Wednesday, June 26th, 2019 MST

Look for the Fed to intervene

Primarily because of the strength of the dollar relative to other currencies, gold has been stuck in the $1275 for the past month.  In the other major currencies, gold has risen as those currencies have fallen against the dollar.

Because of the Keynesian indoctrination that economists and financial personnel have been subjected to over the last 80 years, the dollar is the preferred safe haven – despite gold being the ultimate safe haven.

Now, to supplant Keynesianism, there is Modern Monetary Theory, a concept under which the amount of debt that a government owes does not matter.

In this climate, investors have become habituated to intervention.  The economy weakens, so the Fed implements a loose monetary policy and all is well.  It worked in 2008 for the World Financial Crises, so it should work again is the belief.

In past money printing sprees, inflation resulted.  That is, consumer price inflation.  But in 2008, the money flowed to Wall Street, and now we have a stock market bubble.  In 2000 the Fed’s low interest rate policies ended with the dot.com bubble.

Now, though, the question so often asked is the Fed standing ready to ward off a recession or a stock market decline?  It could be either.

As noted in prior posts, the economy is weakening, and the stock market may have seen its better days (meaning highest prices).  With the Fed raising interest rates four times in 2018, money moved into US bonds, both government and corporate.  In order to buy bonds in the US, dollars have to first be bought, resulting in a stronger dollar and weaker gold.

But now, the odds are that the Fed will next cut interest rates.  If so, just like in 2008, gold should respond well.

4 Responses to “Look for the Fed to intervene”

  1. RK_in_TX

    Well, gold is unusually high already, if compared to silver (~89x price of silver) and platinum (~1.6x price of platinum). Platinum used to be more expensive than gold. And the gold to silver ratio used to be far, far smaller than today. Does this mean gold is overpriced? Are silver and platinum underpriced? And finally, palladium is currently priced above gold, and also far above platinum! What are we to make of these unusual price relationships?

    Reply
    • Bill Haynes

      One of the reasons the price of palladium is well above gold and platinum is that Russia’s Norilsk complex, which primarily is a nickel mine, has moved to mining ore that is low in palladium, the mine’s byproduct.

      Reply
        • Bill Haynes

          Both are low, considering the problems that US faces. This fiscal year’s probable increase in the national debt of somewhere near $1.2 trillion isn’t even talked about in the news, not even the financial channels. Trade wars galore. Military stand-off with Iran. Absolutely no co-operation between the Dems and the GOP on solving any problems. Only thing they seem to agree on is natural disaster relief, which adds to government debt.

          Reply

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