The Fed Has Cemented Its Place as a Powerful Driver of Gold

The Fed Has Cemented Its Place as a Powerful Driver of Gold

Having already provided a tailwind for gold prices prior to the pandemic, the Fed’s latest announcement may drive the metal even higher. Find out why here.

Before the pandemic hit, gold had been on a steady upwards trend since the start of last summer. Although the metal rested on plenty of solid fundamentals, the momentum shift occurred as the Federal Reserve decided to slice interest rates in succession, joined by central banks around the world. The massive amounts of stimulus issued in response to the crisis, along with a prolonged zero-rates policy, also played a key role in helping gold breach its all-time high and climb above $2,000.

Considering the latest announcement by Fed Chair Jerome Powell and gold’s response to it, the Fed’s place as an exceedingly powerful driver of gold prices appears well-set. On Thursday, Powell announced that the Fed’s inflation rate could exceed 2%, a revelation with numerous positive implications for gold.

Inflationary expectations were already running rampant before the trillion-dollar stimulus, and the announcement that Fed officials aren’t too concerned about possible spikes in inflation are likely to play heavily into that role. Likewise, the purpose of the statement appears tied to the Fed’s desire to keep interest rates low, which some consider to be perhaps the most powerful tailwind for gold.

Having held onto the $1,940 support level for the better part of the past two weeks, gold was quick to respond, hitting a high of $1,973 during Friday’s trading session. Delano Saporu, founder of New Street Advisors, shared some of his views on gold’s current state, as well as what investors can expect from the markets moving forward. As Saporu and many other analysts noted, those looking for a safe-haven asset, be it as a hedge or otherwise, have nowhere to turn with the bond market being in dire strides. These investors are likely to pour into gold, not only as a source of safe returns but also due to concerns over the ever-increasing money supply.

Nancy Tengler, chief investment officer at Laffer Tengler Investments, echoed Saporu’s sentiment, highlighting that the strong fundamentals that have drawn investors to gold are still in place. Besides the addition of a sluggish economic recovery with plenty of concerns, negative real rates and ballooning government debt have been sticking out as red flags. The need to spur an economic recovery is likely to worsen the sovereign debt issue, which is generally viewed as a problem without a palatable solution.

Furthermore, Tengler also pointed to the uncertainty in the stock market, stating that only a few tech stocks aren’t high-risk plays right now. Noting that her firm called for a pullback when gold breached the $2,000 level, Tengler advised investors to buy the dip in gold whenever possible.

Is the Fed About to Become a Major Gold Buyer?

Due to a new round of fiscal stimulus and waning global confidence in the dollar, Guggenheim’s Scott Minerd argues the Fed may resume buying gold in a big way.

In a recent note, Scott Minerd, chief investment officer of Guggenheim Investments, outlined a possible scenario that could manifest as a result of the Federal Reserve’s massive pandemic-related stimulus. The U.S. dollar has held a tight grip on its status as a global reserve currency over the past few decades, yet recent years have seen talks of that status potentially being usurped by another sovereign in the not too distant future, with the Chinese yuan as perhaps the most aggressive candidate.

Minerd doesn’t believe that the greenback’s place as the reserve currency has been placed into question so far, but he already sees concerning signals in the form of the dollar losing its market share. These are a clear result of the Fed’s attempts to deal with a massive government deficit while also staving off a recession.

In his note, Minerd expanded upon a sort of vicious cycle that the Fed could soon find itself in. As the CIO explained, the Fed’s current rate of asset purchases is outpacing the rate of bond issuance, and the central bank is likely to try and solve this problem by upping its asset purchases to a massive $2 trillion annually.

Although the Fed’s recent pumping of trillions of dollars into the economy represented the biggest stimulus to date, Minerd thinks that an official (and even greater) quantitative easing (QE) program is on the way. With a budget deficit exceeding $3 trillion and the Fed’s commitment to boost the economy at any cost, Minerd expects the central bank to keep interest rates zero-bound for a minimum of five years, if not longer.

Needless to say, any environment of low or negative interest rates greatly benefits gold, and the yellow metal has been reaching all-time highs in numerous countries whose central banks have adopted similar policies. But there are more reasons why gold could be the refuge investors need moving forward. A commitment to zero rates, especially over a protracted period of time, would likely raise inflationary expectations and potentially pave the way for a sudden spike in inflation.

Along with weakening the greenback on their own, intrusive measures such as these could reduce confidence in the dollar and intensify speculation in regards to its place as the reserve currency. In return, the Fed could attempt to offset its risky policies by accumulating even more gold, despite its reserves already far exceeding those of any other central bank. As Minerd notes, the historic tendency of sovereign nations to hoard gold in order to maintain economic leverage is well-documented, and Minerd would not at all be surprised to see the Fed becoming a major gold buyer in the near future to avoid losing dominance on the global stage.

