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BookmarkThis week’s take down of the gold price has all the classic hallmarks of a major intervention by the Federal Reserve say gold traders who know exactly what they see on their screens. Only the Fed can manipulate and coordinate the bullion banks in this way.
The Federal Reserve is trying to stay one step ahead of the curve and keep its money printing show on the road for a bit longer by propping up the US dollar with an attack on gold. How can the greenback be losing it if the monetary metal is falling in value? It’s a sign of desperation to be doing this, a warning sign that things are going wrong under the hood.
Short-term impact
This is a known ruse but then traders know it will have an impact on prices so they still jump on cue. The pack follow and reinforce the price fall. However, if you look back over more than a decade of gradually rising gold prices and this never lasts for very long.
This is a temporary distortion in a market driven by ever expanding monetary aggregates and the relatively fixed supply of gold. It’s rare stuff, hard to find and hard to mine. Buy on the dips and it’s a surefire winner in the longer term.
Besides what are we to make of the longer term future for the Fed’s policy of quantitative easinng, the printing of $85 billion a month or $1 trillion a year? What does this hold for the price of gold or silver for that matter as the only other monetary metal?
If QE stopped tomorrow then the US bond market would crash. Interest rates would rocket and bond prices fall through the floor. As this is the world’s largest and most liquid financial market, way bigger than the US stock markets, then this would be a major event indeed.
Great Rotation?
Where would that money go? Back into stocks paying tiny dividends? No there would have to be a major correction in the stock market too to adjust for higher interest rates. It would all be an absolute disaster for the financial sector, like back in 1974. Money would, on the other hand, pour into gold and silver as a safe haven in this sort of crisis.
Say things went in the opposite direction and the Fed decided to raise the monetary base still higher, and that has been the recent trend, what would be the impact on bullion prices then? Well we have already discussed the link between the monetary base and the price of gold. More money in circulation and the price of gold will go up even higher.
If that looks a bit like a win-win situation for gold and silver then yes you have got it. That’s why the Fed’s intervention in the bullion markets this week creates a major buying opportunity. We just don’t know how low it will be able to push prices first. But the absence of Chinese buyers for a two-day holiday today and tomorrow should take us to the bottom.
