Gold and Precious Metals

“Oh Jesus, make it stop!”

Yawn. Zzzzzzz…..

Take a deep breath (literally), and read the following aloud….

“At its January meeting, the Committee stated that it intends to continue to implement monetary policy in a regime in which an ample supply of reserves ensures that control over the level of the federal funds rate and other short-term interest rates is exercised primarily through the setting of the Federal Reserve’s administered rates and in which active management of the supply of reserves is not required.”

So said the US Federal Reserve, in a verbose statement issued on 20th March.


Not so fast! In fact, the latest Fed pronouncements are a big deal. Buried in the dull, financial jargon there’s just been a major change in US monetary policy.

Commas may be rationed in the Fed’s media office (take another look at the quote above), but newly-minted money no longer is.

Quantitative Easing (QE) is back on, baby!

That’s the process whereby central banks print up bucket loads of new money, which they pump into the bond markets (and even stocks, in Japan).

I’ll save you the finer points of the latest developments. But here are the highlights:

  • As of 13th March, the Fed still owned $3.8 trillion of bonds, all purchased with money that it conjured out of thin air after the global financial crisis.
  • Of that, $2.2 trillion is US treasury bonds (meaning how much the Fed has already funded government borrowing) and $1.6 trillion is mainly mortgage-backed securities, a.k.a. MBS (bonds backed with mortgage loans).
  • All those bonds are controlled within something known as SOMA, short for the “System Open Market Account”.
  • Somewhat ironically, “soma” is also the fictional drug given to people in Aldous Huxley’s dystopian novel Brave New World (1932). The daily doses were to subdue the population, dulling the pain of their totalitarian existence by preventing them from thinking or speaking freely.
  • The Fed’s SOMA is to dull the painful weight of massive debts. This allows the beasts of burden (American citizens) to endure an even higher debt load (such as by financing the almost $1 trillion a year federal budget deficit).
  • Previously, the Fed was slowly winding down its bond holdings to the tune of $30 billion a month, or $360 billion a year. That implied more than 10-years until a return to normality, when all QE money would be drained out of the system.
  • The reversal process is known as Quantitative Tightening (QT). QT involves the Fed selling bonds, or just allowing them to mature, and then eliminating the proceeds from the financial system (thus reducing the money supply).
  • The amount of QT has now been reduced to snail’s pace, or $15 billion a month. It will grind to a complete halt after September, when there will be no more QT.
  • That should leave around $3.7 trillion of bonds still on the Fed’s books.
  • As the $1.6 trillion of non-treasury bonds mature, up to $20 billion a month will be reinvested in US treasury bonds. Above that, the rest will be reinvested in more MBS.
  • That effectively means the Fed has committed to fund the Federal budget deficit to the tune of $240 billion a year, which is about a quarter of the total. It has enough maturing MBS to do this for almost seven years.
  • On top of that, there will be additional QE in future, as the banking system expands (see the Fed’s gobbledegook statement above). In other words, at least some QE (new money printing) is set to be a permanent feature of US monetary policy. We don’t yet know how much.

This is a big deal.

Originally, we were all promised that QE was a temporary, emergency measure. Now it’s just part of the furniture – an accepted and ongoing policy. How long until the European Central Bank and others do the same as the Fed?

Message to the government: don’t worry about running a huge budget deficit. The Fed’s got your back. And when that fails, helicopter money here we come. Free money for all!

If any central bank had done this before the global financial crisis, bond and currency markets would have freaked out. The dollar would have crashed and bond yields would have rocketed. But traders and investors have been mainlining monetary soma for so long now that they’re virtually inert in the face of monetary self-harm.

It’s not like this kind of thing is new. Argentina – where I live – has often done it before, using the central bank to fund government directly. Funneling the QE money through the bond market is just smoke and mirrors. The end result is the same thing. Printing money to cover government budget deficits.

Apparently, the policy makers in the US are unaware of Argentina’s high-inflation, crisis-ridden financial history…or its present. As a reminder, the Argentine rate of consumer price inflation was 50% last year. Argentina was one of the richest countries in the world a century ago. It’s no longer even close, and there’s widespread poverty. That result has been entirely self-inflicted.

The Argentine central bank no longer funds the government, after a change of regime just over three years ago. But, once it’s released, it’s hard to put the inflation genie back to sleep.

The US just took another important step on the road to Argentina. Admittedly, it’s a long road. Even with the worst will in the world, it takes decades to transform a rich country into a relatively poor one. But it’s a road nonetheless…and the potholes get bigger as you march along it.

Of course, this policy twist is good for stocks and bonds, at least in the short run. Both the S&P 500 and US treasury bond prices jumped on the news (meaning bond yields fell).

It’s also good for gold…at least in the long run. The massed electronic ranks of the poorly-armed, conscript armies of money are being force-marched towards their impending doom. Whereas gold is bullet proof, metaphorically speaking.

During the First World War (1914-1918), climbing out of the trenches to walk (not run!) towards enemy machine guns was called “going over the top”.

With the many trillions that have already been produced by the Fed, ECB, Bank of Japan and Bank of England – and with much more now on the way – I think it’s fair to say the World’s developed country central banks have also “gone over the top”.

Around 16 million people died during the four year slaughter of the First World War. As the twice-decorated British army officer and (anti) war poet Siegfried Sassoon wrote in his poem “Attack”…

“Oh Jesus, make it stop!”

Sassoon survived the carnage. But Wilfred Owen – his fellow officer, war poet and friend – didn’t make it through. He was killed in action on 4th November 1918. That was just a week before the armistice.

If you want to survive this slide into monetary derangement, it’s essential to have a substantial investment in gold. That’s preferably of the physical kind (coins or bullion).

My recommended allocation to gold remains unchanged, at 15% of any portfolio. Make sure you’ve got some, and keep it for the long run.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.