One of the kids woke me up last night around 3:30am. They went back to sleep straight away, but I was awake. So I checked the US market action to see what was happening. Not much…
I got back to sleep for a bit before the alarm went off at 5:30am. When I checked in on the markets again a bit later, things had changed.
The major indices went from in the red to modestly green, while precious metals had another storming night.
What had happened in the meantime?
One of the God’s of finance — a Federal Reserve official — had spoken. The great intervener once again showered its beneficence on the market.
(What people don’t realise so much, is that to give to the few, the Fed must take from the many.) The biggest casualty overnight? The US dollar.
So what happened? CNBC takes up the story:
‘Central bankers need to act quickly and forcefully when rates are low and economic growth is slowing, New York Federal Reserve President John Williams said Thursday.
‘The influential policymaker delivered a speech discussing what should be done when central banks are near the “zero lower bound,” or close to as low as rates can go.
‘“It’s better to take preventative measures than to wait for disaster to unfold,” he told the annual meeting of the Central Bank Research Association.
‘Rather than keep rates elevated to give central banks room to cut in the face of a crisis, Williams said the proper move is not to “keep your powder dry.”’
It’s the same tired old drivel. And the same response from markets…
Although this time, the precious metals are outperforming.
That’s because the sector senses we’re entering a new era of currency wars, and the US is joining in. When global growth slows, and you want to get as big a piece of the pie as you can, what do you do?
You ‘steal’ growth via currency devaluation. If all the big players are doing it, where do you seek refuge? The precious metals.
The Impact on Gold and Silver
Gold is also getting a boost thanks to one of the most influential hedge fund managers in the world, Ray Dalio. This week, he published a long essay on ‘paradigm shifts’.
A paradigm, in this instance, refers to an investment environment first shaped by fundamentals, and then carried on by investor belief.
Often, the fundamentals that underpinned the paradigm begin to subtly change, while investor belief in the previous paradigm remains strong. Dalio argues we are undergoing a paradigm shift now. It just hasn’t been widely recognised yet.
The following are excerpts from his essay (with my emphasis added):
‘Right now, approximately 13 trillion dollars’ worth of investors’ money is held in zero or below-zero interest-rate-earning debt. That means that these investments are worthless for producing income (unless they are funded by liabilities that have even more negative interest rates). So these investments can at best be considered safe places to hold principal until they’re not safe because they offer terrible real returns (which is probable) or because rates rise and their prices go down (which we doubt central bankers will allow).’
‘History has shown us and logic tells us that there is no limit to the ability of central banks to hold nominal and real interest rates down via their purchases by flooding the world with more money, and that it is the creditor who suffers from the low return.’
‘Most people now believe the best “risky investments” will continue to be equity and equity-like investments, such as leveraged private equity, leveraged real estate, and venture capital, and this is especially true when central banks are reflating.’
‘I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.
‘Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.’
What can I say? I agree with all that wholeheartedly.
If you’ve been reading my essays lately though, this isn’t news. I’ve been going on about gold — and how to profit from gold’s rise — for a while now.
What I haven’t talked about so much — apart from the odd mention in my weekly YouTube updates — is the silver price.
But it’s now starting to get sucked into gold’s orbit. Overnight, the price of silver surged to a 12-month high in US dollars. It’s now back above the resistance/support line at US$16.
If the silver price can hold above here, I think you’re about to see strong outperformance in the months ahead.
It’s certainly all happening for the precious metals…and we’ve got our central banking mates to thank.
Editor, The Rum Rebellion
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