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.