Gold & Silver, STAFF NEWS & ANALYSIS
Thanks to Yellen, Gold Will Bounce Back
By Daily Bell Staff - May 30, 2016

Speculative traders abandon gold in latest week  …  Gold prices fell Monday, moving in the opposite direction of the U.S. dollar, which soared after comments by Federal Reserve Chairwoman Janet Yellen last week indicated an interest-rate hike could come this summer.    –MarketWatch

Today, gold prices have been clinging to around $1,200 against the dollar. It is becoming increasingly obvious that the Federal Reserve has two goals.

One is to keep the dollar strong against gold and the other is ensure that the world’s quasi-depression continues.

Yellen doesn’t say so, but this will be the result of her actions.

“It’s appropriate — and I have said this in the past—for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said in a recent speech at Harvard University where she received an award. “Probably in the coming months such a move would be appropriate.”

But it’s probably not appropriate. Nothing in the US economy is signaling “recovery.” US statistics are endlessly optimistic anyway.

We’ve reported previously on this: Yellen is raising rates because she wishes to raise rates not because of any particular financial evolution that is forcing her hand.

In a recent CNBC article, “The Fed could be blindsided by ‘stagflation’,” contributor Michael Pento went even further.

Pento doesn’t seen any real US economic strength. And he believes that if Yellen raises rates, any possibility of a recovery is lessened.

“Janet Yellen is creating ’70’s style stagflation with her monetary policies,” he writes.

Since July of 2015 economic growth has been languishing, while CPI has been rising during a relatively similar time span.  In fact, the most recent month over month increase in the CPI of 0.4 percent was the highest since February 2013.

At the same time, Pento writes that the economy only expanded by 160,000 new jobs in April whereas Wall Street had expected a 203,000 gain.

The Fed is seeking higher employment and low inflation. “What is becoming manifest is the exact opposite.”

Is Yellen prepared for an economic scenario that opposes the one that she anticipates? Pento believes neither Yellen nor Wall Street are prepared for such a turn of events.

In fact, “The government’s effort to engender viable growth through debt and inflation is virtually guaranteed to fail.”

Pento believes the medicine of Paul Volcker is necessary: an  environment of much higher interest rates.

This is because he doesn’t believe the economy is improving but asset bubbles are forming nonetheless. It is these asset bubbles that carry the greatest risk.

Yellen’s slow-motion rate increases do nothing to alleviate these risks.

She is adopting the tactic of raising rates slowly while asset bubbles expand quickly – eventually causing an economic meltdown.

Alternatively, the modest increases will not have a significant impact on price inflation.

Pento closes his article by asking which scenario will play out.

Will low growth plus asset bubbles create an “unprecedented contraction” in the near term? Or will Yellen’s misguided strategy simply create a vicious stagflation that will an unprecedented and intractable inflation?

The only thing missing here is Yellen’s rationale. We tend to think these are end days for the US and the world’s economy – as they exist currently.

At some point, the world moves toward a more global economic structure. Europe itself may use Brexit as a means of achieving a stronger political union.

The International Monetary Fund may try to expand its SDR basket of currencies when the yuan becomes more of a factor in October.

Change happens for a reason. Around the world, economies are staggering. Markets advances are narrowly based. If an evolution is to occur, it will  be within a context of misery and dysfunction.

Yellen may not be “missing” the risks of stagflation. More likely, she is heading there on purpose – as terrible as that sounds to say.

But either she is incredibly misguided or she intends to do what she is doing …

Anyway, we don’t see another bull cycle taking place any time soon. The pressure for increased economic globalization seems to be the priority. And Yellen’s enunciated strategy supports that.

Conclusion: How will gold react? That’s still not clear. But in our view, the longer term trends involve price inflation and economic stagflation. These will weigh down the dollar and drive gold higher against it.

