FOMC: Yellow Metal to Get More Precious?

Professor Lewis,

It feels like the gold market is getting "prepped" like it was last FOMC meeting. What do you think?

Thanks,
Minyan Ken

Dear Minyan Ken,

I agree. It's eerily similar, especially in the gold stocks, per the action in the GDX around the 34 area. Expectations for tomorrow’s FOMC also seem to be eerily low (much like they were for the March meeting). And also like March, I suspect we’re in for another inflationary stunt from the Fed tomorrow that may shock the market.

With the 10-year printing nearly 3% yesterday, the Fed will more than likely, at least make an attempt at pushing long-term interest rates back down, just as it did back in March.

Therefore, I suspect we’ll either see the Fed announce at Wednesday’s FOMC meeting that it's either increasing the amount of long-term Treasuries that it's monetizing, or as an Financial Times article suggested yesterday, the Fed could also guarantee to keep rates at zero for a defined period of time.

Both would likely have the immediate effect of triggering a rally in the long end of the curve, just as it did back in March. After that initial rally though, it remains to be seen what the bond market will do in the wake of such an inflationary stunt? Thus far though, the bond market has been dumb enough to play along and do the Fed’s bidding.

On the other hand, I'd expect the dollar to significantly decline in response to such a Fed stunt (just as it did back in March). The Fed and Treasury are, no doubt, counting on this as well, and its being carefully coordinated with their G20 counterparts in the wake of this weekend’s finance-minister meeting.

After all, there are only 2 options for the US: default or debase, and we’re clearly seeing the debasement road being taken. Is it a coincidence that every big slide in the dollar since November has occurred in the immediate wake of a G20 finance-minister meeting? I don’t think so. The dollar’s devaluation is clearly being managed. At some point it may become “unmanageable,” but for now, it is what it is.

Meanwhile, I'd also expect gold and gold stocks to rally sharply in response to such a Fed stunt, as will likely anything else that isn’t nailed down, from commodities to equities. Like we saw back in March though, the gold stocks (as well as other inflation/debasement beneficiaries) will outperform.

The Fed is running the printing presses. Don’t fight the Fed.

Sincerely,
Professor Lewis



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