"Everything you need to know about gold"
Kelsey Williams RE: FED POLICY…
“I think instinctively – I can’t prove this, we’re going to learn about this empirically – but it seems to me that the neutral rate is probably higher than it was during the intra-crisis period. And so, rates will be higher.” (Jerome Powell, July 2024)
Powell’s comments were from an interview conducted two months prior to the announcement that the Fed Funds target rate was lowered after more than two years of higher interest rates.
FED BALANCE SHEET
Below is a chart posted and updated regularly by the Federal Reserve Bank of St. Louis…
As can be seen in the above chart, total assets of the Federal Reserve Bank have declined by 22 percent since peaking in March 2022. The aforementioned peak was nearly simultaneous with the announcement by the Fed in March 2022 of a change in Fed interest rate policy.
TRADE TARIFFS
As rhetoric regarding trade tariffs increased prior to the election and, with that same rhetoric continuing post-election, the danger to free trade and a strong economy is heightened.
In my article, The Danger Of Trade Tariffs, I said…
“Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are sometimes recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.”
Special emphasis is applicable to the first three words: tariffs are taxes.
That alone should be justification for rejecting tariffs outright; however, some think there is reason to consider them in the name of “fairness”. Politicians are notorious for using the doctrine of “fair trade” to justify their threats and the imposition of tariffs (taxes) on trade partners.
The appeal to and appeasement of voters is uppermost in a politician’s mind when the “fair trade” issue is raised. For example, there are certain U.S. industries that are currently not as competitive and profitable as might be preferred. If the imported good is cheaper, then it is often claimed that the competitor uses “cheap labor”; or is “dumping their goods at cheap(er) prices”.
There might also be tariffs already imposed on domestic goods exported to another country, or countries. If a company or industry has done everything they possibly can to be competitive and profitable, the conditions can give rise to claims of unfair trade practices.
The mistake politicians and others make in calling for tariffs on imported goods is that, whether they are imposed in retaliation, or to “protect” a domestic industry and its workers, the net effect is overwhelmingly negative. Here’s why…
We said earlier that tariffs are taxes. A tariff is a tax on goods imported into a country.Currently, new tariffs are being proposed on imported goods coming from other countries. A tariff on something I buy that is made in China, or food I consume that is harvested in Mexico, means it will cost me more than I had been paying for those products.
I might choose to buy the same products after the increase in price; or, I might buy a substitute good of lesser quality. I will end up paying more for what I want, or be forced to compromise. Others will make similar choices; and neither choice leaves me, or anyone else (consumers) better off.
THE WORST THAT COULD HAPPEN
Trade tariffs often trigger a chain reaction and full-blown trade wars can result…
“America’s last major trade war happened after imposition of the 1930 Smoot-Hawley Tariff, which increased 900 import tariffs from 40-48%. It was supposed to support U.S. farmers whose land had been devastated by the Dust Bowl, but it resulted in higher food prices for Americans who were already crippled by the Great Depression.
America’s trade partners at the time hit back with their own tariffs and global trade fell by 65%, worsened the depression, and contributed to the beginning of World War II.
After Smoot-Hawley, the country suffered tremendously. The general public had little understanding of tariffs or trade agreements.” Tariffs And Trade Wars… by Anna Kucirkova
CONCLUSION
Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are usually recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.
Trade tariffs harm small businesses and result in inefficient allocation of resources. Trade tariffs hinder productivity and economic growth; and, they can lead to trade wars. The end result is always higher costs for consumers.
President-elect Trump’s suggestion that selectively placed super-high tariffs could replace the income tax is just plain stupid. The results and the mathematics are impossibly workable and the attempt would be disastrous for international trade and the world economy. Besides, a tax is still a tax.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
NOTE TO READERS: “Global Credit Collapse Is Deflationary” was originally published as an exclusive for TalkMarkets on October 29, 2024. I have not changed anything in the article, nor is there any reason to modify or alter what is written below because of U.S. election results.
THROWING GOLD BRICS
The latest salvo fired at the U.S. dollar by BRICS countries includes press reports about “creating an international precious metals exchange to ensure fair pricing and trade growth”. Russia’s finance minister, Anton Siluanov, announced that Russia is currently in talks with other BRICS members about such an exchange.
