Global Liquidity Crisis

By every measure this was a “risk off” week. And I believe James Rickards not only has the answer why but also that it may not be over yet by any means. His article published August 10, is titled, “Global Liquidity Crisis Is Underway.” Rickards expects these liquidity issues will in the short run lead to a rising dollar as investors scramble to sell what they are able to sell to build cash and/or pay back debt. In fact, that is exactly what I think we are seeing this week, which is why gold shares across the board are down this week.

Rickards lays the blame for this liquidity crisis on two major factors. First, the so-called recovery is not nearly as strong as the Biden Administration thinks. The economic slowdown at the start of Q3 is very tepid compared to the first half of this year. He points out that real personal income is now down 30%, and with government handouts in decline, consumers are not spending like they were during the first half. And exports are in sharp decline because countries around the world are not doing well, and especially noticeable is a slowdown in China.

Secondly, regarding liquidity here are some warning signs:

  • The Chinese central bank has recently lowered the reserve ratio requirement that commercial banks must hold against loans. This points to economic weakness in China and liquidity problems in the banks.
  • Foreign governments are reducing their holdings of U.S. Treasury securities. This does not signal an aversion to the dollar. It signals that foreign banking systems are desperate to obtain dollars and will sell Treasuries to get them.
  • Certain segments of the Eurodollar futures curve are slightly inverted in a condition called backwardation. This indicates banks and large institutions expect lower rates in the future (a sign of recession) and higher rates in the near term (a sign of financial distress).
  • Yields-to-maturity on 10-year U.S. Treasury notes have been dropping steeply since last March. This is indicative of a global flight to quality (the fear trade) and expectations of disinflation and slower growth in the future consistent with a possible recession.

Rickards goes on to predict that Joe Biden and Janet Yellen will get the message about the weak economy by November of this year, when the third-quarter GDP and several more months of inflation and employment data make it clear. But by then, it will be too late to stop the economic slide. The 2022 midterm elections will be less than a year away. The White House will panic and turn to the Treasury for measures to weaken the U.S. dollar. 

So an economic slowdown and other liquidity factors noted above, which I believe very much explains the “risk off” trend this week, will result in a “stronger” dollar. But that will all change dramatically, according to Rickards, when the Biden Administration panics over a weak economy as the off-year election campaigns get underway toward the end of this year.

By the way, my IDW shown on the prior page was hit very hard this week, falling from 187.67 last week to 184.07 as of Friday. The scramble for cash was, I’m quite sure, the reason why our junior gold stocks were hit so very hard this week.

So where might that leave us for next week? Peter Boockvar provided these thoughts on Friday, August 20. “I’m beginning to believe that Powell’s speech next Friday might end up being a non event in terms of him committing to a stance on slowing the pace of QE. Why would he when he can take in another month of info on the economy, inflation and Delta until the September 22nd FOMC meeting. He can see how back to school is going, how kids and parents are managing. He can see the impact of the end of extra unemployment benefits too. With respect to Delta, we’d have another month of ‘vaccinating’ the unvaccinated via them either getting covid or finally deciding to vaccinate. 1million people got vaccinated yesterday by the way, the 1st time in 7 figures since July 3rd. The covid spread numbers might fall a lot by that September meeting and just maybe the taper decision could actually be determined by the stagflation situation we’re in and they decide to focus on controlling inflation which would in turn reverse higher the decline in REAL wages. Either way, there will NEVER be the ideal time to taper as there is ALWAYS some form of uncertainty.”

It seems to me there is a huge amount of denial of reality everywhere now, which may also explain why stocks keep going up and gold shares are not part of the party in the midst of an emerging recession, meaning that we never really got out of the massive decline that came in the spring of 2020 with the COVID-19 shutdowns. Sigmund Freud referred to this inability to recognize reality when it is so obvious but painful as “black comedy” in his 1925 essay titled “Humor.” He wrote, “The ego refuses to be distressed by the provocations of reality, to let itself be compelled to suffer. It insists that it cannot be affected by the traumas of the external world; it shows, in fact, that such traumas are no more than occasions for it to gain pleasure.”

