I Bought A Stock (AU) At 20; Now It’s 23 – Am I Rich?

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I BOUGHT A STOCK (AU) AT 20…

…Now, it’s 23. I must be rich. That sounds ridiculous and it is. But, that is how some gold bulls sound when talking about “new highs” for the yellow metal. At least one analyst mentioned the “four year wait” for gold’s breakout, so let’s go back to 2020. More precisely, August of 2020. If anyone had bought a stock which was predicted to “break 20 and go straight to 30” would it have generated the same excitement that predictions for gold to go from $2000 to $3000 did? Not likely; but that did not stop the torrent of predictions and hyped expectations for the rocket launch that some expected. Calls for $5000, $10,000, and higher stoked the fever and emotions of anxious investors.  Alas, we all had to wait for almost four years. Now, those same anxious investors are hoping the rocket launch hasn’t aborted – again.

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Chair Powell’s Speech Re: Fed Independence

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In Fed Chair Powell’s speech this past Wednesday, he spoke about Fed monetary policy and also talked about the role of the Federal Reserve. In addition, he referred directly to the matter of the Fed’s independence and the necessity of maintaining that independence. In effect, he warned Congress about efforts to involve the Fed politically or to attempt modification of the independent monetary policy role of the Fed.

Below are selected excerpts from the speech which are followed in turn by my comments…

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What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Investors Are Too Anxious For Rate Cuts

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INVESTORS ARE TOO ANXIOUS FOR RATE CUTS

Anxious investors seem to be expecting more than has been “promised” regarding interest rate cuts. Some (quite a few) seem overconfident that the long awaited pivot is a done deal. In addition, anticipated results from the expected cuts are already built into the markets to a large degree. Here are some thoughts worthy of consideration…

1) Suppose the Fed cuts rates later this year, but not as much as expected. Is cutting interest rates 1/4 or 1/2 percent all that is necessary to kick the gravy train into high gear?

2) Is a Fed pivot a temporary thing? Maybe the Fed cuts a quarter point once or twice, then re-pivots and begins raising rates anew.

3) What if the Fed doesn’t cut rates at all?

ANTICIPATION IS MAKING ME WAIT

(Thank you, Carly Simon, for the perfect subheading.) The possibility of three rate cuts in 2024 has been amplified to mean that the Fed will cut rates this year – 2024. The rate cuts most everyone is expecting are the same rate cuts that were assumed and expected for most of last year – 2023. Isn’t it possible that rate cuts could be postponed again? How long can elevated stock prices and other assets maintain their lofty levels based on the expectation of lower interest rates which continue to be expected but not realized?

IF THE FED PIVOTS, MIGHT IT BE TEMPORARY? 

Overlooked in the rush by everyone outside of the Federal Reserve to talk interest rates down are comments by Fed Chair Powell which include the phrase “higher for longer”. Those who are so intent on expecting lower interest rates might do well to consider not just the possibility, but the likelihood of rates remaining higher for longer. 

Rates were intentionally forced lower by the Federal Reserve over nearly four decades prior to the official announcement their campaign to raise interest rates in March 2022. During those four decades the Fed moved back and forth both higher and lower regarding interest rates, but all changes in direction were temporary within a long-term decline in rates lasting nearly forty years.

The emphasis on “lower for longer” took interest rates close to zero and created an addiction for cheap money and credit. The artificially low interest rates that fueled the addiction were not normal. They were abnormally low historically and created huge bubbles in asset prices. Financial and economic volatility increased and the U.S. dollar suffered a loss of credibility and purchasing power.

As a result, the Fed was forced to change its interest rate policy to protect and defend the dollar. Not out of a patriotic sense of duty, but in order to save the financial system. It may be too late for that.

That brings us to our final point. What if the Fed doesn’t cut interest rates?

WHAT IF THE FED DOESN’T CUT RATES?

It is very much a possibility that the Fed might not cut rates at all. The inclination to do so seems to change from week-to-week and month-to-month along with changing economic data and statistics. Jerome Powell has been consistent in his comments that “higher for longer” is the game plan. Maybe rates get kept at current levels for awhile longer.

