Strange Moves In Gold, Federal Reserve Policy, And Fundamentals

Tyler Durden's picture

Authored by Pater Tenebrarum via,

Counterintuitive Moves

Something odd happened late in the day in Wednesday’s trading session, which prompted a number of people to mail in comments or ask a question or two. Since we have discussed this issue previously, we decided this was a good opportunity to briefly elaborate on the topic again in these pages.

A strong ADP jobs report for March was released on Wednesday, and the gold price dutifully declined ahead of it already, while the stock market surged concurrently. Later in the day, the Fed minutes were published, and their tone was definitely seen as very “hawkish”, at least by today’s standards.


Strange happenings alert!

There was quite a bit of talk about rate hikes and  – gasp! – even about ending reinvestment of funds the Fed receives when debt securities in its QE portfolio mature. The merry pranksters also bemoaned the egregious bubble their own policies have given birth to.

According to Reuters:

Most Federal Reserve policymakers think the U.S. central bank should take steps to begin trimming its $4.5 trillion balance sheet this year as long as the economic data holds up, Fed meeting minutes showed.


The minutes also showed “some participants viewed equity prices as quite high relative to standard valuation measures.” [duh…]

(emphasis added)

Here is a 15 minute candle chart encompassing Wednesday’s intra-day moves in June gold futures:

June gold futures, 15 minute candles. After at first declining in anticipation of a strong ADP report and hawkish Fed minutes, gold rebounded when said minutes were released – and actually sounded even more hawkish than expected – click to enlarge.


Talk about “balance sheet normalization” – with the added twist that “most” committee members seemed to think it was an idea whose time had come – apparently was indeed a bit of a surprise to market participants, who probably (and quite reasonably) assumed it would never happen. Not surprisingly, they have already gotten over the “shock” as of Thursday’s trading, but in this case, their initial reaction actually made sense.


An Endangered Bubble and Discounting the Future

What will happen, if the Fed actually allows its balance sheet to shrink by no longer reinvesting money it receives for maturing securities? Unless inflationary bank credit expands at a faster rate than the repayments, this will invariably result in shrinking the money supply. Essentially, it would be a reversal of QE – a part of the deposit money created by debt monetization would return to where it originally came from, namely thin air.

You have one guess what will happen to “risk assets” if and when free excess liquidity in the system begins to evaporate. Here is a hint: it will be time to wave good-bye to the bubble. Stock market traders actually had the right idea on Wednesday afternoon:


S&P 500 intra-day – the Fed minutes triggered a brief moment of quite apposite bubble doubt – click to enlarge.


Before we continue, we want to stress that we are using Wednesday’s odd market moves merely as an opportunity to illustrate an important point – we are well aware that one-day moves are usually meaningless and best categorized as “noise”. Nevertheless, these moves in a way provided an illustration of an effect of longer term relevance.

We have discussed said effect a few times in these pages before. Recall that back in 2014 – 2015, assorted Fed heads were talking incessantly about impending rate hikes, which they then kept postponing over and over again. At the same time, a whole host of gold bears in the mainstream financial media never tired of reminding everyone of the merciless decimation that was certain to be inflicted on the gold price once the Fed actually did hike rates.

Long time readers may also remember that we said to this: bring it on! Luckily they finally did bring it on in December of 2015. One day after the first rate hike, we published a final, extensive debunking of the claims made by the afore-mentioned authors with respect to gold and Fed policy in an article appropriately entitled “Gold and the Federal Funds Rate”.

As it turned out, the first rate hike coincided almost to the day with what was so far the post-2011 correction low in the USD gold price (gold bottomed much earlier in other currencies). Not only that – gold has rallied by almost 20% since then. We haven’t heard back yet from Mr. and Mrs. Pet Rock (generic name for the flood of “gold experts” no-one had ever heard of before who suddenly flooded the pages of Bloomberg, the FT, the WSJ, etc., throughout 2015).


Gold, weekly – the first rate hike so far marked the end of the bear market that started in late 2011  – click to enlarge.


