by David Brady, Sprott Money:
My principal thesis for “the low” in Gold has been a Fed policy reversal to interest rate cuts and QE, causing the dollar to tank and Gold (and everything else) to soar. Nothing has changed in that regard.
What has changed is that the central banks are already turning the monetary spigots back on—all but the Fed. This morning the ECB announced new stimulus measures just two months after they supposedly tapered their QE program to zero. Think about that. They turned off the monetary spigots for a proverbial five minutes, German and EU economic data continue down the sinkhole along with inflation, and the ECB does a 180 back to QE and likely NIRP too (both of which clearly don’t work, but what else can they do?). This is the definition of a “Ponzi scheme”. Without increasing cash inflows, it collapses. That is the EU and global markets today.
What’s ahead for the EU and, indeed, the world: Japanification? A zombie global economy for decades? Or possibly rampant stagflation, where prices soar and the economy just drifts along on life support until it becomes obvious that QE was never a cure, but has become poison and needs to be stopped. At that point, the central banks are rendered powerless, the system collapses, and we get a global monetary reset. Gold and Silver soar beyond belief under such circumstances.
Back to the present. The ECB is printing again. The Public Bank of China, or PBOC, has already started too. They printed 5% of their GDP in new loans in January alone (when the S&P and global stock markets desperately needed a boost), truly massive credit creation. The BoJ never stopped printing. And finally, the Fed did a “verbal” 180, pausing rate hikes for now, but continuing to reduce its balance sheet. They are trying to repeat what they did in 2016 after the historic sell-off in January that year, to enable further rate hikes down the road.
Why? In order to provide ammunition to deal with the crisis already unfolding. Yes, raising rates so they can cut them later. Makes as much sense as paying someone to borrow your money, also known as negative interest rates. This is how desperate the central bankers have become to keep this Ponzi scheme going, but they can’t fight Mother Nature, the economy, and markets forever. Time is running out. All of which is why Gold and Silver and other hard assets are the new “TINA” (there is no alternative) assets for what is to come. China and Russia have known this since at least the 2008 financial crisis led by the U.S., anticipating the U.S. would have to print dollars en masse to pay for its deficits and debts, especially the massive unfunded liabilities coming due in a big way next year.
Until then, the Fed is trying to squeeze in another rate hike or two and reduce its balance sheet a little further. The other central banks are helping them out in the meantime by printing currency again and buying dollars, and using dollars to buy U.S. assets, mainly stocks, in my opinion. The “carry trade” on steroids. This pushes the S&P higher, the Fed’s primary mandate, and enables further rate hikes. The other central banks are also printing to support their own markets and maintain confidence in the system at large. The risk of a widespread loss of confidence in central bank policies is growing, as it becomes increasingly transparent that these policies do absolutely nothing for the economy except create more debt and raise asset prices.