The Fed Raised Interest Rates. Now What?

Not only has the Fed raised interest rates, they want to keep on doing it through 2018. Can our economy sustain the ongoing increases?

The Fed Raised Interest Rates. Now What?

From Filip Karinja, for Birch Gold Group

This week, the Federal Reserve voted to raise interest rates a quarter of a percent to 0.5%, the first rate risesince 2006.

But this wasn’t the only bold announcement the Fed made. In a report released the same day, titled “Economic Projections“, they predicted that by 2018 they would raise rates to 3.3%.

It seems odd that they would come out with such a view on rates when, just last month, Janet Yellen said she would consider lowering rates into negative territory if the market was to fall considerably, like in 2008.

Considering the astronomic levels of our federal debt, having rates at 3.3% would be economic suicide; the United States simply would not be able to meet its obligations to its debt.

Interest rate target Federal Reserve The Fed Raised Interest Rates. Now What?

Projected Federal Reserve interest rate target (SOURCE)

So what does the Fed see changing in the next three years so positively — not only in the United States, but around the world — to be able to raise rates so sharply?

Here are the present day facts:

  • The global economy is beginning to contract, with many central banks already printing money like crazy and reducing rates into negative territory.
  • Retail sales have been falling short of expectations.
  • New housing has dropped off sharply.
  • The United States is becoming more polarized than ever — on politics, race, religion, etc.
  • The possibility of war in Syria and the Middle East region is ever intensifying, with nations taking turns dropping bombs all over the region.
  • Terrorism is increasingly spreading into the western world.
  • The threat of conflict with nations such as China, Russia, Syria and Iran is on the rise. Consider how Turkey shot down a Russian jet earlier this month.
  • Youth unemployment in Europe is reaching worrying levels.

For some reason, none of these factors seem to be weighing in on the Fed’s projections for the coming years. But ask yourself: How many of these problems do you think will be solved any time soon?

If you think any of this is overly cynical, take a look at this video, from Mr. Positive himself, motivational coach Tony Robbins. In it, he explains the nation’s debt problem and how there is no solution for it. Even if the rich were to be taxed a full 100% on earnings, it would not put a dent in the deficit.

Now, pretend you’re over two years in the future, in 2018. Would you guess that the debt will increase or decrease?

With the debt already so absurdly high, if the Fed moved rates out to 3.3%, the interest on this debt would be practically impossible to pay.

So put yourself two years in the future, and think about what it may hold for our nation. If you have any concerns, you may want to consider protecting your savings with some precious metals. Give us a call — we’re ready to help.

Is the bond market the next shoe to drop in Wall Street? Read why here.

photo credit: Perspectived, lines, madame #instaprol via photopin (license)

Wall Street Has The Death Star Pointed At The Bond Market

star wars movie comes out first before hike Wall Street has the Death Star Pointed at the Bond Market

From L Todd Wood, for Birch Gold Group

This is shaping up to be a monumental week. Depending on your interests in life, you may be looking forward to the new Star Wars release, camped outside the movie theater for first crack at the coveted golden ticket.

Or, you could be anticipating the much heralded twenty-five basis point increase in the Fed’s short term interest rate. Either one is likely to be talked about over and over in the press for some time to come.

However, I think it’s telling that we have waited longer for the Star Wars movie than a Fed rate hike.

Birch Gold has written much recently about the consequences of an interest rate hike in this weakened economy. Although, there is one issue that is only starting to be discussed in the financial press that is the weakness in the credit markets and lack of liquidity since the Dodd-Frank bill was implemented.

As an ex-bond trader, I can tell you that life on this part of the ‘Street’ has gotten very difficult. Electronic systems are replacing many trading jobs as it did with the equity markets over the last decade.

However, the bond market is unique. Some bonds are not freely traded and it takes a good trader to know where the bones are buried and how to make sure liquidity in a certain security is adequate. Periods of stress in the interest rate markets make this job all the more difficult.

In addition to technology destroying jobs in the bond market, Dodd-Frank disincentivized large banks from participating in the market. This consequence may turn out to be extremely destructive as the Fed begins to raise rates. Investors holding certain bonds may see the need to sell those securities as a rise in interest rates will make the paper less valuable going forward.

The problem is, with big banks out of the market, there is no one to take the other side of the trade. In the past, hedge funds and such could just sell a large position to a broker, who would take it on their balance sheet and ‘work’ the sale over several weeks or months, limiting the impact on the price of the security.

Now, there is no one to off-load the position to. If you call a large trading desk (if there are any left), they will offer to ‘try and find a buyer.’ If you need to sell right away, to cover a margin call or other financial need, you could devastate the price of the bond. This is what market crashes are made of.

