ZIRP And QE Won’t Save The Economy – Buy Gold

It’s not that we’ll mistake them for the truth. The real danger is that if we hear enough lies, then we no longer recognize the truth at all…  – “Chernobyl” episode 1 opening monologue

I’ve been discussing the significance of the inverted yield curve in the last few of my Short Seller’s Journal. Notwithstanding pleas from the financial media and Wall Street soothsayers to ignore the inversion this time, this chart below illustrates  my view that cutting interest rates may not do much  (apologies to the source – I do not remember where I found the unedited chart):

The chart shows the spread between the 2yr and 10yr Treasury vs the Fed Funds Rate Target, which is the thin green line, going back to the late 1980’s. I’ve highlighted the periods in which the curve was inverted with the red boxes. Furthermore, I’ve highlighted the spread differential between the 2yr/10yr “index” and the Fed Funds target rate with the yellow shading. I also added the descriptors showing that the yield curve inversion is correlated with the collapse of financial asset bubbles. The bubbles have become systemically endemic since the Greenspan Fed era.

As you can see, during previous crisis/pre-crisis periods, the Fed Funds target rate was substantially higher than the 2yr/10yr index.  Back then the Fed had plenty of room to reduce the Fed Funds rate. In 1989 the Fed Funds Rate (FFR) was nearly 10%; in 2000 the FFR was 6.5%; in 2007 the Fed Funds rate was 5.25%. But currently, the FFR is 2.5%.

See the problem? The Fed has very little room to take rates lower relative to previous financial crises. Moreover, each successive serial financial bubble since the junk bond/S&L debacle in 1990 has gotten more severe. I don’t know how much longer the Fed and, for that matter, Central Banks globally can hold off the next asset collapse. But when this bubble pops it will be devastating. You will want to own physical gold and silver plus have a portfolio of shorts and/or puts.

The Fed is walking barefoot on a razor’s edge with its monetary policy. Ultimately it will require more money printing – with around $3.5 trillion of the money printing during the first three rounds of “QE” left in the financial system after the Fed stops reducing its balance sheet in October – to defer an ultimate systemic collapse.

But once the move to ZIRP and more QE commences,  the dollar will be flushed down the toilet. This is highly problematic given the enormous amount of Treasuries that will be issued once the debt ceiling is lifted (oh yeah, most have forgotten about the debt ceiling limit).  If the Government’s foreign financiers sense the rapid decline in the dollar, they will be loathe to buy more Treasuries.

The yellow dog smells a big problem:

It’s been several years since I’ve seen gold behave like it has since the FOMC circus subsided. To be sure, part of the move has been fueled by hedge fund algos chasing price momentum in the paper market. But for the past 7 years a move like the last three days would be been rejected well before gold moved above $1380, let alone $1400, by the Comex bank price containment squad.

While the financial media and Wall Street “experts” are pleading with market participants to ignore the warning signals transmitted by the various yield curve inversions (Treasury curve, Eurodollar curve, GOFO curve) gold’s movement since mid-August reflects underlying systemic problems bubbling to the surface. The rocket launch this week is a bright warning flare shooting up in the night sky.

…What can we do then? What else is left but to abandon even the hope of truth, and content ourselves instead…with stories. (Ibid)


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“Dave mate. You’re making me rich. I don’t know what’s going on with Gold Fields but they’ve spiked up 33% and my calls are going ballistic.” – Mining Stock Journal subscriber in Australia

7 thoughts on “ZIRP And QE Won’t Save The Economy – Buy Gold

  1. “But for the past 7 years a move like the last three days would be been rejected well before gold moved above $1380, let alone $1400, by the Comex bank price containment squad.”

    Which leads to the question: why haven’t the Comex price containment squad acted??

    1. Simply because they can’t. Too much buyers combined with too much speculative short sellers stopped at resistance (short squeeze), pushed by the latest fed meeting where Powell throws in the towel. Big commercials sold the rally as usual like there is no tomorrow but this time at resistance when they cap the price, their friends (speculative shorts) where stopped, powerless with huge loss, unable to sold, so to help them to covert.

      Their usual scheme does not work this time, it was too much, too fast.

      And now gold short commercials seek friends to sell helping them to covert their huge short position. (223 855 as of 6/18, price: 1346.6, record high is 340 207 as of 7/5/2016, price 1356.4)

    2. Perhaps the small buyers have capitulated and are no longer buying physical. The big fishes will buy regardless of the prices but cannot buy in quantity which may cause disruption or alarm.

      I’m one of the small shrimps who have been stacking since 2009. I haven’t bought anything for more than a year. If gold moved higher, I don’t care since I already have a nice stack but I’m not getting any more at this juncture regardless of the movement. As far as the other paper (stocks and bonds) shrimps and digital (Bitcoin) shrimps, they will never look at physical PMs until it’s too late.

      Basically, I believe Comex price containment is to keep the shrimps from physical – they don’t care if the shrimps buy mining stocks or paper GLD. However, them moment the shrimps show any interest on acquiring physical, they would make the shrimps cry in pain.

      Global gold production went down on 2004, the year which GLD was introduced in the stock market. It went back up on 2009 and went back down gradually when Bitcoin started its ascension.

  2. The only surprise is that it has taken so long for this to
    start unraveling. I remember back in June 2014 having
    dinner with some friends and explaining why owning
    precious metals was imperative. The reaction was that
    the Dollar would always be king and that gold was a joke
    (paraphrasing). I have been stacking for fifteen years and
    sleeping like a baby. What has been coming for a long time
    is just around the corner now. It’s so obvious Stevie Wonder
    can see it.

    1. Gold is undervalued not only for purely monetary reasons, but also due to the true cost of mining being severely distorted by the artificially low price of energy. Gold mining today requires the usage of heavy machinery which in turn requires huge amounts of energy to run these machines. The low price of energy is not sustainable long term. Emissions need to be reduced due to climate change worries. All of that means that gold is severely undervalued. People do not really understand that mining is a one time affair. I can imagine a future with no gold mining at all, due to depletion of gold deposits and due to an energy crisis. If energy gets scarce, it will be more important to run agriculture than to mine gold.

  3. I wouldn’t be too surprised if gold went back down again. I think China is not ready to go to a new reserve currency (SDR) or gold back currency. Trump is ready to ditch the dollar’s reserve status and that’s why he is doing everything he can do to bring manufacturing jobs back.

    Gold price will ascend when China embraces the tariffs and looks inward to boost its economic cycle of consumption/production.

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