that the Fed would consider raising the short-term interest rate six-months after it winds down QE… and the Fed’s removal of another $10 billion in stimulus… hasn’t helped.
Nor has weakness in the Chinese currency. China is the world’s No. 1 gold buyer. And with the renminbi down 2.5% against the US dollar this year, gold is more expensive to import for Chinese buyers.
Also, the lack of a serious escalation of tensions between Russia and Ukraine has stemmed investors’ desire for safe havens (although this could change at any time).
At Bonner & Partners, we don’t advise you trade in and out of gold. As Bill puts it, “Gold is real wealth.” It’s also “disaster insurance” against the collapse of the fiat money system.
We recommend you buy on the dips… and hold for the long term.
