Gold has already corrected $50 since approaching the post-Brexit high of $1375. What’s next now that the Fed is likely to start shrinking its balance sheet this week?
From my latest at Seeking Alpha:
With the FOMC meeting later this week it is likely we’ll see the beginning of the Fed shrinking its balance sheet. With a decrease of open hostilities developing between the U.S. and North Korea, gold (GLD) has backed off previous highs with the S&P 500 (SPY) and the Dow Jones Industrials (DIA) are at new highs.
Gold rallied against a falling dollar (UUP) and the political uncertainty emanating from Washington. President Trump is making deals with Democrats and the foreign policy establishment, infuriating the GOP leadership and forcing it to adopt his domestic agenda, most of which is back on the table.
So, the question is how will gold react to the FOMC’s decision?
In other words, will this action by the Fed be deflationary or inflationary?
And the reason why the second question is so important is because gold is continuing to react to market pressures in predictable ways. And the case for any new bull market in gold of the kind we saw from 2001-11 requires gold to act counter to conventional wisdom.
The Last Gold Bull
In that gold bull market, the dollar was in a bear market. The European Union pursued strong monetary policy and the breakdown of the financial system in 2008 is what took gold from a low near $700 during the crisis to a peak over $1900 by 2011.
During the bull market competitive, round-robin QE from the major central banks added trillions in liquidity which supported the gold price.
And it was these competitive devaluations that kept confidence in the system low and it culminated in Standard & Poor’s downgrade of U.S. sovereign debt.But then the central banks coordinated their efforts, the Swiss National Bank pegged the franc (FXF) to the euro (EUO) and confidence was restored to the financial system.
Gold has been riding out that rising confidence in the central banks for six years now.
And any argument against a new bull market is predicated on the belief that the central banks have a handle on global liquidity issues and can stave off any potential collapse before it gets out of hand.
I don’t believe that to be the case. Janet Yellen, apparently, thinks otherwise.
If I’m wrong people, stop reading my articles. If she’s wrong the global monetary system fails, again…. (read the rest here).
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