Yesterday's FOMC statement and the subsequent news conference with Chairman Powell removed the last significant headwinds for gold. We think that a new bull market for gold is about to commence.
Essentially, Chairman Powell trashed the Fed's forward guidance of the last several years, which he had enunciated as recently as October, 2018. There is now no commitment to a forward path to "policy normalization" that has been the developing Fed narrative since ending QE in November, 2014, and its first of eight rate hikes in December, 2015. Over the past few years, this narrative has substantially strengthened the dollar and raised real interest rates, two factors that have traditionally translated into pressure on the gold price.
According to Chairman Powell, rates can go up or down and the balance sheet can expand or contract based on the economic data. We have now returned to Alan Greenspan's data-dependency.
Why this sudden and far-reaching change in direction? There can be no other rational interpretation than the Fed's fear of a stock market rout, which we got a taste of in December 2018. Powell argued yesterday that the Fed continues to believe that the U.S. economy is strong. For months now, the long end of the Treasury market has disagreed. He noted that "the case for raising rates has weakened" but provided no convincing economic data to support this claim.
Powell also stated that there is now need for "an abundant reserve" for the banking system compared to the past and that future interest rate changes would be administered by the Fed, not managed through changes in the quantity of reserves. He confirmed that the Fed had returned to use of the Fed Funds Rate as its main monetary tool.
We think the chairman knows that QE creates asset bubbles and that is why he was a firm advocate of policy normalization. By reversing field, he has proved what we have long suspected…that QE is another Hotel California: "You can check out any time you like but you can never leave."
In our view, balance sheet expansion (more QE) is now more likely than more Quantitative Tightening despite the fact that we can now say with certainty that QE is strictly an asset bubble machine, not a support to the real economy. We will provide our evidence in following commentaries.
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.
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