The Barbarous Relic in Favor again?

2013 was quite a year for U.S. stock markets and a poor year for gold. While we continue to be constructive on equities, gold may be putting in a bottom as the one-year chart below indicates.

What will gold do? I have no idea. Debt around the world continues to grow out of control, the Federal Reserve continues to “print” money to keep assets inflated and we have read reports of continued massive buying of gold by the Chinese banks. According to Dennis Gartman “China’s demand for gold was up 41% last year over the prior year.”  Gold has risen nearly 10% this year.

On any given day I could show you articles and blogs about how gold’s collapse is imminent or that it’s rise to $5000 is only a few years away. It’s like listening to politicians.

FebruaryGraph

On the interest rate front, The Wall Street Journal reports some voting Fed members are getting more hawkish about ending the era of low interest rates. We could not be happier to hear that but have been largely disappointed by the previous calls in the past, which have only led to lower rates.

The Journal reports “Conversation at the Federal Reserve’s most recent policy meeting turned to something that hasn’t been a serious topic for years: the possibility of interest-rate increases in the near future. “

“The Fed has held short-term interest rates near zero since December 2008, near the height of the financial crisis, and Chairwoman Janet Yellen shows no appetite for raising them soon. Investors, seeing that, generally don’t see Fed rate increases until well into 2015, a view also held by many officials.

Still, a “few” Fed officials argued at a Jan. 28-29 policy meeting that increases might be needed soon to prevent the economy from overheating, according to minutes of the meeting released Wednesday. These officials were most likely from the Fed’s band of policy “hawks” who have largely failed in resisting the central bank’s easy-money policies.

The fact that the subject came up at all in January shows how the central bank’s policy debate is slowly and subtly evolving and might offer the first glimmers on a distant horizon of a Fed move. Surprising declines in the unemployment rate in recent months have forced officials to start discussing their plans for eventual rate hikes, what will impel them to act and how to guide the public about their likely course in the months ahead.”

Former Reagan budget director David Stockman recently stated in a Bloomberg interview that ” Calamity Janet (Yellen) has no clue how to wean Wall Street from the pathetic addiction to this massive stimulus, easy money that has been going on for the entire century.

I backed that up because she has spent her whole life as a monetary bureaucrat in the Fed system, and has no clue what honest capital and genuine free markets are about.

[She] believes the entire system has to be run by a monetary politburo, turning all the dials and short-term interest rates and yield curves and the entire financial system.

She is part of group-think, part of the Keynesian consensus that 12 people are running a $16 trillion economy.

They are delusional.”

Mr. Stockman minces no words.

Equities are at all time highs and interest rates artificially suppressed by the Fed remain at all time lows. The economy continues to be just strong enough to keep GDP rising and just weak enough for the Fed to keep interest rates artificially low. Something is going to have to give and at some point we are going to have a huge move in the re-pricing of assets around the globe. We are only a headline away!

 

J. Brock Hamilton
February 20, 2014