To hear it told nowadays, you’d think that gold’s amazing run began when Jay Powell started cranking out bank reserves. Those telling the story equate those bank reserves to effective money printing, so it conforms to the conventional myth about gold’s relationship to the money supply (whatever that is).
Throw in a federal government, every federal government, recklessly borrowing and spending, and bullion nearing its record high makes for an inflationary confirmation to Jay Powell’s otherwise very thin fiction; a story the technocratic-loving mainstream media is desperate to likewise print (pardon the pun).
Spot gold rose 0.9% to $1,835 an ounce on Tuesday, a level not seen since September of 2011 on expectations of higher inflation due to prospects that central banks and governments around the world will continue to step up efforts to support the economies hardest hit by the coronavirus fallout.
Nope. Not even close. Gold is actually rising instead on concerns that central banks and governments around the world will fail in their collective efforts to support already deflationary economies.
How do we know?
Simple. Let’s actually review gold. Contrary to the lie of omission stated up there at the outset, gold didn’t resurrect itself during the depths of March on account of the Federal Reserve’s changing reserve account balances. No sir, gold got going all the way back in…early October of 2018.
While the mainstream media back then was filled with stories about looming inflation prospects, the justification behind Jay Powell’s rate hiking hawkishness, by that October we’d already seen a proliferation of contradictory signals: the dollar, a big one, had suddenly burst upward in April 2018; May 29 and collateral (gold negative); the eurodollar futures curve inverting that June stating that liquidity problems (deflationary) were going to end up leading Chairman Powell to cut rather than hike rates (he did).
To put it quite simply, from October 10, 2018, onward both gold and the bond market would be driven by the same monetary problem; it wasn’t inflation, just as I had warned on October 8:
The PBOC is actually telling us that they expect in the months ahead the same or perhaps bigger commitment to “stepped up support.” CNY doesn’t need support if there is no worsening “capital outflow” situation of retreating eurodollar funding…
Like 2015, these RRR cuts are showing us the eurodollar condition. China’s money problems aren’t really Chinese. They are money problems.
From there the eurodollar landmine did, in fact, show up which not only boosted bonds it ignited the gold market with the fires of deflationary or fear gold. Furthermore, by late December 2018, it totally wrecked the inflationary scenario that the mainstream media (and all the Bond Kings) had been emphatically touting for more than a year by then.
The front end of the Treasury yield curve followed the eurodollar curve into inversion right during this landmine period signaling how the global monetary system had transitioned from warning about the chances for deflationary conditions to them actually showing up.
That’s what the landmine represented, and what it really had meant. Think the little girl in the movie Poltergeist:
The only time bonds and gold somewhat “disagreed” over these first months it was after late February 2019. I think it more a collateral rumble than anything, but even setting that aside at most gold was lower sort of mildly in agreement with the next evolution in mainstream thought about how the Fed pause might be enough to stave off a further globally synchronized downturn (which, according to convention, supposedly just showed up out of nowhere).
Bonds, meanwhile, weren’t at all impressed with Powell’s promise to hold the rate hikes. Both the UST and eurodollar curves were increasingly adamant about worse to come – a view which, by late May, the gold market jumped back onboard with as the yield curve twisted (inverted) even more forcefully at the front.
Both gold and bonds skyrocketed, the curves distorted even more because of reborn inflationary pressures due to a pause in rate hikes? Of course not (and it sounded as ridiculous at the time as it does now in hindsight). Driving interest and buying in both was the opposite view, more deflationary concerns that grew mainstream serious by August 2019.
The small part of the yield curve which the “experts” watch finally inverted bringing out widespread exasperation that maybe there really was something seriously wrong with the world and its economy. Maybe the Fed, too.
But then, early September 2019, central banks began to more seriously fight back. The ECB relaunched QE on September 12 followed by a not-QE (with multiple “repo” operations) at the Fed. Something, something, repo mid-September.
Both bonds and gold paused in each’s ascent to re-assess whether or not upscaled monetary policies and what many called massive, forceful accommodation might work.
Interesting, too, how during the Autumn of 2019 that gold prices declined concurrent to this prior round of “money printing” across Europe and in the United States. In bonds, the front end of the yield curve briefly turned positive as not quite optimism (relatively less uniform pessimism) took hold of sentiment.
That all changed early in December 2019, weeks before China would admit to an outbreak of some strange and novel coronavirus. With ECB QE on full blast, repo operations still ongoing, and the Fed buying up T-bills for not-QE inspired bank reserves, both bonds and gold were bid again, curves distorted signaling renewed worries over bad things (not inflation, in other words).
As the potential for those bad things continued to rise with the added negative pressures of COVID-19, there was zero chance of inflation therefore bonds and gold perfectly clear in what they were indicating: losing control.
Finally, late February, GFC2. This wreaked havoc across many markets including gold which was pressured like bonds by the collateral bottleneck long feared (back to May 29, 2018) finally materializing right before the Fed’s incompetent eyes. Gold was pummeled by it, just as it had been at times during GFC1, while even parts of the Treasury market (outside of bills) were rendered illiquid by the uncontrolled, deflationary ruckus.
While Jay Powell floundered helpless as a kitten, we’ve been led to believe he was some tiger and gold from that point on just switched sides and started to agree! After having risen for a year and a half being driven almost exactly like bonds, in tandem with the dollar, these global deflationary concerns, suddenly gold’s latest leg upward was the very opposite thing?
Yeah, no. Of course not. What’s driving gold right now is the same thing which has rendered the Fed’s proposed yield caps stupid. The demand for safe, liquid instruments continues because, again, the opposite of inflation remains the operative condition just as it had been going all the way back to October 2018 (and before).
Powell would be better served ditching his flirtation with yield caps buying Treasuries and instead proposing to impose them on gold by selling (paper) bullion. Then again, he doesn’t actually need a gold cap because right now everyone is spinning higher gold just the way he wants them to.
As always, money-less monetary policy comes down to ridiculous, easily disproved deception. Other than that, there’s nothing else in the official central banker toolkit. Realizing this, you might then understand exactly why gold and bonds are being bid concurrently in this way.