Let’s see if I have this straight. For the past dozen years or so, dating back to the 2008 financial crisis, the Federal Reserve and other major central banks have been trying to raise inflation and thereby generate economic growth. (I’ve never quite understood that thinking; I always thought economic growth generated inflation, not the other way around. But that’s just me.)
So now it finally appears that inflation is about to rear its head, or so the bond market thinks, on the prospects of a nascent economic boom fueled by pent-up demand, fiscal stimulus, a decline in Covid-19 cases, and a vast rollout of vaccines. And what is the market’s reaction? Total panic. Sell bonds and tech stocks that have soared during the pandemic. And beg Jerome Powell and the Fed to save them from losses once again.
Let’s see which Powell responds—the one who has told us over and over again that the Fed will be “patient” and be pleased to let inflation run hotter and longer if it means boosting the employment market; or the one who repeatedly rides to the rescue whenever investors start to lose money and beg for relief.
On the surface, it should be the first one. Over the past month or so, bond yields have risen sharply on fears of rising inflation. Rather than a cause for worry, this should please Powell and the rest of the Fed. After all, they’ve been preaching for months that this is what they want, so this should come as no surprise to anyone. Plus, it’s a good thing – rising rates signal economic growth. Yet, the market’s reaction is shock and dismay. Continue reading "Which Way Will The Fed Blow?"→
We must be getting closer to the global asset bubble bursting or the end of central bank intervention, or both since the latter is likely to cause the former. How do I know? Central banks and the international agencies that support their policies have already begun the blame game, in order to deflect criticism from themselves when the bubble does burst.
European Central Bank President Mario Draghi started the process two weeks ago. With the troubles at Deutsche Bank, Germany’s largest bank, perhaps as his reference point, Draghi struck back at European bankers’ criticism of the ECB’s negative interest rate policies, which the banks blame for their difficulty in turning a profit. While accepting some of the responsibility for that, he instead said a good part of the blame belongs to the commercial banks themselves.
“Low-interest rates tend to squeeze net interest margins owing to downward rigidity in banks’ deposit rates,” Draghi admitted. “But over-banking is also a factor in the current low level of bank profitability. Overcapacity in some national banking sectors and the ensuing intensity of competition exacerbates this squeeze on margins.”
Gold is a unique asset class, despite being uninteresting from a volatility investing perspective. I mean, it's currently sideways amid a soaring equity and dollar value, but it is still interesting for selected market participants for its safe haven status and diversification purposes.
We all have different time frames that we use, common investors use daily, weekly and monthly charts and the quarter to year perspective when they summarize the profits or losses. And so do the public companies when filing their earnings reports every quarter. And for these type of investors, Gold's dynamics in recent years have been frustrating as it is has been totally unmoved month by month, making investment unpromising.
On the above monthly chart, tailored especially for INO.com readers, I want you to see for yourselves the direct relationship between Gold prices and the demand for ETF holdings. For 2 years as depicted on the chart, Gold lost 17% of its total value. Meanwhile the SPDR Gold Trust holdings lost 22% of its total value, almost matching dynamics. The holdings fell even more than the Gold price did telling us about worsening investors' sentiment for Gold. Remember the old words that "the Fear has a large shadow". The holdings were falling, gradually neglecting upswings in the Gold price, and only this January did the holdings pick up from 709 to 763 tons amid Gold's price growth from $1172 up to $1273. But this outstanding move proved to be short-lived, and both indicators fell back to the lows.
Monetary policy, which is also known as interest rate policy, describes the actions or in-actions of a country’s central banks. Interest rate policy generally focuses on maximizing price stability and growth. The central bank of a country is considered the institution that controls a countries currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries.
Each central bank has guidelines that are mandated by their legislature. For example, in the US, the central bank has a dual mandate which is to maximize price stability and employment. Other central banks, such as the European Central bank, have only one mandate which is price stability.
Central banks often spur growth and employment by reducing interest rates, making it easing for banks to lend money at reduced rates. Lower interest rates also increase liquidity, and make purchasing riskier assets a more attractive alternative than holding low interest baring government notes. Continue reading "Trading Using Monetary Policy Analysis"→
How can we explain gold dropping into the $1,300 level in less than a week?
Here are some of the factors:
George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.
He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.
On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the "printing" may not cause as much dollar debasement.
On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.
COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).
The lackluster price movement since September 2011 fatigued some speculators and trend followers.
Cyprus was rumored to need to sell some 400 million euros' worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.