Central Bank And Government Incentives Are Gold’s Catalyst

The daily news feeds are full of news about what one could call “smaller” questions. They include, among many other, whether the Fed will taper, whether the equities are ready for a long overdue correction, whether there is an economic recovery, whether there is inflation or deflation, etc.

In the following article, Gary Christenson takes the investors’ view and looks at the really big picture. He rightfully points out what the direction is of central planners. In a world that is increasingly governed by the combination of central banks and governments, one should take their objectives very serious. While it is true that their policy is not sustainable and it somewhere in the future will collapse, one should note as well that unavoidable does not equal imminent!

Increasingly, the markets and the economy is planned to achieve the following objectives:

  • The Fed wants higher stock prices.  This is related to the wealth effect that central planners must reinforce.
  • The Fed wants low interest rates, which keep bond prices high. The higher bond prices, the more attractive the idea for people to invest in Treasury notes.
  • The Fed and the U.S. government need low interest rates so the U.S. government’s debt service costs remain low and credit is inexpensive. Hence, investors are forced to reach for yield, buy stocks, and maintain the bond and dollar bubbles.
  • The U.S. government wants to spend money, lots of money, and avoid the consequences. Politicians are focused on their election and easy spending, next to limitless spending (at all cost).
  • Central banks, especially the Fed, and western governments want lower gold prices, so their unbacked paper money still appears valuable. By doing so, the U.S. dollar as a world reserve currency remains attractive and retains relative value against other currencies.

The key question that is answered by Gary Christenson:

Can the Fed and the U.S. government manage the markets to achieve low interest rates, higher stocks, low inflation, low gold prices, and a strong dollar, all while spending much more than revenues support and thereby running the national debt up to insane levels?  My assessment is NO! 

What does the data indicate?

  1. Assume that the world changed around the 9th month of 2001.  Stocks had peaked and crashed, the Twin Towers came down, government expanded, and the U.S. declared a War on Terror.  There were bubbles to be inflated, massive debts to be incurred, no-bid contracts to be awarded, huge profits to be generated, and stories to tell.
  2. Assume that the spending, increasing debt, bubble blowing, and military-industrial profit generating machine have been operating more intensely since 2001.
  3. Assume that “this time is NOT different” and that our current fiscal and monetary trends will continue for several more years.

Gold and the S&P 500 Index

Graph One shows 25 years of the smoothed* monthly price of gold divided by the smoothed value of the S&P 500 index.  The ratio went down from the 1980s to about 2001 and rose thereafter.  Until 2001 investors wanted financial assets more than real assets like gold and silver.  Since then the price of gold has risen more rapidly than the S&P 500 index.  The Fed wants the S&P to keep rising and so we should expect QE will continue in the hope that it will levitate the stock markets.  Unless this time is different, gold will continue to rise.

smoothed_gold_sp_index_1988_2012

Gold and the National Debt

Graph two shows 25 years of the smoothed* monthly price of gold divided by the official national debt in tens of $Billions.  The ratio went down from the 1980s to about 2001 and then started rising.  Even though debt has been increasing rapidly since 9-11, the price of gold has increased even more rapidly since its bear market lows in 1999/2001.  Knowing that politicians, corporations, and banks need the spending and debt to continue increasing, we should expect massive deficits and ever-increasing national debt – growing about 10 – 12% per year.  Unless this time is different, gold will also continue to rise.

smoothed_gold_debt_index_1988_2012

Gold and the Dollar Index

Graph three shows 25 years of the dollar index multiplied by smoothed monthly gold prices.  In broad terms a higher dollar usually goes with lower gold prices (when priced in dollars) and vice-versa.  The product removes most of the currency variation and shows the big picture trend for gold.  Since about 2001 the trend has been upward.  Unless this time is different, gold will continue to rise.

smoothed_gold_dollar_index_1988_2012

The Fed has incentive to continue QE – to levitate the stock and bond markets and keep interest rates low.  But QE will eventually weaken the dollar with excess supply, reduced demand and reduced value.  Expect gold to rise in price.

The politicians want to spend money, lots of money, and will borrow and print until they can’t.  The national debt and the price of gold will increase.

Summary

Unless the financial world has materially changed, we can expect that an increasing S&P index will correlate with higher gold prices, and an increasing national debt will correlate with higher gold prices.  Similarly, continued QE will correlate with a lower dollar and higher gold prices.

They say “don’t fight the Fed” and “don’t fight the administration.”  Even if it looks like a train wreck during amateur hour, the incentives motivating both the Fed and the government all align with higher gold prices.

Maybe the Fed and the politicians can’t get everything they want, but we expect they will be happy with strong bond prices, higher stock prices, and more spending.  Those conditions will co-exist with higher gold prices.  Consequently we expect the Fed and the politicians understand that the price of gold must go much higher.  Sacrifices, such as higher gold prices, must be made to maintain the “full steam ahead” status of our national train wreck in progress – deficit spending, ever-increasing debt, QE-forever, more wars and currency debasement.

Do you own a sufficient quantity of physical gold and silver?

 

More Thoughts:
SRSrocco Report:  Coming of QE5 and Much Higher Precious Metals Prices

The DI: Created Currencies… Are Not Gold
The DI: The Smell of Collapse Is In The Air

 

GE Christenson | The Deviant Investor

 

* Prices were smoothed by taking a 24 month simple moving average of monthly closing prices for gold, the S&P 500, and the dollar index, and then creating a yearly value by averaging the 12 monthly prices.

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