Gold dropped well below $1,400 on Monday. Mainstream analysts said sell-off was because hope for a resolution in the trade war interjected some optimism into the markets, pumped up risk sentiment and put a damper on safe-haven buying. But that optimism apparently faded fast. On Tuesday, gold began to rally again and pushed back above $1,400.
The fact is economic realities don’t support optimism.
In his latest podcast, Peter Schiff said he sees a lot of days with big moves up for gold in the future because the yellow metal has a lot of catching up to do.
We talk a lot about how central banks serve as the primary force driving the business cycle. When a recession hits, central banks like the Federal Reserve drive interest rates down and launch quantitative easing to stimulate the economy. Once the recovery takes hold, the Fed tightens its monetary policy, raising interest rates and ending QE. When the recovery appears to be in full swing, the central bank shrinks its balance sheet. This sparks the next recession and the cycle repeats itself.
This is a layman’s explanation of the business cycle. But how do the maneuverings of central banks actually impact the economy? How does this work?
The Yield Curve Accordion Theory is one way to visually grasp exactly what the Fed and other central banks are doing. Westminster College assistant professor of economics Hal W. Snarr explained this theory in a recent Mises Wire article.
This article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.
In my previous article, Being a Good Financial Steward: A Lesson from the Parable of Talents, I encouraged readers to follow the example of the good servants by finding a return on their precious metals. The good servants traded their talents (literally weights in gold and silver) in order to gain more talents.
And unto one he gave five talents, to another two, and to another one; to every man according to his several ability; and straightway took his journey. Then he that had received the five talents went and traded with the same, and made them other five talents. And likewise he that had received two, he also gained other two.” Matthew 25:15-17
While it’s not clear what activities were in involved in the trading of these talents, we are confident that the good servants were productive. (Matthew 25:20) Comparing this with the bad servant who simply dug his talent in the ground out of fear readers are given clear examples of both productive and unproductive financial stewardship.