On Wednesday, the Fed raised the Fed Funds rate by a quarter point as expected. The FOMC statement was suitably "dovish" by reducing the consensus forward guidance on future rate hikes from three to two. The Fed also signalled that its Quantitative Tightening program would continue on "autopilot" as planned. The response was not what the Fed expected. Stocks fell hard and bonds soared.
Financial markets are about to revisit some important questions.
First, does QE actually work? Does it boost the real economy or does it simply drive up valuations by encouraging speculation? We think the weakest economic recovery in two generations provides the answer.
Is the Fed right when it raises interest rates and continues to sell $50 billion in assets every month because the economy is strong? Or are the credit markets right when they buy Treasury debt despite Fed hikes, driving down yields and flattening the yield curve because they think the economy is weakening fast? We vote with markets.
Can a weakened economy sustain Fed balance sheet and interest rate normalization? The stock market is saying no.
For 10 years, these have been central bank markets. Printing money in America, Europe and Japan has, in our view, created the biggest financial bubble in history. Now that the printing has come to an end, the bubble is beginning to burst. Investors are beginning to lose confidence, they are beginning to flee risk. Aversion to risk means conversion to gold. We think the gold rally of the century is soon to begin.
There is one last test. When central banks reverse their tightening plans and turn back to QE, which we think is coming soon, will the good times roll once again? We think not. After 10 years, we can see that QE does not translate into a stronger economy. We can see that monetary stimulus cannot be painlessly withdrawn.
Furthermore, the real issues are not in the stock market but rather in credit. QE has generated a further massive increase in the debt load that far exceeds the ability of the economy to service it. In our view, the corporate bond market is going to implode, exposing historically weak balance sheets and zombie companies that only survived because of plentiful credit priced at 5,000 year lows.
Perhaps the Fed will ride to the rescue and flood the corporate bond market with fresh liquidity. We are confident that would kill the dollar. Perhaps the Fed will decide to resist further attempts to reflate in an attempt to return to monetary sanity (which we doubt). Massive defaults and unemployment would then ensue, in our view. There is one effective response to either possibility. We think investors will reach for the security of the only asset that is no one's liability and cannot be printed: Gold.
This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, and reflects the thinking that has helped make them successful gold investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one of its largest shareholders. Disclaimer: The authors are not registered or accredited as investment advisors. Information contained herein has been obtained from sources believed reliable but is not necessarily complete and accuracy is not guaranteed. Any securities mentioned on this site are not to be construed as investment or trading recommendations specifically for you. You must consult your own advisor for investment or trading advice. This article is for informational purposes only.[NLINSERT]
1) Statements and opinions expressed are the opinions of Rudi Fronk and Jim Anthony and not of Streetwise Reports or its officers. The authors are wholly responsible for the validity of the statements. Streetwise Reports was not involved in any aspect of the content preparation. The authors were not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the authors to publish or syndicate this article. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
2) Rudi Fronk and Jim Anthony: we, or members of our immediate household or family, own shares of the following companies mentioned in this article: Seabridge Gold. We personally are, or members of our immediate household or family are, paid by the following companies mentioned in this article: Seabridge Gold.
3) Seabridge Gold is a billboard sponsor of Streetwise Reports. Click here for important disclosures about sponsor fees.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.