Posted in Gold & Silver, STAFF NEWS & ANALYSIS
  • joe_bob_gonzales

    it has been clear to me for a long time that Keynesianism has been misapplied by the govt and the fed. I have read that Keynes himself admitted to Hayek that his ideas did not hold much water.

    however, if we view from the angle that the interventionist ideas are used by govts to increase the amount of power they hold and control, then the actions make much more sense.

    remember that keynes himself was a fabianist, a sort of gentler than thou socialist type. but in the end, a socialist. which means that they are elites who know better than you what you need and how you need it.

  • Sydney

    Gold can and often does go up in a deflationary environment!

    Theoretically AND historically true!

    Theoretically true despite fallacious Mises Institute indoctrination that money is only defined by its quantity, when theoretically and historically it is the quality of money which exerts itself during crisis.

    All deflations are deflations against money, real money which during the financial crisis of deflation is always and only gold.

    Please consider third party liability or risk. Who exactly has physical possession of anything of value generally and gold in particular? Hypothecation and re hypothecation and re hypothecation, which is the fancy way of saying physical, tangible assets are traded as simply concepts, or paper promises without any basis in reality. Very few actually hold gold in their hands. Exceedingly few. History books will be written about an entire monetary, banking and financial system that is based entirely on concepts and beliefs that are simply not true, or rather not based in physical reality at all. Physical possession of gold is physical reality. Physical gold is no ones liability. When the house of cards tumbles down thru deflation the only thing left is PHYSICAL gold (maybe silver too).

    Also please consider balance sheet accounting. True, no multi nationals or big banks use a balance sheet. Why should they? They get free money! Or rather a continuous stream of free money is more accurate. But almost everyone else is, on a balance sheet that is. The only asset that is not someone elses liability is gold. That’s it. When the dominos start to fall everything else evaporates……vanishes… poof, gone, except physical possession of gold.

    Golds rise during deflation is not only theoretically true it is historically true as well. Every major deflationary period prices go down against money. This is the definition of deflation. What is carefully concealed is that during crisis ONLY Gold is considered money! Historically Gold DOES climbs in purchasing power during deflation:
    1658-1669 prices down 21% gold purchasing power up 42%
    1813-1851 prices down 58% gold purchasing power up 70%
    1873-1896 price down 45% gold purchasing power up 82%
    1920-1933 price down 69% purchasing power of gold up 251%.(Golden Constant by Roy Jastram)

    How does the quantity theory of money stand alone without any consideration of the quality of money? Well only in certain environments is it uncontested. These environments at one time (but no more) made up the entirety of Western Civilization’s controlled economic discussion. It may require a conspiracy of obfuscation to explain the refusal to consider that money does indeed have a quality.

    Conspiracy as it may be, is beside the point. The central point is gold value increase does NOT require inflation!

    What about rising interest rates? Does not rising interest rates destroy the price of gold? Not so fast. Rising interest rates destroys the value of bonds. Historically there has been a rush of currency out of bonds during periods of rising interest rates and at times into gold. As gold rose to 800 USD in the seventies this was during a period of rising interest rates.

    I suppose in the end it is about confidence. As crisis rises, confidence goes down and the “quality of coupons” becomes more of an issue. I suspect we may just be on the cusp of a period of decreasing faith in the current epoch of mind controlled faith in coupons and concepts that disempower the individual. The individual being me, I guess.

    As always thank you for a great read and a website of great content!

    • Thanks.

    • mary

      Your apparent antipathy toward Mises Institute aside, from my reading of their materials you are wrong that they say money is only defined by quantity. They have always been for returning to a gold standard. If not concerned about the “quality” of money, why would they hold that opinion?