At their current level, interest rates are still abnormally low on a historic basis. Historically normal interest rates average 7-8 percent. We are not there yet. And with the extreme lows for interest rates experienced for several decades, there is a significant amount of inefficient allocation of money and resources that needs to be reallocated. That will result in varying degrees of financial and economic pain.

CONCLUSION 

The Federal Reserve has a history of market intervention and manipulation. The Fed’s interest rate policy is a manipulation ‘tool’. The market intervention and manipulation is ongoing. The overriding purpose is to create and sustain an environment that enables banks to continue to lend money and collect interest in perpetuity.

Often, though, application of the ‘tool’ is a defensive reaction to unintended and unexpected financial and economic events. For many years now, the Fed has been occupied with battling the negative consequences of it previous policies and actions. They may be in the driver’s seat, but the vehicle is out of control.

Stormy seas are ahead. If the Fed cuts too soon or too much, the cheap bubble juice will create more inefficiencies and extreme volatility. Right now, just the expectation of a return to cheap and easy money/credit has blown bubbles in almost everything priced in dollars. At some point, bubbles get popped. That is something the Fed is trying to avoid.

Interest rate cuts are not a sure thing. Investors could be in for a nasty surprise. (also see Federal Reserve and Market Risk)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care

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The money supply continues to fall, but investors don’t seem to care. They are convinced that their success is connected to a potential Fed shift in interest rate policy. Nothing else seems to matter. That is partially attributable to the fact that, as the financial markets continue their upward trajectory, less and less attention is paid to the deteriorating economy. And, the deterioration is getting worse.

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System Liquidity Risk – Cash Is Preferred & Appreciated

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SYSTEM LIQUIDITY IS THE BIGGER RISK – “CASH IS PREFERRED AND APPRECIATED”

There is quite a bit of debate right now about whether inflation’s effects will worsen again soon; or, whether the inflation threat has been minimized and “disinflation” will prevail. Don’t look now, but the specter of a liquidity crisis is looming in the background.

The situation is such that a liquidity crisis of epic proportion might overtake all of us in our arguments about the quantity and extent of inflation’s effects. My concern was heightened this past weekend when I drove to a small, local restaurant to pick up a take-out order.

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Two Reasons The Fed Manipulates Interest Rates

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There are two reasons the Fed manipulates interest rates. Before we talk about those reasons, though, it is important to understand that the Fed does not actually control interest rates. Interest rates are set in the bond market. Buyers and sellers (traders) bid for and offer bonds for sale. When a buyer and seller agree on a price, the trade is finalized. The specific price, in conjunction with the face value of the bond (always $1000) and the stated coupon rate attached to the bond (and the length of time until the bond matures for yield to maturity) factor into the formula which determines the current yield, or what might be called the bond’s current interest rate.

In addition, the Fed does not set the fed funds rate. The fed funds rate is the rate which member banks (banks which belong to the Federal Reserve system) pay to borrow money from each other in an overnight market. What the Fed does is announce their “target range” for fed funds.  The Fed hopes that member banks will limit their lending activity with each other to the publicly announced target range.

The Fed has direct control over only one specific interest rate – the discount rate. The discount rate is the rate which member banks pay to borrow money directly from the Federal Reserve. The specific rate which the Fed charges to member banks at its “discount window” can and does influence trading in the fed funds market.

The extent of the Fed’s influence is limited mostly to short-term rates, such as those above. Since they do not actually control interest rates, particularly long-term rates, how do they influence trading activity in the bond markets? They talk a lot. This should be obvious to most observers. A more critical factor, though, is the Fed’s active participation in the bond market, buying and selling huge amounts of U. S. Treasury securities (and CMOs more recently).

TWO REASONS THE FED MANIPULATES INTEREST RATES

The history of the Federal Reserve is a history of interest rate manipulation. Specific interest rate policy of the Fed, and subsequent compliance (go along to get along) in the credit markets, resulted in a trend of lower interest rates dating back nearly four decades. The trend began in the 1980s and continued until just a couple of years ago. Unfortunately, the collateral damage from “cheap and easy money (credit)” led to crisis conditions in the credit and foreign exchange markets.

