Policy Bullish for Gold

This was another obvious “risk-on” week. But until Friday, gold didn’t join Treasuries as a safe haven.  Bullion banks once again hammered the price of gold downward with their whatever-it-takes paper market short sales. Gold’s weakness even prompted Michael Oliver to warn of a possible decline in gold to the 36-month average ($1,640.) Finally on Friday, gold showed some strength rising $14 above Thursday’s close to end at $1,782.

What caused Fed Chairman Powell to pivot toward a more hawkish monetary stance this week? Of course, now that he has been reappointed as Chairman, he doesn’t have to play politics. Some people have suggested that with a serious inflation problem hurting Democrats politically, there may have been encouragement for Powell to turn toward a more aggressive tapering schedule. Whatever the case, the Fed’s hawkish stance seemed to have caught the equity markets by surprise. Michael Oliver may have identified the real reason for the Fed’s more aggressive posture. When he was last on my radio show he pointed out that corporate bonds were starting to see their yields rise dramatically, especially in the “junk” sector. Michael noted that with pension funds having had to buy risky “junk” to gain yield, they are now starting to register huge losses on their debt holdings. That could lead to a blood bath among pension funds and a major political headache for the Fed and the Biden administration. With inflation posing a serious political and economic problem, the only way to get some buying back into the debt markets would be to trigger a reallocation out of stocks into bonds. Hence, Powell’s more aggressive stance. At the same time, the Fed and its shareholders (bullion banks) fight to keep gold from rising because they want to see financial resources allocated to the debt markets, not gold. And it may also be their hope that a plummeting equity market could lead to a cooling off of inflation. For various reasons, I doubt that would work.

Regardless of which direction the Fed heads, Danielle DiMartino Booth has noted that the Fed is 100% certain to commit a policy error. That is bullish for gold and gold shares no matter which direction the error.

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.