To this one must consider what happens when the threat of the markets losing excess liquidity becomes manifest. Gold is potentially the greatest beneficiary of such a development (treasury bonds may benefit as well to some extent). That may indeed appear counter-intuitive at first glance… after all, higher interest rates and weaker money supply growth are traditionally held to be negative for gold.

Indeed, they are – however, it is important to look at the situation holistically and consider potential leads and lags. Traditionally the gold market is one of the  markets that are most sensitive to changes in the liquidity backdrop. It often (but not always) also looks ahead the farthest.

In other words, it is not necessarily always reacting to what is happening right now, or in the near future – at times it is discounting future events long before they happen.

Below is a recent chart by Dr. Frank Shostak of AASE showing the rate of change in the US money supply measure AMS (adjusted money supply). This is essentially a narrow version of the broad money supply TMS-2, which excludes savings deposits. That makes it more volatile than TMS-2, but it is nevertheless a quite useful measure of the money supply.


A swift collapse in the y/y growth rate of money AMS to levels last seen in 2007 – i.e., right around the time when the last bubble peaked – click to enlarge.


It may still take a while for the effects of the slowdown in money supply growth to take hold – as can be seen above, the 12-month moving average remains fairly elevated, and there is always a considerable lag between a slowdown in money supply growth and declines in asset prices and a slowdown in economic activity.

Still, we consider this chart to be the biggest warning sign for “risk assets” since the beginning of the stock market rally in early 2009.


Asymmetric Central Bank Policy

If and when free liquidity is choked off to a sufficient extent, the bubble in risk assets is definitely going to stumble. What will happen when this enormous bubble bursts? Our guess is that the entire financial and economic system will once again find itself on the very brink.

Perhaps banks will weather a systemic seizure better this time around, as a much larger percentage of their deposit liabilities consists of covered money substitutes due to QE. Moreover, they have taken quite a few measures to bolster their capital – but that is a bridge we will cross when we get there. What is important with respect to gold is this:

Gold is an asset that isn’t offset by a corresponding liability, i.e., it is not dependent on any counter-party promises.  Thus it becomes the go-to asset in times of systemic crisis. In terms of discounting the future, it also reflects the inevitable response of central banks to a bursting bubble. Keep in mind that the tightening of policy that puts an end to the further expansion of an asset bubble and the subsequent reopening of the liquidity spigots are always asymmetric.

When Paul Volcker tightened policy in 1979 to 1981, the true money supply fell by a small percentage in 1981 – but it expanded by nearly 50% y/y in 1982 after he began to lower rates. In fact, it doesn’t matter which period of tightening one compares with the subsequent period of loose monetary policy – the asymmetry is glaringly obvious every time.



Once central banks try to arrest a decline in asset prices and a contraction in aggregate economic activity, a great many of the fundamental drivers of the gold price that look neutral or even bearish at the moment will turn unequivocally bullish.

We can probably assume that market participants have learned from the experiences of the past two decades – which means that an early discounting of such future developments has become much more likely (whereas they were quite slow in responding to an obvious improvement in gold’s fundamentals in 2000– 2001).

That may also explain why the market-based measure of the “fundamental gold price” calculated by our friend Keith Weiner is currently at a far higher level than one would normally expect if one were to solely look at the macro-economic gold price drivers. What his indicator is essentially telling us is that someone is busy accumulating physical gold in the market place (reservation demand for bullion has presumably increased as well) in spite of the fact that the macro-economic fundamentals are not yet bullishly aligned.

Some market participants are probably taking out insurance against a variety of potential negative outcomes (even an unexpected surge in price inflation may be on the list of things that require guarding against). We happen to believe that the are likely to constitute what is generally known as “smart money”.

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SallySnyd's picture

Here is an interesting look at what one former Federal Reserve President had to say about the Fed's potential future policy direction:


Like other central banks, the Fed has backed itself into a policy corner..