The specter of inflation seemed ready to overwhelm the markets and the economy; and, as they have done in the past, the Fed reversed direction on interest rates. Rightly so, some would say; except that the Fed has been playing the same game since its inception in 1913 – and they have a losing record. (see Fed Interest Rate Policy – 2008, 1929, And Now). So, why does the Fed continue to play a game they keep losing?

There are two specific reasons. The first is because it is in their own self-interest.

The Federal Reserve is a private institution. It is a banker’s bank. The Fed provides an environment which allows banks to create money in perpetuity and collect interest ad infinitum.

Fed manipulation of interest rates is a misguided effort to extend and control the prosperity phase of the economic cycle. Over the past century, the effects of inflation created by the Federal Reserve has increased the volatility and frequency of financial catastrophe and economic dislocation. Hence, the Fed spends most of its time putting out fires. This, of course, conflicts with and limits the Fed and member banks abilities to grow their lending capacity and income stream from the interest they collect on their “funny money”.

The second reason for ongoing Fed manipulation of interest rates is related to the first reason; and, it involves the U.S. government.

Before the Federal Reserve was authorized by Congress, representatives of the cabal of bankers and politicians that were trying to get specific legislation through Congress and to the President’s desk for signature met with some highly placed government officials. At that meeting, a promise was made that guaranteed the U. S. government would always have the funds it wanted – if the bill passed which authorized the origin and operation (private) of the Federal Reserve. The legislation passed.

When you hear politicians today, or at any time, complain about the Federal Reserve, you can be relatively certain that any attempts by Congress to thwart the Federal Reserve and its operations won’t get very far. Bite off the hand that feeds you? Kill the golden goose? I think not.

The Federal Reserve is very happy with the arrangement, too. Biggest source of income to the Federal Reserve? Interest on U.S. government securities. That is not a coincidence. It is the perfect example of a win-win situation. (see US Government is Beholden To The Fed And Vice-Versa)

CAUTION FOR INVESTORS 

The reason the Fed began its attempt to raise interest rates is because they were at a juncture where continued easing could again trigger huge declines in the dollar. On the other hand, rising interest rates increases the risk of potential implosion in the credit markets.
We said earlier that the Fed spends most of its time putting out fires. Federal Reserve activity for the past several years is based on fear. They are afraid of triggering a complete collapse in the U.S. dollar, yet they are also afraid that their efforts to restore interest rates to a more historically normal level will be rejected and the credit markets will collapse and usher in economic depression.
The irony is that they are trying to manage the effects of inflation that is of their own making. And doing a poor job of it.
With history as a guide (see The Fed’s Changing Game Plan) and allowing for the lack of Fed success over the decades, it seems that betting on a “Fed pivot” to trigger investment profits amid new bull markets holds more potential risk than reward. (also see Federal Reserve – Conspiracy Or Not?)

Three Things That Are Killing Silver

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Over the years (and decades) silver travels a path fraught with excitement and disappointment. Both the excitement and the disappointment stem from three things that are killing silver – unrealistic expectations, inflation, and time.

UNREALISTIC EXPECTATIONS

The unusual conditions leading to the explosion in the silver price in the late 1970s are unlikely to happen again in a similar context…

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U.S. Dollar Best Of The Worst; Gold Best Of The Best

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Among the major fiat currencies in the world today, the U.S. dollar is “the best of the worst.” What that means is that there are no better alternatives.

BRICS – QUESTIONABLE MOTIVES

That is especially true when one considers all of the nonsense and suppositions stemming from statements made by member nation representatives of BRICS. Both Russia and China are foremost in their efforts to talk the dollar into disrespect and disrepute. Their motives, however, have nothing to do with providing a better alternative.

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Justification For Gold

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Justification for gold to move substantially higher in price continues to press the boundaries of imagination. In this article we will try to filter the noise in the headlines and also simplify what has been marketed as something much more complex.

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