New Zero Bound Only Game In Town

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 3

As a general rule, the most successful man in life is the man who has the best information

The Federal Reserve tried to fix the U.S. economy by Quantifornication - stimulus measures.

Investors reacted to the Fed’s unconventional efforts. Since the U.S. dollar is the world’s reserve currency and precious metals are priced in dollars they bought gold and silver to protect their wealth against currency devaluation and inflation.

Gold catapulted to a record in 2011 as investors wagered on higher inflation and a weakening dollar.

Gold and silver soar in price

How things have changed, the dollar has recently gained a lot of new friends while gold has very few left. The Fed is going to end its bond-purchasing program this month and start raising interest rates sometime in 2015, experts are talking June/July.

Investors believe:

• A substantial upward trend in real interest rates will soon begin.
• In a strengthening economy.
• In a future where there is no inflation.

Expectations regarding the Fed’s present, and it’s next moves, are pushing the dollar ever higher, gold and silver lower.

The chart above compares the movement in the dollar index with gold’s price.

Have investors got it wrong? Should we be more happy about rising interest rates or more worried about Russia/Ukraine, religious genocide, China and its deteriorating relations with other China Sea stakeholders, Ebola, very weak macroeconomic data coming out of Europe/Japan/Brazil, a slowdown in China and more than a few other hot buttons?

And do rising long rates really threaten gold? Has gold’s price ever gone up in conjunction with rising interest rates?

The following information and snippet is from Adam Hamilton and Scott Wright over at Zeal Intelligence.

Between August 1976 and January 1980 gold went up 731.7 percent, at the same time 10y Treasury yields climbed from 7.7 percent to 11.0 percent, a 42.2 percent climb.

From April 2001 to May 2006 gold nearly tripled with a 180.6 percent gain. During that time the average yield in benchmark 10y Treasuries was over 4.4 percent. 

“For nearly its entire bull run, gold thrived in long-yield environments much higher than today’s.

During the first 7 years of gold’s secular bull climaxing in March 2008, the metal nearly quadrupled with a 291.7% gain.  Yet over that entire span, 10y Treasury yields averaged 4.5%. 

By December 2009 gold’s secular bull had been powering higher for nearly 9 years, and somehow managed to gain 373.5% across a once-in-a-century stock panic over a secular span where the 10y Treasury yield averaged 4.3%…Rising long rates weren’t a threat to gold in its last secular bull, and they weren’t a threat to gold in this secular bull… 

Between June 2003 and June 2006, 10y Treasury yields soared 68% higher from 3.1% to 5.3%.  Surely 5%+ yields would crush gold, right?  All those deluded fools buying that anachronistic zero-yielding relic would see the error in their irrational ways and shift into good safe Treasuries.  But that’s not what happened.  Over that 3-year span, the gold price climbed 63.8% despite a steady rising-long-rate environment!”

Peters got his thinking cap on

“Peter Pan’s advice was to think of an impossible thing each morning. FOMC members have presumably been following this advice…”  Vincent Reinhart, chief U.S. economist at Morgan Stanley and former top U.S. central bank staffer, referencing the Federal Reserve’s exit strategy

Are we even going to see rising rates?

The following snippets are from an article written by Michael Pento over at pentoport.com…

“Today, the equity and bond markets have positioned themselves for the best outcomes of all possible scenarios. These markets are assured that the Fed can painlessly exit QE in October and real interest rates will rise with no ill effects on the economy…

As the world’s Central Banks frantically print money, the US dollar is soaring due to the belief that the US economy will remain unscathed from a global economic slowdown…

Investors should think again if they believe the Yellen Fed will be aggressively raising rates and boosting the value of the dollar given the labor market’s already-fragile condition…today’s central banks, determined to smooth out every hiccup in the economy, only have one answer–print money. When all you have is a printing press, every problem looks like a monetary crisis. 

The Fed will not be raising rates anytime soon. To the contrary, Ms. Yellen will soon be forced back into the money printing business…