We just had another brief scare in the stock market, and it once again brought out the clowns from the Federal Reserve to entertain investors with a little monetary slapstick and policy juggling. This time it was led by Chief Jester Powell who just a few days ago made it clear that we haven’t seen the last of Quantitative Easing (QE), stating “Perhaps it’s time to retire the term ‘unconventional’ when referring to tools that were used during the crisis. We know that tools like these are likely to be needed in some future form…”
There we go! The Fed is finally admitting what I’ve long contended - QE and other forms of unconventional stimulus are here for good. During the last crisis and throughout the recovery, the Fed assured us that such tools were temporary and that the extraordinary stimulus would ultimately be removed. The Fed did begin the process of gradually raising short-term interest rates and modestly unwinding QE, but both were suddenly halted at the beginning of the year. The Fed will never admit that it’s beholden to the financial markets, but it isn’t a coincidence that the sudden about-face came right after last autumn’s sharp stock market sell-off. A mere six months later and the Fed is finally conceding that QE and other non-standard forms of stimulus are here to stay.
In a December 2009 note focused on gold, I emphasized, “Gold should be owned as a hedge against political incompetence and monetary mismanagement.” Political incompetence? I know my left-leaning clients don’t need any prodding on this one. Regardless of your opinion about Trump, it should boggle your mind that we’re running a trillion-dollar annual deficit during what Trump claims is the best economy possibly ever (spoiler: it’s not). Just imagine what that will soar to in the upcoming recession. $2 trillion? $3 trillion? When politicians borrow more money and increase the deficit, that borrowed money quickly flows through Gross Domestic Product (GDP), giving a boost to current economic growth. They get to spend more money and boost the primary measure of the economy, so of course they like debt! Let’s just not conflate debt-driven economic growth with growth derived from increased savings. Remove the huge increase in debt we’ve seen during this economic expansion, and you’ll find a vastly different and weaker picture (a topic for another day). Political fiscal incompetence? Check.
“Monetary mismanagement” should speak for itself at this point. The Fed has been the chief engineer of multiple bubbles and collapses, and now they’re stuck. Like politicians, they’re hooked on stimulants, and it’s again easy to see why. Who wants to lead the Fed and prudently remove stimulus if it leads to an overdue recession or market collapse? It may be ultimately unavoidable, but who wants to take the blame for it and live with that legacy? Better to keep playing the game, extending the bubbles, and leaving the inevitable problems for someone else. If you can keep the charade going long enough and leave before it all blows up, you’ll be heralded as a financial wizard, offered cushy jobs on Wall Street, enjoy a lucrative speaking tour, perhaps make a cameo in a rap video, and be paid extremely well to sit on various boards. Monetary mismanagement? Check.
The reasons to own gold are as strong as they’ve been since the gold bull market began in 2002. Our Focus Chart today shows the price of gold over the past 4 years. There has been a modest trend higher over this period, but the most striking point from the chart is the inability of this precious metal to break through the $1350 level. There have been half a dozen attempts since 2016, and each one has failed.
Over the last couple of years, we’ve discussed the existence of this resistance level and the likelihood that numerous assaults on it would be required. In addition, I’ve shared for a while now my belief that the next big move for gold probably wouldn’t come until investors realized that the Fed’s ‘extraordinary’ stimulus measures were here to stay and would be even larger in the future. We’re now at an interesting point. The Fed is finally communicating that those measures are indeed permanent, and investors are starting to listen. In addition, gold has recently rallied from $1270 in late May and is once again tickling that $1350 level today (the chart is a couple days old).
I’m not a fan of short-term predictions…something I always say right before I make one. I’d expect this $1350 level to be tested a few times in the coming days/weeks. There’s no guarantee that we’ll finally break through this time, but the odds are higher than they’ve been in the past few years. Once through, we could see a fairly quick move up toward $1400 which will likely be another resistance point. Beyond that, we should see gold finally start attracting more serious investor attention globally. We’ve seen the precious metals mining stocks have a nice move higher with the recent rally in gold prices. These companies are highly levered to the price of gold, and they’ve been forced to pare costs during the brutal downturn of the past few years. Once gold finally resumes its long bull market, we’ll see tremendous gains in the mining space like we did in early 2016. Whether this recent move up turns into the decisive move to new highs or not, the ingredients are in place for it to happen reasonably soon.
Best,
Ken Bell, CFA, CFP, MBA, Gold Coin Stacker
06/07/2019
The Market Rubbernecker is associated with Aspera Financial, LLC, an investment management and financial planning firm based in the Cary, Raleigh, and Durham area of North Carolina. This and all Market Rubbernecker missives and musings (written, oral, or mimed) are subject to the disclaimers, disavowals, and hindquarter-coverings found at www.asperafinancial.com/aboutrubbernecker.