      • Sydney

        Thank you for your response. Please consider the following:
        Dr. Antel Fekete of the New Austrian School has made it clear on more than one occasion (DB interview) that no one from the Mises Institute will debate him on Adams Smiths Real Bills Doctrine. No one. Dr. Fekete has explained Real Bills or self liquidating bills of exchange used within production lines of seasonal items are VITAL to the use of gold as currency. Dr. Fekete has gone so far as to predict economic calamity if gold alone, without Real Bills, were used as currency. Calamity potentially arising from lack of liquidity using gold as currency without Real Bills. Not one person from Mises Institute will engage him in this discussion which makes it sound like a Mises Institute policy. Yet members of the institute engage themselves and others in a whole variety of other topics and debates. Not Real Bills. Not Dr. Fekete. Having been lied to for the entirely of my life by systems such as institutes which control thought and discussion I have a very hard time just looking at all the so called wonderful things the Mises Institute has contributed to the discussion of Liberty. Snubbing the likes of Dr. Fekete on this one topic is enough to come under at least suspicion. It is hard for me to over look this snub or consider it as anything but directly subversive to open exchange of knowledge and experience AND indirectly subversive to a system of currency which likely is required for realization of personal liberty and maximal economic prosperity. Mises institute is ok with any amount of ramblings about Liberty so long as Liberty is not achieved apparently. Yes they are ok with a gold standard as long as it fails horribly due to lack of liquidity and then herds the sheep to another round of fiat tyranny. Don’t believe me? Well then why won’t they debate Dr. Fekete. I am open to dropping my antipathy toward the Mises Institute immediately if they agree to debate Dr. Fekete on this likely very important topic.

        Best Wishes to any and all who are in favor of open exchange and free dialogue of any reasonable ideas.

        Thank you to the DB for a great web site and forum for discussion of reasonable ideas.

        • Phil Scott

          This is very interesting. I have read Dr. Fekete and he seems to tell the truth and he makes sense to me.

          I just don’t understand why you say that gold fails from lack of liquidity. Does that just not increase the price? Isn’t this just deflation – relative reduction of the money supply?

          Am I missing something?

    • Phil Scott

      This thinking is a bit muddled as it jumps around the argument. It reminds me of a typical standard paper money economist who throws various irrelevancies into the discussion and then declares himself the winner.

      Dr Fekete would I think consider himself to be within the ‘Austrian’ School and a great advocate for Mises. Real Bills follows on as a natural consequence to using gold for money. I think Dr Fekete is also working on a system which automatically makes him a profit as the paper money system collapses. This is interesting but is in addition to REAL Economic thinking not in opposition to it.

      Also it is difficult for people to get a handle on the reality of gold when they continue to price it and everything else in terms of the US paper currency which has lost 97% of its value since the Fed started. Our big problem is that paper money economics does not have any base of value with which to truly understand whether we are becoming more or less wealthy.

      It won’t be long before we are all living in million dollar houses but they will still be the same old house we are living in now.

      So continuing to measure everything in terms of the US dollar cannot help but distort the truth. AND since the BIG Banks are continually defrauding the public with naked shorts and other manipulations on the US and London bullion markets we do not know the value of gold anymore.

      All logic fails when free markets are killed.

      • Sydney

        Thank you for you response.

        My presentation very well may be deficient. If you can bear with me here’s another try.

        Purchase of gold is often done as a hedge against inflation. Gold can also be considered a hedge against deflation as well.

        Gold’s purchasing power often rises during deflationary (price deflation) periods as well as inflationary (price inflation) periods. This makes sense theoretically when one considers third party liability as well as what remains after debt destroys even the asset side of the balance sheet. Historic accounts have often demonstrated increasing purchasing power of gold during deflationary periods (price deflation). Deflation by definition is the increase in value of money (gold) relative to goods and services. Evidently currency (money substitutes) requires confidence as a substitute for money. Crisis of any kind by definition erodes confidence in everything but gold apparently (and maybe silver). There. Less muddled I hope.

        Point well taken that USD exchange rate for gold hardly defines golds value. Pricing things in ounces of gold rather than USD makes a lot more sense. Historically ounces of gold per purchase is relatively stable or much more stable than its USD exchange. Please note that during periods of price deflation the PURCHASING POWER of gold has risen. In other words the same number of ounces of gold have purchased MORE goods and services.

