The Fed Lied but Gold Ain’t Died

by John Galt
February 1, 2018 05:00 ET

From today’s FOMC (Federal Reserve Open Market Committee) statement:

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

If one has listened to my older advice and read up on the Fed, it does not take much to read through the entire statement and draw this conclusion:

Unless the Fed is engaged in bond and equity markets, they lose control of the economy and price assignment of which they hold so dear.

Thus what is “price assignment” in a less jargonistic world? It means that the Federal Reserve through monetary manipulation by either interest rate adjustment, asset purchases, or direct yet indiscreet interference in the M1 and M2 money supplies suppress natural market price variations initiated by free market forces. If anyone hasn’t been paying attention, the direction of inflationary prices, as measured via PCE and CPI-U(non-seasonally adjusted) has been slowly but steadily in an upward direction but far below the reality that the average consumer sees at the grocery store, insurance purchase, or medical costs just for some direct examples.

This brings us to the end of the Greenspan-Bernanke-Yellen era.

Why is this important?

Under the common mainstream media (financial especially) mantra, Federal Reserve Chairman Powell is a “hawk” meaning he wants higher rates and a stronger dollar as a consequence to suppress inflationary forces. How did that work out after it failed to create actual monetary inflation?

In fact on the more commonly tracked US Dollar Index (USDX) the activity is even more dramatic to the downside:

This monthly chart illustrates that the Bernanke-Yellen reflation was an abject failure. If it were a success, America would be conflicted about 4%+ GDP growth along with 4%+ CPI inflation. Instead the country is mired in stagnation with consumer price inflation via variations in commodity prices which are running a normal cycle between deflationary and inflationary forces.

There is however one key indicator flashing something quite different:

(Note: I used the monthly charts from because they illustrate the variances without a jumbled mess. YMMV)

Gold rallied in anticipation of the Obamaflation trade which Bernanke crushed. In the process he limited asset and commodity inflation in such a manner where credit growth was constricted and economic expansion limited to paltry pathetic numbers which have not been seen in US history during a “recovery.”

Once Yellen took over and the 2016 Presidential cycle took hold however, it appeared that Yellen signaled a withdrawal from monetary manipulation regarding international price interaction and concerned herself with extracting the Fed from localized intervention in US economic affairs. Obviously the plan did not work with the election of President Trump. The actions of the Federal Reserve became more political designed to favor the elites yet failing to take into account the impact of international investment or in the case of the US Dollar, divestment from the Fed game.

With the decline of the dollar, gold is now flashing a period of massive 1970’s inflation is on the horizon. Not immediately but instead, over a period of the upcoming 12-20 months, Fed policy will start to indicate a subdued but obvious panic about the loss of control over dollar pricing power. As the rate increases in the FOMC accelerate starting in March, gold will become not less expensive, but more so as the markets read this action as a reason to sell the dollar and move into hard assets, just as they did under Federal Reserve Chair G. William Miller in the late 1970’s.

As long as gold holds the $1320 price area as support in the short term, it means the new bull market is intact. Barring something extreme outside any normal market fluctuation, gold should hold then eventually break above $1400 by late spring to early summer in a sustained move to much higher prices. IF the FOMC fails to raise the Fed Funds Rate in March however, all bets are off as to how quick gold accelerates upwards, so buckle up, the ride could get wilder than 2006-2009.

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