Can The Fed Taper Enough?

Early in this past week, equity markets were troubled by fears that China’s Evergrande insolvency would lead to a global financial pandemic. As well, Wall Street continues to believe against all evidence that inflation is transitory and thus that the Fed is on its way to tapering. I tend to believe China is in a better position to deal with its debt than the U.S. is because China’s debt is owed to itself, unlike the U.S., which owes trillions to foreigners—though I’m not dismissing a possible global contagion stemming from Evergrande.

What I don’t believe is that the Fed will be able to taper much if at all without triggering a massive decline in asset prices. But as my friend Jeff Deist liked to say when he worked as Ron Paul’s Chief of Staff, “Perception is reality” in politics, and the Fed once more demonstrated very effective propaganda again last week. If you think the Federal Reserve acts independently of politics I have a bridge in Brooklyn, New York, to sell you. Do you think Nancy Pelosi and other members of Congress with their billions of dollars in the stock market will allow Jay Powell to willingly usher in the next stock market crash? As long as Wall Street buys the temporary inflation propaganda enabling it to believe the Fed can normalize its balance sheet, this massive stock market orgy can continue. But rapidly rising inflation will remove Wall Street’s rose-colored glasses. When the Fed is powerless to hold real rates negative no matter how much money it prints, it will be “game over” for the Kool-Aid kids on Wall Street. So rather than Fed tapering, I see it soon expanding its balance sheet fairly dramatically as rising levels of inflation force real rates of interest further into negative territory. And that is exactly when the next major move higher for gold will occur. In the short commentary below, my friend John Rubino suggests the realization that tapering is pure fantasy and gold will have its day, likely early in 2022.

Sometimes it helps to zoom out a bit.

For gold (at least when priced in US dollars), the past few years’ action has seemed boring, one might even say directionless. But move the starting date back and flip the graphical relationship between metal and currency, as 321 Gold’s Stewart Thompson recently did, and the picture looks a lot more dramatic.  Since the US took the world off the last vestiges of the gold standard in 1971, the general trend for gold priced in dollars has been up (which on the above chart is represented as downward movement). Said another way, the dollar has been falling versus gold.

That’s not a secret, of course, but note how close gold is to its multi decade channel. Piercing $2,200 would do massive technical damage to the dollar and leave gold with a lot of room to run.

Prediction: This breakthrough happens on the day the Fed retracts its recent tapering talk and promises easy money forever.  Early next year, in other words.  (From John Rubino at

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.