Over the past few trading days, there have been failures of three bond mutual funds at last count, due to this very reason. The liquidity in the market is just not there. I saw in 1994 when the Fed raised unexpectedly, investors who thought they were in ‘safe bond funds’ saw their principal reduced by upwards of thirty percent.

It seems many others are remembering these days as well and are attempting to get their money out. Why they waited this long is a mystery as the Fed has been looking to raise for some time now. However, these funds are now trying to sell bonds and there are no buyers. So they close and go into bankruptcy and investor money is held up longer.

This risk is very real. The Federal Reserve hiking rates will have all kinds of unintended consequences and as with roaches in the kitchen, if there is one, there are many. I can almost guarantee, if three bond funds fail, there will be many more. All of this negative activity could land us in a new recession. The bond market may just be the proverbial canary in the coal mine.

Don’t let your portfolio be destroyed as the markets readjusts. Make sure your savings is protected and back your money with a safe-haven asset such as physical precious metals.

If you’re on Twitter, be sure to follow us here. We will keep you up to date on all relevant and important financial news you need to know.

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Will Economic Disaster Follow After The Fed Raises Interest Rates?


fed interest raise december Will Economic Disaster Follow After the Fed Raises Interest Rates?

From Filip Karinja, for Birch Gold Group

With the Federal Reserve set to meet next week to vote on what to do with interest rates, many are speculating that we may see a rate hike.

This is something Janet Yellen has hinted at over the past few months but has kept delaying.

Should the Fed raise rates, it would be the first hike in 7 years since rates were lowered to 0.25%. Prior to these past years, it was unheard of to have rates so low, and for such a long time.

With some financial experts claiming that the economy is likely headed for another recession, why would Yellen want to raise rates now? According to the L.A. Times, ”…she said one reason to raise the so-called federal funds rate… is so the Fed has the flexibility to lower it if those risks cause the economy to falter in the future.”

In other words, the claim is that Yellen is buying herself some breathing room. By raising rates now, if (and when) crisis strikes in the future, she can lower them again back to today’s levels, and thus avoid having to lower rates all the way down to 0% (or negative) and/or launch QE4.

So by next week, backed by her dubious claims that the economy is finally on solid footing, we may see Yellen increase rates rise to 0.5%. And in the coming months, she may even go as high as 0.75%.

Here’s the problem: This illusion of a recovery put on by the Fed has so many holes in it that a growing number of people are beginning to see through. And more people are also questioning, Why further stunt growth of our plodding economy by increasing rates?

Can you imagine how embarrassing it will be if they raise rates next week and the economy slows even further, or we see a sell-off in stocks? What will they do then?

They won’t be able to raise rates any higher, as it will just compound the problem. But lowering rates immediately may not work either, as it would be a huge blow to confidence in the Fed’s ability to forecast the economy, something for which they already have a poor track record.

After next week’s decision, if the Fed needs to take steps in the future to begin easing monetary policy again, the only other option it will have is to fire up the printing presses again and print money through some form ofquantitative easing (QE). In fact, some experts are predicting that QE4 will be launched early in 2016.

Keep in mind that on a global level, Europe is already printing money as the global network of central banks collude and take turns in trying to prop up the frail global economy.

When it’s the Federal Reserve’s turn to print money, you can rest assured that we are nearing the end game.

But until our economy reaches that final point of no return, you can count on Yellen to continue to do whatever is necessary to keep the economy going, even if her decisions aren’t sustainable.

Is such an aimless monetary policy something you want to tie your savings to? If you want to put at least some of your savings into an asset that can provide a counterbalance, give us a call.

What will happen to gold if the Fed raises interest rates? Find out here.

photo credit: Federal Reserve Chairman Janet Yellen testifies before the House Finance Committee with Senior Fellow Donald Kohn observing. via photopin (license)

Interest Rates Just Dropped From 20% To Zero – What Happens From Here

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rob with fountain pen Interest Rates Just Dropped from 20% to Zero – What Happens From Here?

L. Todd Wood

For the past several decades, bond yields have grinded lower and lower, now reaching effectively 0%. Yet despite such a decline, there has been a lot of talk in the financial press of a growing bubble in the market.

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Is Europe’s $1.28 Trillion Economic Plan A Recipe For Disaster

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mario draghi ecb qe Is Europes $1.28 trillion economic plan a recipe for disaster?

From Filip Karinja

Here we go again – only this time, in Europe.

This past Thursday, Mario Draghi, president of the European Central Bank (ECB), announced that the ECB will launch its own Quantitative Easing program in March, purchasing €60 billion ($67 billion) in government debt each month. [Read more…]