Perspective By Rich Checkan
Information Line - September 2023
The official end of summer comes with the autumn equinox. This year, that falls on September 23rd.
Of course, the unofficial end of summer is Labor Day weekend. It is now in our rearview mirror.
Children are back in school. Vacations, for the most part, are complete. Full focus turns to work and to the markets.
Historically, this is the start of gold’s annual time to shine.
But there’s more to it. Jewelers are buying gold in the fall for the wedding season as well as for the end of year holidays. They tend to buy now so they can make the jewelry they hope to be selling for these various holidays and events.
But this year, there are more forces starting to build pressure on the gold price…
The 10-year treasury recently hit its highest yield since 2007. The 30-year bond hit its highest yield since 2011. These peaking yields have clearly syphoned some investment dollars away from gold. This is one area to keep an eye on going forward.
After a slight decline, the next step for bond yields could be quite helpful for gold’s price appreciation. If bond yields have peaked, the luster of gold should come back fairly quickly.
Of course, that would suggest the Federal Reserve at least paused rate increases. And, at least for the September Federal Open Market Committee (FOMC) meeting, that is the consensus among analysts.
Cracks are starting to form in the labor market… one of the key areas the Federal Reserve considers when deciding to raise rates or not. Although payrolls jobs numbers are increasing, they are rising slower than anticipated. Worse yet, previous months’ figures are all suffering downward revisions after the fact.
On top of that, the unemployment rate is rising. Mix in the fact that wages aren’t inflating to keep up with the costs of goods and services, and we can very well be on the verge of a recession.
Personally, I believe we are on that precipice. The strain on consumers has been evident for quite some time. The recent reports about consumer credit card debt topping $1 trillion are confirmation to me that consumers have replaced cash-out home refinancing with credit cards in order to make ends meet.
This will put even further strain on our consumer driven – and dependent – economy.
Amidst it all, the dollar has fallen from dominance a year ago at 116 on the U.S. Dollar Index to right around 104. That’s a significant fall from grace.
Finally, despite the fact that he wanted to talk tough at the Jackson Hole meeting, Chairman Jerome Powell’s hawkish comments were delivered so meekly the markets clearly do not believe him.
AND… Central Banks
There is only one reason… because it is not a result of retail buying. The retail customer has largely been watching from the sidelines since the all-clear signal was given regarding the banking crisis in the first quarter.
Personally, I don’t think banks are all clear… especially with the ticking time bomb known as commercial real estate default lurking in the shadows. But consumers clearly felt all was clear and it was safe to get back in the water.
The gold buying that has supported the gold price for the past year or so has come from central banks. They set records in 2022. They surpassed last year’s pace in the first quarter. They have slowed their buying a little since then, but the central banks are far from done.
This backstop is what has kept gold trading in range despite weakness from retail buyers. It is what has kept gold steadily sailing into a headwind.
However, I would expect central bank buying to continue given the instability of a world that is polarizing.
That should provide sufficient support to the gold price as retail investors come back into the market in this traditionally strong period from September through February.
Sprinkle in peaking bond yields, a pause in interest rate hikes, labor market weakness, wage stagnation, debt concerns (at every level), and the potential for recession and default (at various levels), and I think you have a recipe for higher gold prices.
The good news is I don’t see this happening overnight. But the trend has been building for some time. So, don’t delay further. Take care of your allocations now… for gold as wealth insurance… and for silver for profit motive.
In the end, I honestly believe you cannot go wrong here. After all, Congress shows no sign of becoming fiscally responsible. Deficits are predicted to grow at a rate of $5 billion per day. Our debt is expected to exceed $50 trillion by 2033.
The only response from our government will be to expand the money supply… inflate the currency… make each and every dollar worth less.
If you want to Keep What’s Yours, start converting dollars to gold and silver now.
Call us at 800-831-0007 or send us an email today so we can help you get your precious metals allocation in order.
Editor's Note: Dr. Mihai Macovei is an associated researcher at the Mises Institute. This article was originally published on September 1, 2023.
Most important, the Fed cannot rely only on interest rate hikes to tighten monetary policy. It needs to also shrink its balance sheet via quantitative tightening (QT) to reverse its previous quantitative easing, a policy of massive purchases of Treasury and mortgage-backed securities to boost commercial banks’ reserves and liquidity while lowering longer-term interest rates. Quantitative easing made the Fed’s balance sheet explode to a whopping $9 trillion, as of May 2022 (figure 2), and analysts agree that by reducing bank reserves, QT should exert upward pressure on interest rates while curtailing lending.
In June 2022, the Fed started implementing its QT policy by shedding its holdings of US Treasuries and mortgaged-backed securities at a rate of $95 billion per month. But this process was undermined by the need to provide liquidity to the banking sector after banks, such as the Silicon Valley Bank, experienced hefty deposit runs. As a result, the Fed’s balance sheet declined by around $600 billion (or about 8.0 percent) from its peak to about $8.3 trillion by the end of July 2023, although the volume of held securities outright dropped by about $900 billion over the same period.
Impact on Interest Rates and Credit
This shows that a majority of large and well-capitalized US banks increased loan interest rates much less than the Fed while also paying close to zero interest rates on bank deposits. They can afford it because they have plenty of reserves and liquidity, which the Fed did not mop up, and they continue to lend to the economy. Although the annual growth in total bank credit decelerated from close to 7.0 percent in 2022 to −0.9 percent in the second quarter of 2023, it was primarily driven by the decline in credit to the government, or investment in Treasury securities. At the same time, consumer and real estate loans grew annually by more than 6.0 percent and 5.0 percent respectively in the second quarter of 2023, while commercial and industrial loans recorded a small dip and remained flat in the first half of 2023 (figure 5). As lending to the private sector remained positive, it is unsurprising that economic output also continued to expand.
Editor's Note: Nomi Prins is a best-selling author, financial journalist, and former global investment banker. At Rogue Economics, Nomi shines a light on the collusion that happens between Wall Street and Big Government behind closed doors, and she provides actionable steps for readers to protect and grow their wealth.
This week, we have questions on the soundness of the Fed’s book… what it means for the market and the banks… as well as what’s next for gold in the new digital dollar era…
I was curious with the quantitative tightening (QT) happening now that the Fed will likely take losses in reducing these securities from its balance sheet.
Keith, thanks so much for your questions. They bring out the “wonk” in me. Let me explain…
What happens to the digital dollars if the electrical system is attacked, or the country suffers a natural disaster and/or an enemy attack?
Hi, Robert, that’s a great question. And it’s the reason why the Fed and the government as a whole is so focused on cybercrime protection. We really are vulnerable without trying to stay ahead of cybercriminals.
You say gold can be a good backup, but how would we be able to “spend” gold if everything goes CBDC? How do we/can we even trade it, especially if they “cancel” paper money, which seems to be a possibility?
Hi, Bob. Thanks for your questions!