There’s a lot of talk about a slowdown in the economy.
World trade has slowed sharply… the worst downturn since the Panic of 2008.
We saw a story the other day that 6,000 retail stores have closed so far this year. That’s more than all of last year.
Housing starts have fallen to a two-year low.
And David Stockman asks how the stock market can be up when business profits are down year after year. Here’s a chart from the Federal Reserve he uses to make the point graphically:
President Trump and his advisors are very concerned about evidence of a slowdown. They want the Fed to lower rates, and to print and pump money into the economy.
They are calling for interest rate cuts that will put real interest rates (rates after inflation) into negative territory.
Return to QE?
President Trump is himself explicitly calling for another round of Quantitative Easing, a repeat of the biggest money-printing binge in US history.
You know what that does to the price of gold?
We do. We’ve seen it before.
Quantitative Easing began in November 2008. Gold took off like a rocket ship. This chart shows the shocking increase in the Fed’s holdings of US Treasury securities (the blue line). Those holdings had been about $800 billion for some time before this chart begins in 2008.
Before long it had $2 trillion in US securities. Where did the Fed get the money to purchase a fresh $1.2 trillion in US government bonds?
Silly question. It made it up on a computer.
As a part of QE, the Fed not only ratcheted up its purchase of Treasury bonds with money it made up out of nothing more than a digital keystroke, it began purchasing mortgage-backed securities, toxic and worthless mortgage portfolios from the crony banks (the red line).
The Fed had no mortgage-backed securities before QE. Before long, it had more than $1.6 trillion of them.
I’ve overlaid the price of gold so that you can see how the launch of QE pulled gold up to a high of $1900 in 2011.
The chart might suggest that gold became indifferent to the QE money pumping before QE leveled off in 2014. But in reality, money managers around the world realized that all of that bond and mortgage security buying was going to firehose money right to Wall Street and money center banks. So they all piled into the stock market. Many sold gold to buy stocks.
The result has the US in a dilemma. It has taken a lot of loose money to drive the stock market to today’s levels. Now the market, addicted to loose money, is growing skittish. As we saw at the end of last year, the stock market wants the Fed to provide it with another fix.
It’s like a junkie getting the heebie-jeebies. If it doesn’t get its fix, it will fall. Hard.
And money will come rushing out of the stock market and into gold. Gold will take off.
If it does get the QE fix it wants, like last time, gold will skyrocket again. Just like it did when they started this whole QE mess.
Either way, gold moves up. “Bigly,” as the President might put it.
If you’d like to know more about the gold and silver markets and learn how to participate in the coming boom, speak with the RME gold authorities. Simply call our office and you will be connected to one of our knowledgeable gold and silver professionals.