Previously, for several years, we have heard about a potential BRICS sponsored currency or monetary unit, that would minimize the dominant role of the U.S. dollar with regards to international trade, and supplant or replace the dollar as a reserve currency. The attraction of an alternative to the U.S. dollar is hopefully enhanced and stimulated by incorporating gold ‘backing’ into any proposed formula.
WHAT IS BEHIND THE BRICS MOVEMENT?
To be quite frank, the motivation and driving forces behind BRICS are political and retaliatory in nature. As the accepted voice of the BRICS countries, Russia speaks loudly and clearly about their displeasure and disenchantment with trade sanctions, the dominant role of the U.S. dollar, and the United States in general. In addition, Russia is unhappy over its own failure to achieve global supremacy.
Throw in a freedom-hating China, which would like to see the Yuan replace the dollar and maybe control the gold market, plus a few other countries with their own axe to grind, and you wind up with BRICS (Brazil, Russia, India, China, South Africa, and the rest).
As a group, the countries that make up BRICS account for more than one-third (37%) of the global economy. BRICS has the potential to wield some clout, but tenuous and suspect relationships between and among the various member countries will tend to water down any “official” agreements and actions. (A similar negative, counterbalance exists within OPEC: a certain individual nation(s) acts contrary to the group’s expressed policies and desires, limiting the potential impact of embargoes and production quotas.)
The BRICS movement is not about gold. It is a politically-motivated, anti-U.S. and anti-dollar movement. Russia and China are more concerned about supremacy and control than in fostering a more reliable and stable currency. Using gold to further their efforts and accomplish their intentions is convenient. Otherwise, they would not go to the trouble of creating the charade known as BRICS and suggesting a gold-backed alternative to the U.S. dollar.
GOLD, BRICS, & THE GREAT RESET
The talk about a gold-backed international currency has gold bulls fantasizing about supernormal and unrealistic prices for gold. This has exacerbated negative sentiment and analysis about the U.S. dollar from those who might otherwise be less enthusiastic about “the coming collapse of the dollar” and the ushering in of the Great Reset.
The Great Reset is today’s best example of decades-old predictions about a ‘new’ currency to replace the ‘old’ dollar. It isn’t that there aren’t forces out there who are conspiring to bring about financial and economic upheaval en route to their goal of one-world government and global domination; there definitely are. The Great Reset is likely part of that secret cabal’s attempts to bring those evil designs to fruition.
However, in the gold sector, having tasted recently of higher prices for their beloved yellow metal, investors and others are beating the drum loudly and vigorously about negative events that they think will send gold prices to the moon and make them rich.
Unfortunately, for them, their expectations for gold are not fundamentally sound.
REAL GOLD FUNDAMENTALS
The proclivity of reference to the demise of the U.S. dollar seems belated. The U.S. dollar has already lost more than 99% of its purchasing power since its destiny was entrusted to the Federal Reserve more than a century ago. At this stage of the game, though, there is no shortage of concerned individuals telling me how to protect myself against the coming collapse in the dollar. Don’t look now, but the collapse has already happened.
Yes, the U.S. dollar could lose an additional 99% of its current purchasing power. But, how long will it take? Another century? It took gold more than one hundred years to increase in price by one-hundred fold. Is it supposed to do that again solely in anticipation of a further similar loss in the U.S. dollar?
Okay, let’s assume that there is a complete collapse in the U.S. dollar within the next year or two. And, let’s further assume that gold reflects that collapse in the U.S. dollar by surging in price to $100,000 oz. What do you do?
Should you sell your gold and take your profits? A 50-fold increase in just a couple of years is fantastic, but…
If the U.S. dollar becomes totally worthless, and the gold price is measured in hundreds of thousands rather than hundreds and thousands, the dollar price of gold is meaningless. If nobody accepts dollars in trade because they are worthless, then you haven’t gained anything at all. What you have done is protect and preserve your purchasing power.
After the events described above, you still have an ounce of gold. Gold’s value is in its use as money. An ounce of gold at $100,000 is no more valuable than an ounce of gold at $2000, or an ounce of gold at $20.67. It is all about purchasing power.
GOLD BACKING VS CONVERTIBILITY
It is easy to say that a new currency will be backed by the gold holdings of the nations involved. It is also possible to verify that the gold is held by those same respective countries. However, without convertibility, there are no practical restraints on issuers of any new currency. Even with convertibility, the element of trust is of paramount importance. The U.S. dollar’s own history tells us that.