TwelveOhOne's picture

Nowhere to go from here but-- shiny!

fx's picture

I have never understood the hype about "shifting inflation targets" as a policy tool. I mean, the BoJ keeps targeting the 2 % elusively for years and years. Do the central bankster clowns and their brainless "watchers" really want to tell me that it would make a real difference if the BoJ suddenly adopted a 5 % target? While the 2 % already remains far out of reach?

MFL5591's picture

Read what you want, the Cartel led by the Tribe is a group of shit criminals.  These articles are laughable!

Poopy's picture
Poopy (not verified) MFL5591 Apr 9, 2017 11:23 AM

 "Diversity" 4 jews = NO NON-JEW FED CHAIR IN OVER 3 DECADES

John Law Livez's picture
John Law Livez (not verified) SallySnyd Apr 8, 2017 6:47 PM

moar everything

bob_bichen's picture
bob_bichen (not verified) John Law Livez Apr 9, 2017 12:20 AM

"john Law Livez"  <<< "dailywesterner, com"  SPAMMER!

John Law Lives's picture

Thanks for your efforts, mate.  It is discouraging that ZH seems to care so little about this.

Bill of Rights's picture

Fuck the metals trade after yesterday's blatant market interference I no longer have faith or the will to continue ... I dont give a fuck if gold or silver goes to the moon... I'm out. It's been a suckers bet since 2008 and here we are nearly ten years later in the exact same spot... have fun losing . Stack it to the ceiling it means nothing...

bardot63's picture

Right.  Stick with paper and digital.  No way you can lose. 

Davidduke2000's picture

if you need the money to live on do not bother with any investment. I am in gold and silver big time as I do not need my money to live on, I even have Russian rubles .

philipat's picture

IMHO, in view of all the manipulation and corruption in the "markets", PM's will not be allowed to take off and will not do so until the sytem collapses and there is a reset. As always, again IMHO, PM's should be about 10% of investment assets as insurance for when, not if, this happens.

Davidduke2000's picture

I still prefer cash and P.M. in bullion , I lost a lot of money on the VIX because that is the only stock they hit to show that the market is worth it, so I got out and kept my gold miners  where I own a very large position in various miners some of my miners have mines in Russia, however I request half of my shares in my hand in certificates as in 1929 the brokers went bust and people lost their shares they had with the brokers, I also have a lot of gold bullion stored in large banks vaults.

philipat's picture

Yes, of course Physical metal but stored OUTSIDE the banking system is best. And yes also, the Fed/ESP chosen targets for manipulating the "markets" using their HFT friends (Citadel) are the USD/JPY pair and the VIX. It's a much less expensive way of manipulating PM and equity "markets" whereas UST's have to be bought directly by "Others" which is the ESF.

I'm not sure where in the Fed's Charter it states that manipulating markets is part of their mission and so requires not one but TWO massive trading floors in NY and Chicago?

Jimmy Jimmereeno's picture

"...requires not one but TWO massive trading floors in NY and Chicago..."

Are  you speaking of the Comex and CME respectively?  If so, it's time for you to become informed.  Physical trading floors ceased to exist several years ago.  If one trades now he trades electronically.  Furthermore, CME owns nearly all NY and Chicago platforms; they are all under one umbrella.  Regarding the FED, it has no beneficial interest in CME.

philipat's picture

If you can't be bothered to read my post I shalln't bother to respond.

SoilMyselfRotten's picture

 I also have a lot of gold bullion stored in large banks vaults.


'Take it to the bank' doesn't mean what it used to, you're one trusting sort.

3rdWorldTrillionaire's picture

He was referring to the Fed's trading floors.......

Bill of Rights's picture

I to have many ounces of gold and way to many ounce of silver ... the silver is being sold gold is staying put... I sold all my mining shares Friday ... overweight in cash for now ... I'll figure it out .

illuminatus's picture

As long as you need stuff to survive you will need money. If you have a surplus you are automatically on the roller coaster. I know you're too smart to think that cash is any safer than anything else. 

Jimmy Jimmereeno's picture

Well, you are the first ZH'er (besides me) I have encountered who has figured out the gold - silver conundrum, who admits it, and who is doing the right thing:  either outright liquidating silver or swapping it for gold as well as divorcing yourself fron the mining shares market. 

