Gold’s big move is big news. It’s also a big mystery.
As discussed at some length here on Monday, there’s a shortage of convincing explanations for the yellow metal’s near 20% rally since mid-February.
In all likelihood, some combination of the narratives mentioned and detailed in that linked article is behind the move, but I gotta say: It feels too acute for there to be “no there there,” so to speak, particularly given the incongruous move in US rates (which are working against gold).
I don’t think the rally’s just a “confluence of factors.” I think something’s moving this market. Until I can offer a guess as to what that something might be, I suppose there’s not much use in speculating on a phantom catalyst, though.
If you ask Nomura’s Charlie McElligott, who weighed in briefly on Monday, “there’s a bunch of ‘tail-y outcome’ stuff” behind the rally, most of which is related to the appearance of fiscal indiscipline, the specter of overt government financing by the central bank and, to jettison the euphemisms, the suspicion that it’s all a Ponzi scheme (my description, not Charlie’s).
“Fiscal dominance is no longer conspiracy theory but an ugly policy fact,” McElligott wrote, on the way to enumerating three (closely related) points which together help explain buoyant bullion. To wit, from Charlie:
- Fed Chair Powell is advocating lower rates while Treasury borrowing in the front-end explodes as both US society and politicians in both parties have ‘no tolerance for pain,’ meaning no willingness to raise taxes or cut spending, because ‘if it feels good, do more.’
- Cranking up deficits (current Dem and GOP candidates are both running on economic populism / fiscal spending platforms in perpetuity) and talking Fed rate cuts at a time when nominal GDP growth is 4-5%? Check, please.
- Treasury Secretary Yellen’s trip to China last week sure sticks out to me like a sore thumb under these conditions — trying to smooth buyers of ballooning issuance, because from here, the options turn far uglier [whether] YCC or QE or, God forbid, outright debt monetization as the ultimate fiat money debasement catalyst.
Do you believe in a balanced world? Think of the gold’s rally and bitcoin’s rally as insurgency against US fiscal dominance. The US can’t simply crank up spending and deficits, not because they can’t (I know about MMT), but because the more they do it, the bigger the counterbalance will be. Think Putin, Xi. Think WW III. Because Putin and Xi are surely watching what Yellen is doing. Again, I would rather the US run the world, but in a disciplined way, if it could.
Tommy, there’s no “insurgency.” I appreciate where you’re coming from with all these gold comments, but don’t get pulled too far down that rabbit hole. There’s nothing down there that’s any fun, I can promise you that. The US absolutely can crank up spending and deficits any time it wants to. For a currency to lose its reserve status there has to be an alternative. And it’s not just about the currency, narrowly-construed. The entire world runs on USD collateral. The world needs Treasurys more than the US needs to “borrow.” A world without US “debt” (Bills, notes, bonds and agencies) to grease the wheels of global finance is a world that stops spinning overnight, almost literally. And from a practical perspective, you can’t do anything with gold. Bitcoin’s just a silly spreadsheet entry. And nobody besides Russia wants to denominate the majority of their reserves in CNY, because once you get into CNY in size it’s not obvious how you’d ever get out. It’s not freely-traded and the market’s not liquid. And no, I don’t believe in a balanced world. Because the counterbalances are far less trustworthy than the US. And that’s really saying something.
Yeah frankly, I’m getting a bit paranoid writing those comments that I’m thinking that bunker in New Zealand is looking real good. Maybe I should just get back to hedging/cutting back those simple longs in gold and stocks.
I mean a little more physical gold, a little less stocks.
One more thing, why do you think the world gave you a genius mind, brilliant analytical and writing capabilities, and took away your social interactions? Sure, it’s your choice to let all those things and people go. And I’m not saying that being a loner is bad. I, like you, don’t like almost all humans. I’m saying that maybe it’s an example of a balanced world. Just maybe.