An article written by Michael Every of Rabobank suggests all this talk by the Fed of tapering may be an attempt to trigger a real correction in the equity markets so that they may be justified in another round of QE and to get senators to agree to trillions’ more fiscal stimulus. Why else would the Fed be talking about tapering when commodities are slumping? Iron ore is down 26% this month; 10-year U.S. Treasury yields have gone from a low of 1.14% to a high of 1.37% and back to 1.24%, as well as all the overall global liquidity crises noted above as spelled out by James Rickards. And we have not even mentioned the dire consequences the fall of Afghanistan to global terrorists this past week may mean in terms of future economic growth, especially for western countries.

The problem the Fed has is that the only thing the Fed has in its toolbox is a monetary sledge hammer. But with prices starting to rise and an inability to allow interest rates to reflect rising inflation, the only thing left in the toolbox of government and its partner in crime, the Federal Reserve, is fiscal policy because at zero bound rates, money printing without fiscal policy to get money into the economy is useless. But individuals fail to see the dire condition of our economy and sell stocks because, as Freud points out, “the ego refuses to be distressed by provocations of reality.” Meanwhile, Fed talk about tapering seems not to be very effective because the market knows that it won’t allow stocks to follow too far before new massive QE will be forthcoming.

However, the Fed may be playing with fire. It cannot know when the collective mood of the markets will change, nor does it have the ability to judge all the complexities of global flows even in normal times, never mind the complexities of a Covid-infected supply-chain-challenged, socialist-trending world. I think it is only a matter of time before we see a plunging stock market followed by a hyperinflating monetary policy combined with more fiscal stimulus. I see no reason in the world to be complacent about inflation.

Where does that leave us then regarding our gold stocks? I think at some point here gold will wake up and we may see some $50 to $100 updays for the yellow metal, especially if the equity market tanks. Yet I’m concerned in the short term for reasons spelled out from Rickards above. After reading his article, I felt the need to build cash, which I did but not nearly to the extent I wanted. About the only thing I did last week was shave 7.5% of my Novo holdings down to 23% of my portfolio. After the gold price manipulation by the bullion banks, I was happy to see gold seeming to have found a bottom this week. And based on an August 18 missive put out by Michael Oliver (, we should be very close to a turn in gold.

Here is what he wrote about gold on August 18: “Gold’s 10-day avg. oscillator action rose to our previously plotted structure yesterday, and with today’s downside (assuming it ends with a down settlement price) is reflexing off of that line. Meaning MSA’s oscillator line is being validated by gold’s action as a real structure, now with another pivot along the line. Close over that structure and you can assume the upturn is still in process and being renewed—from the intraday lows in the $1670s last Monday. For tomorrow would need settlement (spot August future) of $1787.60. For Friday a close at $1785.70.   Of course, the Fed minutes are to be released at 2:00 ET today and we know all the gold and silver bears love the Fed as a headline generator—so fully confident are they that the Central Bank will begin to shift course. Or so they think.

As it turned out, the Fed minutes had very little negative impact on gold with the August futures closing price on Friday at $1781. It opened at 1784.1, reached a high of 1787.5 and traded at a low of 1778.2. So gold traded above the necessary close of 1785.70 but failed to close at that level or above. But keep in mind that next week the number gold will need to close at will be somewhat lower, as Michael will no doubt point out in his weekend letter.

For the first time since December 2018, so far this month the average monthly price of gold has dipped below the 20-month average, thanks to this correction for gold, which is now nearing one year old. There are seven trading days left in August so the monthly average, which is just $5 below the 20-month average of $1777.73, could still rise above the August average. Certainly, there is sufficient fuel to power gold back dramatically higher. As noted last week, gold relative to the amount of Covid-related money printed is at its lows of the mid $200’s of the early 2000s. Taper talk could finally give investors a punch in the face that requires them to look realistically at the horrific condition our fiat currency world is in, such that there will be a collective rush into honest money once again. And what is absolutely true is that at current prices of gold, producers will show very strong earnings in the third quarter while other sectors may start to reveal disappointing earnings reflecting weak economic conditions stated above.

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.