There is little to no correlation between shares/physical silver (purely speculative instruments) and gold.  Currently it's not a problem to be heavy cash (but also holding gold bullion).  Barring a major USD debauchment (inflation) that will be easily foreseen, one must be delusional to hold mining stocks and commodities (i.e. silver in this instance) in lieu of cash money.  The retail mentality that dominates all of the precious metals websites is a commodities market proxy for the stock market's odd-lotter psychology. When they are having new assholes drilled your cash position, giving you an objective perspective on market reality, will afford you a great investing perspective.

Keep cool and bon chance.

meterman's picture

Right on Jimmy boy - Sold all 3000 of my silver coins last year and never looked back - good riddance.

stacking12321's picture

I applaud your decision.
Silver won't rise til the weak hands are flushed out.

Beowulf55's picture


I think they are pretty well flushed out after 5 years.................

Justin Case's picture

Yoar stock certificates could have been put in direct registration. It enables stockholders to be directly registered on the records of the corporation in book-entry form, with no need for a physical stock certificate. Might be safer in event the certificates burn or are stolen etc. You did the right thing. You are still at risk in the event markets are closed for any extended time due to liquidity or corporate bankruptcy. Banks have the ability to seize assets for Gov't. or close for crisis. Us a private srorage facility that isn't affiliated with a bank, that way they aren't regulated by banking laws.

Metal has no third party risk and everyone knows what gold and silver are or exchange it at the bank or coin shop for the fake kind if you need supplies.

fockewulf190's picture

10% in phyzz means your willing to risk 90% of your assets now despite your belief that a systemic collapse is inevitable. I take the exact opposite view, keeping 90% in phyzz and 10% in paper, yet agree with you that the system is terminal. The cartel has done an effective job in suppressing the price, but now face increasing legal risks in the courts (Deutsche Bank), as well as risks from issueing naked short futures contracts (especially in silver) in the face of stalwart resistance from investors who are buying and holding onto their contracts instead of always selling after a cartel raid on the price as was the norm for years. OI in silver is just shy of it's all time high right now. There may be some bluff calling on those shorts upcoming.

Bill of Rights's picture

Has ZERO to do with money .... and a lot to do with it's a losing bet. Again carry on I'm just not riding the roller coaster no more.

BandGap's picture

I respect your view but taking another direction. It's your money.

Last Friday was the first time I have seen a significant drop in silver while the price of gold went up (modestly). There is a wrinkle in the fabric.

Going to stay the course. Got nothing to lose that isn't worth losing.

Scuba Steve's picture

According to your thesis ...

Why not keep selling Puts on Silver miners and keep cashing premium by laddering down?

Ride the wave baby ...


stacking12321's picture

You don't get it, do you?
It's absolutely not a losing bet, it's a 100% sure thing.
Has anything changed fundamentally since you bought it?
Did the USA get out of debt? Has the money supply been reduced at all?
The only thing that changed is that you got impatient and you gave in and believed them when they told you that you are "losing money" in silver.
There's a war of perceptions being fought to make it look like it's a losing bet.
You fell for it.

Watch the great short. Burry stuck with his position even when the market moved against him, because he knew he was right. Sometimes you take the pain and ride it out, instead of folding, when you know you're right.

creeko's picture

I own PMs not only for their intrinsic worth, but also because it's just my way of saying "fuck you!" to bankster fiat fraud.  Every ounce is a fart in their general direction. 

HungryPorkChop's picture

@Bill of Rights, I'm starting to concur as its been a suckers game for the past 8+ years.  Now looking for sh*t they can't just beotch' slap every Friday just for fun.  The only people that have profited from the shiny are 3rd world countries.  Yeah, if I lived in Brazil or Ethopia then it would make sense.

philipat's picture

Or Japan, UK, Australia or Europe, which are NOT third world countries. In fact anywhere not denominated in "the mighty dollar", which is now at an inflection point so things might change sooner than most think?

