Powell thinks it’s “Volker time!” Boy, is he wrong! Near-term gold & silver.

By Michael Oliver
May 12, 2022

Too many market analysts, investors, and economists think Volker’s anti-inflation policy is the course now, and they applaud the Fed’s tightening as the solution to “commodity price inflation.”

Of course, the false notion prevails that “inflation” only occurs if it exhibits itself in commodity prices. Believers blindly ignore the linkage between rapid expansion in money support coupled with artificially lower than real-world rates and price rises in other markets—such as the stock market. Stock market verticality is “good.” Even if it is sponsored/bloated almost solely by monetary factors.

Well, Powell and his fellow would-be academic policy-wielders are now “fighting inflation” via rate rises and balance sheet reductions. Commodity price rise must be halted and reversed (farmers, miners, et al. be damned!). Or so that is their goal.

But if one simply nails to the wall the price charts of gold, commodities, and the stock market back during Volker’s time and those same markets today, you’ll see a totally different picture. And it’s the reason MSA argues that the outcome will be bloody for those who love the prior inflated assets like the stock market and related. It’s totally different this time!

Volker’s first term (summer 1979 to 1983) In late 1979 Volker began his anti-inflation policy. The Fed Funds rate went from 11 to 20% by March 1980. But note that gold’s eight-fold bull market occurred during continuing rate rises from 1975 to January 1980.Yes, Volker increased them dramatically in the last several months of gold’s bull trend. But arguably gold was ripe to top any way! And the Commodity Research Bureau Index had advanced from just above 180 in summer 1977 to nearly 340 in late 1980, a three-year explosion, despite ongoing rate hikes. Both topped in 1980, gold first. But the question is: was it really rising rates, or just largely due course for those massive bulls to peak?

Now we point out the major difference between then and now. The stock market had peaked its 1970s bull trend in 1973 and produced a 50% bear market until late 1974. Chart on prior page. Then it was a dead asset for a decade, not the bubble of that era.

This time around it’s totally different! The bubble that’s breaking now is the stock market and related markets, all of which were buoyed for over a dozen years by the Fed.

The Fed is trying to reverse that now, and will in fact reverse it. But not in the markets (and later the economic data points) that the Fed wants to see reversed! And gold knows it. There’s one key issue right now and it’s likely a short-term one.

And gold knows it.

There’s one key issue right now and it’s likely a short-term one.

MSA issued annual momentum trend sell signal for the NASDAQ 100 at the January close this year and for the S&P 500 at the February close. Not long after that we identified levels below both indices which, based on fairly long-term factors (both price and annual momentum), could prove to be bounce points worthy of the name.

For NDX it was any return trip to its 36-mo. avg. (then in the lower 11,000s, now adjusted up to 11,558 for May). For the S&P it was the 3800 area. Today, finally, the S&P 500 has dropped into the mid-3800s and NDX has traded down to 11,692. We’re not trying to be precise; we just want to ballpark a likely support zone. Those areas look justified to act as support and frankly need to. For example, if NDX drops anytime this month to 11,095, then we have to scratch that key support level for NDX and assume it’s in a more immediate collapse-type mode. For now, just approached our support levels.

Obviously gold has been reflective of the stock market’s action (over the past handful of weeks, though  not before). Despite that, we point out that gold is unchanged on the year, while NDX is down 28% and the S&P 500 18% on the year. For some reason (it’s no mystery) some large investors/fund managers are apparently moving money out of the latter and into the former, hence the extremely sharp relative performance behavior.

If the stock market (again, we’re watching it short-term now, especially as it has reached our logical bounce zone defined several months ago) does not find footing around here, then we’d assume that gold will follow them into a next drop, though highly likely at a much lesser percentage pace than a collapsing stock market bubble. Or there is no further collapse?

As we showed and explained in the weekend report, those prior stock collapses of October 2008 and March 2020 witnessed gold temporarily participating in the debacle (though to a much lesser percentage than the stock market), only to then—in both cases—see gold turn rapidly from its low and never look back. Why did it turn up while the stock market either continued down after the event (the October 2008 low in the S&P 500 was followed by further decline until March 2009) or, as in March 2020, when gold was back at its highs in seven trading days while it took the S&P 500 five months to crawl its way out of the hole?

Because gold knew what the Fed was going to do before it became public knowledge! The Fed will not tolerate a collapsing asset market and the data point declines that will rapidly follow that event! That’s why Powell repeatedly mumbled “data sensitive” during his press conference last week. He was already aware of the potential that their shift in policy could very well be too serious in terms of “data” consequences.

A reporter for Bloomberg asked Powell a question at that press conference regarding economic consequences of balance sheet reductions. Great question. Now read Powell’s answer—word by word.

I would just stress how uncertain the effect is of shrinking the balance sheet. You know, we, you–we run these models, and everyone does in this field, and make estimates of what will be the–how do you measure, you know, a certain quantum of balance sheet shrinkage compared to quantitative easing? And, you know, these are very uncertain. I really can’t be any clearer. There won’t be any clearer. You know, people estimate that broadly on the path we’re on, and this is–this will be taken, probably too seriously. But sort of one quarter percent, one rate increase over the course of a year at this pace. But I would just say with very wide uncertainty bands, very wide.” 

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.