        Finally Dr. Fekete can speak for himself of course. The DB interviews with Dr Fekete are consistent with Dr. Fekete’s praise of Menger over that of Mises (yet he does hold Mises in esteem to some degree). No, I don’t believe Dr. Fekete would consider himself to be within the ‘Austrian School’ at least insofar as he has founded the “New Austrian School” which does NOT disparage Menger.

        Best Wishes.

        • Phil Scott

          Thanks, Sydney.

          I appreciate your response.

  • Jim Johnson

    The “price” of gold is their panic index- it will no longer be allowed to concern anyone, just as unemployment figures no longer reflect reality-. Anyone stupid enough to contract payment in FDR’s will get just that, 19 trillion dollars printed up the day before it goes useless. When my silver spot price dropped below the price miners need to extract it for us (it is called a Fundamental, kids), so went out any consideration this is anything but total fabrication. But hey! People in Star Trek got paid somehow, didn’t they?

  • Phil Scott

    The free markets of the world are now being destroyed and replaced with BIG Bank controlled markets. If the Western run Central Banking system succeeds in this, gold will eventually be stolen by governments and normal free market economies will cease to exist. They will not be possible with paper money which is always and inevitably printed to infinity just like it has always been! Imagine how the world will be with just electronic money controlled by banks and government and everyone dependent on a bit of plastic and the goodwill of the evil ones who created the system.

    Our only hope is that China and Russia will remain firm and independent and back their paper currencies with gold and thus provide a basis for economic action.

    If they fail then world prosperity disappears as free trade becomes impossible.

    If they are crazy enough to do this then they are crazy enough to launch into World War III when their scheme looks like it will fall apart. This will be a very quick war as all nuclear weapons are suddenly unleashed by all parties at the same time.

    We won’t be travelling up to the Northern Hemisphere for quite some time after that.

  • James Clander

    Worth the Read – for the Gold Comments Alone – Mark J Lundeen – May 29, 2016

    “Mr Bear Has A Purpose In Life; It’s Called Market Hygiene”

    http://www.gold-eagle.com/article/mr-bear-has-purpose-life-it’s-called-market-hygiene

    Snips :
    What is going on here? As is painfully evident in the chart below, it’s the same old stuff; the big Wall Street bears are cheating once again in full view of their government regulators at the CFTC. They’ve done the same market maneuver twice in the past few months: run up COMEX gold open interest (OI) with promises to deliver tens-of-millions of ounces of gold they don’t have. As they do this they also take a significant long position. At the peak in OI, when the price of gold slows its advance, they used these long positions to flood the market with sell-at-market orders, intending to ignite a selling panic in the gold market.

    Have no doubt about it, these plunges in OI were and are vicious attacks on the price of gold. But when we consider that the price of gold at its lows of last December was only $1,050, the big bears on Wall Street can’t be happy that after causing a collapse of 87,423 contracts in COMEX gold open interest in past ten trading days, gold closed the week well above its lows of last December: at $1,212.

    The question to ask now is whether the big bears currently have the ammo required to drive the price of gold below $1,200, or will they once again have to drive COMEX gold open interest up to still higher levels than what we saw just ten trading days ago to start the process yet again for the third time since the beginning of 2016.

    I realize after all I said above, things look pretty bad. But keep in mind that for all the big-bad bear’s huffing and puffing, he hasn’t blown down the gold bull’s house just yet. In fact the old play book used by the big bears isn’t working as well as it has in the past.

  • Praetor

    Gold! And truly all PMs will rise, and as the old saying goes, ‘will be worth their weight in Gold’. Gold is the money of the elites and their highest store of value. On the other hand what they gave the people was fiat a means of exchange for goods and services, that they provide. More or less an accounting and control system that they manipulate to their benefit. Until these system of accounting and control collapses, they will remain the ‘ELITES’!!!

  • aj54

    Yellen is of course doing harm on purpose, as Bernanke and Greenspan did before her; their greater mandate is to their private owners, not the people of the country.
    End the Fed.

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