The U.S. dollar was once convertible into gold at a fixed ratio of $20.67 oz. Twenty U.S. paper dollars were exchangeable for one ounce of gold and vice-versa. As long as convertibility was available, the U.S. dollar could be considered “as good as gold”.
Active convertibility is a restraint on the government’s expansion of the money supply. If too many dollars are created, the government won’t be able to make the required exchanges on demand without losing more gold in exchange for paper dollars which continue to lose purchasing power. As the money and credit expansion continues, the dollars continue to lose purchasing power. This results in a preference to hold gold rather than dollars.
The redemption of dollars for gold increased and led to suspension/cancellation of gold ownership for U.S. citizens by President Roosevelt in 1934. When President Nixon closed the gold window for redemptions by foreign governments in 1971, the U.S. dollar was left without any vestige of gold backing or convertibility.
Without convertibility, any new currency, even one with the pretense of being backed by gold, is just another empty promise and another substitute for real money, i.e., gold.
CONCLUSION
Do you trust the governments of Russia and China, or any quasi-government authority to institute and maintain any proposed new currency (gold-backing or not) that would be a better alternative to the U.S. dollar? As bad as the dollar is, you aren’t going to get a better alternative from any of the BRICS countries. This is manifestly so, because…
Inflation is the debasement of money by government. All governments inflate and destroy their own currencies.
In the case of the BRICS countries, the proposed new currency is a substitute for a substitute (U.S. dollar) for gold/real money. (Also see Gold Convertibility – NOT Gold Backing)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
ALL HAIL THE FED!
As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.
FED CUTS RATES, BUT…
Just a couple of weeks ago, on September 18th, the Fed announced a 50 basis points cut in interest rates. To be clear, the announced cut was generally expected and already discounted in the markets. Most markets had risen substantially over the prior two years in anticipation of a change in direction for interest rates, which had risen sharply and then had remained at higher levels until the recent announcement.
Most investors and analysts appeared to be waiting for the Fed to confirm what was already “known and expected”. Reaction to the official announcement was mostly positive as stock prices continued their upward march and mortgage rates declined.
Bond prices, however, peaked at about the same time the Fed made official its latest gratuitous action. Over the past three days, bond prices have dropped sharply, gapping down at the market open each day. Below is a chart of TLT (20+ Year Treasury Bond ETF)…
Since the Fed announcement, TLT has dropped from a 52-week peak of 101.64 to 95.55 at today’s close. That is a drop of 6% in bond prices at a time when other markets are shouting approval of Fed action and extending recent gains. Why are bond rates rising at the very time the Fed is trying to move interest rates lower?
INFLATION? RECESSION?
A singular possibility is that the bond market sees something other markets don’t; at least, not yet. What is likely troubling to the bond market at this time is the threat of a resurgence of inflation; more correctly, the effects of inflation. Cheaper money and credit now, in the short term, could have serious negative consequences later on. Bigger increases in the CPI and PPI will get everyone’s attention.
A peculiar contradiction to the rise in bond rates is the fact that mortgage rates have declined. In other words, mortgage rates are reflecting what might be expected to happen as a result of the Fed’s efforts to engineer rates lower for now. But, that does not explain why bond rates would move opposite to the Fed’s action and intent.
Finally, the bond market may be ahead of the curve with respect to what comes next. Stock investors seem almost oblivious to the reality of accelerating deterioration in the economy. Stock prices will eventually reflect that reality. (see If The Markets Turn Quickly, How Bad Can Things Get)
Also, the bond market might be telling us that rates need to move higher, and remain at a higher level that is more consistent with historical averages. This could happen in spite of the Fed’s efforts to lower rates, regardless of intention and desire. (also see What Happens After A Rate Cut Is Announced?)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
HOW BAD CAN THINGS GET?
Pretty damn bad. Which means that it will likely be much worse than most of us can imagine. Other than Covid and its forced shutdown of economic activity by governments world-wide, the most recent learning experience for investors is the Great Recession of 2007-09. Beginning in October 2007 and ending in February 2009, the S&P 500 Index lost 53%…
Most of that loss (38%) occurred during calendar year 2008. It was the largest single, calendar-year decline since a similar -38% in 1937. Both the NASDAQ (-53%) and DJIA (-50%) declined by similar amounts.
