Shelter from the Storm

Having acknowledged in our last post (Fake Money, Fake News) our gratitude to the Fed for providing us a chance to acquire gold and silver at lower prices, in this post we would like to shed a little more light on the forces behind the current price drop.

Let us start with the Fed’s policy meeting and announcement on Wednesday (6/18), at which it decided to continue its money-pumping at the current rate.   That means it will continue buying Treasury securities by at least $80 billion a month and purchasing mortgagebacked securities by at least $40 billion per month.  That means money-printing at a $1.44 trillion annual rate.  

Nothing new there.

The only thing new in the Fed statement was an opinion poll of when voting members think the central bank will raise rates.  In other words, the markets were spooked by a shadow, not substance:  what Open Market Committee members think the Fed may decide to do in a year and a half.

Idle conjecture over what the Fed may do by-and-by down the road appears to have eclipsed the fact that the Fed voted unanimously to keep its highly inflationary policies in place.

Although current conditions forced the Fed to forecast inflation a full-percentage point higher than it did at its last meeting, it still insisted that it would only be a transitory phenomenon.  

We recommend our friends and clients focus on substance.  The Fed is simply terrified at the thought of what will happen if it stops Quantitative Easing, pumping made-up money into the economy, even in the face of sharply rising consumer prices.  Wall Street and the money center banks, which created the Fed to serve their interests in the first place, know that stock prices are floating on a sea of Fed liquidity, and sternly signaled their displeasure that the Fed is even “thinking about thinking about” higher rates down the road.

In any case we think there are others to thank for the opportunity to buy gold at lower prices, even in the face of inflation running hotter than it has in more than a generation.

There are several places to look, but here is one.  As we have pointed out, the entire commodities complex has climbed higher under the Biden spending initiatives and the Fed’s liquidity pumping.  Copper, a widely recognized leader in signaling higher inflation, was among the biggest gainers, followed by other commodities.   

But even as the Fed was deciding that it would continue its $120 billion in monthly money-pumping and maintain its interest rate targets, China announced that it would dump some copper, aluminum, and zinc stockpiles to counter high prices (notably it is not selling its gold). 

We have seen the same sort of thing many times in the past.  Sales of petroleum from the strategic reserves have had more to do with presidents seeking to drive prices down in time for the election than with long-term conditions of supply and demand or with the value of the dollar.  The US Treasury and the International Monetary Fund auctioned off millions of ounces of gold in the 1970s trying to force gold prices down.  The price of gold went up anyway.  

A flight from commodities on China’s decision to sell some stockpiles to counter high prices is one component of the sell-off in gold.  But it, too, is more shadow than substance. That is because China’s stockpiles are small compared to its annual demand for those same commodities.

Or to borrow a term from the Fed, its impact will prove to be transitory.  And it will do nothing to stop the destruction of the dollar’s purchasing power.

Whipsawing markets and volatility are like the winds that foretell the approach of a violent thunderstorm.  The paper gold and silver prices on Wall Street can be buffeted about a bit, but real gold and silver offer shelter from the storm.