Should We Declare the Gold Bull Run Dead?
Gold had another precipitous drop on Wednesday (Sept. 23), falling through the support level at $1,900 to a 2-month low. That has led some to ask – is the gold bull dead?
The concern is understandable but I think it’s too early to declare last rites. In order to believe the gold bull run is over, you have to believe the Federal Reserve is actually going to tighten monetary policy and the dollar is going to remain strong.
That seems rather unbelievable.
The big drop in gold and silver has primarily been driven by dollar strength. The dollar index hit a two-month high on Wednesday. Investors have moved into the dollar due to concerns about a resurgence in coronavirus in Europe and the possibility of further economic lockdowns. The sudden risk-off sentiment hasn’t only clobbered gold and silver. US stocks have taken big hits as well. In some ways, it looks a little bit like March when everything was selling off.
But the big driver of all of this is the Fed. In many ways, the selloff we’ve seen both in stocks and precious metals is a big temper tantrum because the Fed didn’t promise more stimulus during the September FOMC meeting. Sure, the central bank maintained its commitment to extraordinary monetary policy. But the markets don’t think that’s enough. As Peter Schiff put it in a podcast earlier this week, there’s this idea out there that the Federal Reserve is not loose enough. The Fed’s monetary policy is not dovish enough. What we have is not enough. The addict wants even more of the monetary drug.
Chicago Federal Reserve President Charles Evans stoked this notion of a “hawkish” Fed when he said that the central bank could raise rates before inflation averages 2% for some period of time. “We’ve sort of said we’re looking to get inflation up to 2%, and then after that, we could be raising rates and still have an accommodative setting of monetary policy,” Evans said on Tuesday.
That raises the first key question: do you really believe the Fed is going to raise rates?
If you ask me, that’s a hard no.
How could it given the levels of debt in the economy? Rising interest rates would pop the debt bubble and crush the economy. Remember, the Fed couldn’t even normalize monetary policy in 2018 – a decade after the Great Recession. It gave it the old college try. And then the stock market tanked and the Fed cut interest rates, relaunched QE (although it refused to call it that), and engaged in repo operations to rescue the market and shore up a rickety financial system. There is a lot more debt now than there was in 2018. The stock market bubble is bigger. The real estate bubble is bigger. If the Fed couldn’t raise rates two years ago, how in the world will it do it now?
In fact, Evans has already walked his statement back, as Reuters reported.
‘I don’t fear 2.5% inflation,’ he said, noting that the lower the tolerance for an inflation overshoot, the longer it will take for the Fed to meet its goal of 2% inflation on average. Regardless, he said, the Fed won’t raise rates until inflation reaches 2%, sustainably, and the central bank is confident it will overshoot that goal – conditions that won’t be met before the end of 2023.”
And Fed Vice Chair Richard Clarida was also talking in his most dovish voice, saying, “Rates will be at the current level, which is basically zero, until actual observed PCE inflation has reached 2%. That’s ‘at least.’ We could actually keep rates at this level beyond that. But we are not even going to begin thinking about lifting off, we expect, until we actually get observed inflation … equal to 2%.”
If I were a betting man, I would say the odds of the Fed raising rates in the next five years are the same as the interest rate – zero.
But there is another important question to grapple with: will the Fed provide more stimulus?
I think the answer to that question is an emphatic yes.
In fact, Jerome Powell was on Capitol Hill pushing for just that this week. He said the economy appears to be improving but, “there is a long way to go.” And he said, “We need to stay with it … The recovery will go faster if there is support coming both from Congress and the Fed.”
The Fed chair is clearly still all-in on stimulus. He would prefer Congress to pass another fiscal stimulus bill. But when you boil it all down, fiscal stimulus is monetary stimulus. If Congress spends more, it will have to borrow and the Fed will have to monetize all that debt — in other words — more money printing.
And I am almost certain that even absent action from Congress, the Fed will do what it can to keep the bubbles inflated. If stocks keep falling, the Fed will up QE.
Even if I’m wrong, the Fed has already committed to maintaining QE at least at the current level. Even that is bullish for gold. The Fed is printing money at a record pace. The money supply has increased at record levels for five straight months. It’s hard to project dollar strength longterm given we are still in the midst of QE infinity.
In a nutshell, to believe the gold bull run is over, you have to believe the Fed is done with stimulus. It seems pretty clear it’s not.
There are other reasons to remain bullish on gold. In fact, Citigroup analysts think gold could be back over $2,000 before the end of the year. They focused in on election uncertainty, saying it may “be under-appreciated by precious metals markets.”
Citi also cites plummeting global bond yields, more liquidity injected by the Fed and dollar weakness, global trade tensions, and the continuing COVID-19 pandemic as reasons to be bullish on gold.
But in my view, it all comes back to the Fed. If I really believed it was about to get out of the stimulus game, then I’d say, sure, gold is in trouble. But it’s not. And it’s not. I would argue that this isn’t a time to panic. In fact, it just might be a good time to buy the dip.