A change in the monetary system presages a commodity bull market. Not only gold, but commodities generally will likely respond positively to what’s underway, advises Adrian Day, editor of Global Analyst.
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The Fed is changing policy. This shift is already underway. In March, the Federal Reserve decided to reduce the pace of the roll-off from the Fed’s balance sheet. While not changing the reduction in Mortgage Backed Securities (MBS), the Fed slashed the rate of the roll-off in Treasuries from an already-cut $25 billion a month to just $5 billion.
Given a balance sheet of $6.76 trillion ($4.23 trillion of which is in Treasuries), Bill Fleckenstein is right to call this “a rounding error.” The balance sheet remains higher, by more than 60%, from where it stood on the eve of Covid, despite three years of QT.
During his post-meeting press conference, Fed Chairman Jerome Powell was at pains to say repeatedly that nothing should be read into this. It was to do with money markets, he said, or maybe to do with the debt ceiling, but “don’t take any signal from it.”
That is just plain nonsense. This move is clearly to help the long-term Treasury market, which already has few buyers at current rates. Powell himself said the Fed would stop the reduction in Treasury holdings “at some point.” In my view, it is a precursor to a new round of QE from the Fed, likely later this year. It may not be called QE, but that is what it will be.
Whether we see just QE and tariffs or a broader set of policies, depending on whether they are implemented successfully, they would likely lead to more stock market weakness. Not to mention bond market weakness and some dollar weakness.
Every one of these policies would be gold-positive, if only by increasing uncertainty, both in the near term as well as over the longer term. Gold reacts positively to chaos and uncertainty, to disruption and volatility.
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Plus, commodities are as low relative to financial assets as they have been at any time in the last 100 years. They are cheaper even than at three previous points of extreme undervaluation. I must quote Goehring & Rozencwajg: “If gold is the canary in the coal mine, it is singing loudly.”
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