Prior to the Great Recession, post-Y2K markets collapsed in a heap on the heels of the most profitable decade in U.S. financial and economic history. For more than 2 1/2 years, between February 2000 and September 2002, stocks were in a tailspin led by the NASDAQ which declined by 80%. The carnage is pictured on the chart below…
The extent and breadth of the declines and accompanying bankruptcies of hundreds of dot.com companies is rivaled only by the Stock Market Crash of 1929 which is shown on the chart (source) below…
Over an excruciating three years (September 1929 – July 1932), stocks declined by 90%. Stocks did not recover their original pre-crash levels until 1954, twenty-five years after the September 1929 peak. The accompanying economic depression lasted until 1941, although a significant portion of what is termed a resumption of economic activity, was accounted for by war-related industrial activity. Economic conditions on the homefront were characterized by rationing, price controls, and shortages.
WHAT MIGHT CAUSE A MARKET CRASH?
Stock market crashes like those described above don’t happen spontaneously. There are a number of factors which lead to eventual corrections of significance. They include the evolution of normal business and economic cycles, duration and extent of previous stages of those cycles, intervention and manipulation by governments and central banks, the need for corrections and rebalancing due to poor judgement and market excesses, and political and economic factors.
U.S. economic activity has been declining broadly for more than a year or two. That is partially attributable to changes in interest rates which have caused a reassessment of cost factors and undermined the credibility of various investment strategies. The manipulative expansion of cheap and easy credit over the previous four decades resulted in excesses that weren’t fundamentally justified and which distorted the financial landscape. Highly disproportionate availability of cheap credit led to serious misallocation of resources and capital.
In addition, the use of leverage has exacerbated the problem. The unfathomable and unexplainable derivatives monster has the potential to wreak incalculable damage on the financial markets. The use of leverage throughout all markets – stocks, bonds, commodities – and including the use of options, futures, and other more precarious derivatives, currently rivals its pre-1929 use which approached 90%.
The currently added recent market excesses are based on expectations for a return to cheap credit. It is assumed that once the Fed announces a rate cut, that a return to the good old days is right around the corner. As much as a 50 basis point cut is already factored in to current stock and bond prices. What happens when that cut is announced? (see What Happens After A Rate Cut Is Announced?)
MORE ABOUT THE FED
The Fed will likely NOT pursue a series of significant rate cuts UNLESS there is an acceleration of the current decline in economic activity. It makes no sense to simply return to the hell that was brought about by its own intentions and actions previously, and which forced them to try to navigate a return to a more normal and reasonable, higher level for interest rates. On the other hand…
Since the Fed is occupied mostly with slaying dragons which it birthed by its own errant monetary policy, including more than a century of intentional inflation, they are doomed to a life of putting out fires and containing collateral damage. For investors, it is time to wake up to the fact that the Fed is not your financial savior and its purpose and goals, irrespective of any so-called mandates, are not aligned with yours.
CONCLUSION
It is possible that a deepening recession (official or not) could morph into something worse – an economic depression. Even if the Fed cuts rates aggressively, it might not be enough t0 stop the cascading waterfall of lower prices for all assets priced in dollars; including stocks, bonds, commodities, real estate, etc. A collapse in the credit markets such as that which occurred in 2007-08 would likely overwhelm any efforts by the Fed to stop the hemorrhaging.
It would not be unreasonable to see prices decline by 50% or more initially. Further declines would be likely as it is unlikely that an event of this nature at this particular time could be reversed in timely fashion. The prevailing conditions of unemployment and shuttered doors spawned by wholesale financial destruction would be too much for a beleaguered Fed.
It may or may not happen, but investors who ignore the possibility could be in for a shock. I do not consider the likelihood of such an event, or the reaction of the Fed or the government, to be altered in any significant way regardless of November election results. (also see: Default – Deflation – Depression)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES
No amount of wishful thinking and baseless proclamations will change that. Owning gold stocks (miners) instead of the actual physical metal (in other words, processed and refined with appropriate hallmarks and in tradable form) is a losing bet. Investors should ignore the siren song of gold mining shares.
Recent articles trumpeting silver’s outperformance relative to gold and some ridiculous price projections are a bit too much. Missing from most of the extremely positive commentary is a dose of reality. Below are three charts (source) which should provide some needed perspective. The charts show average monthly closing prices (inflation-adjusted) for the periods August 2020 – July 2024; April 2011 – July 2024; and January 1980 – July 2024. Here is the first chart…