Bay of Pigs's picture

Wtf are guys talking about? Gold was $700 in 2008 and close to $1900 in 2011. I understand your frustrations but get your dates correct.

Gold and silver are at BOTTOMS now not at tops. Both are severely undervalued by any measure, massive debt, low rates, inflation, and especially geopolitical risk. Hang tight.

Bill of Rights's picture

Long time friend ... you know without any doubt I realize this , you of all people here know this ... I just don't have the will to continue.... getting older bro and my priorities are changing...

Bay of Pigs's picture

I hear you loud and clear. I've had to sell some the last couple of years myself. The PM sector is nothing but a massive crime scene.

Peace and Aloha buddy and best wishes!

Justin Case's picture

I actually paid $280.00/oz for gold and $6.30/oz for the silver.That was back in around 1984 I think. They can manage the price only short term. There is alot of labor and money involved to dig out of the ground, so if gold and silver don't keep up with the real inflation rate. miners will simply stop mining it. Many AISC are $12 to $17.00/oz now. Gold is the storage of yoar labour that can be converted to fake money when you need it. Gold is a long term investment. Trying to buy and sell to make money is difficult. Long term everone's winner. Cash not so much.

HungryPorkChop's picture

Hey Bay Of Pigs.  I concur you are correct just have lost my a$$ over the past decade in metals and then politician Trump lines his walls and cabinet with Goldman Sachs.  Ugh!  This means NOTHING changes for years outside a complete meltdown. 

Anyone can cherry pick dates so we could also make the argument that silver hit a price of $16 in 2008.  So over 9 years silver has gone from $16 to $17.50.  That's about a 1% return per year..  We could make the argument that in April 2011 gold was over $1,950 and 6 years later around $1,250.  That's about a -5% return per year.  In any event, the crooks are in control and have destroyed this market and see no signs it ends anytime in the next 4 years.  They have taken stocks that were $50 share and turned them in $8 stocks.  They've taken Juniors and bankrupted them causing people to lose everything. 

Bay of Pigs's picture

Yes. You are correct. The situation has been very bleak the last few years.

divingengineer's picture

I've taken a beating on metals too.
I'll hold on for a while. Maybe my little boy can sell them for a profit some distant day.
Or maybe they'll be illegal to own like they were between 1933 to1974.
They'll become a family heirloom in that case.

DirkDiggler11's picture

Exactly why I buy PM's, not as an investment, but as a means to store wealth that I can pass along to my 3 little ones...

Yog Soggoth's picture

If you had gold between 1933 to 74', there was still a market. Funny though, they would have to make it illegal the world over, and at that point the world would be over.

meditate_vigorously's picture

Why on earth would you buy metals as an investment?

anticultist's picture

About Long term trend in stocks, I have the Dow data to 1800's is just the inflation, monetary/labor debasement.

Gold also matches inflation pretty well. It is a form of diversification, it is a

form of insurance. Its basically insurance for the collapse of currency/government.

Gold and silver is heavily suppressed there are court cases won and fines levied for price rigging, it is called the london gold "fix".

The real free market price discovery price may be much much higher.

There are some other esoteric themes that silver will become a key strategic base material of coming hyper technology, well maybe

that is speculative.

The long term possibility in stock investment is really only, dividend reinvestment. 

Anything you hold is not yours, the retirement funds belong to gov until tax is paid on them,

they have statutes already written to confiscate, nationalize and redistribute private retirement funds for example.

Engineered situations like the 2008 stock crash to tranfer the 401ks to the bank owners are forms of 3rd party risk,

and force former middle class to use their 401k early at high tax rates, is planned middle class depopulation operations.

I used several gold ounces to save my butt in that time.


This is the 3rd party risk of communist government. There is 3rd party risk in anything called investments.

Any time generational trends like the real estate hyperinflation symptom of currency failure is entrained into the public belief system,

is prone to a secular trend change such as migrationa out of high tax states and pension failures may begin the end

of real estate "investment" generation.

Gold and silver is the only thing you can possess unencumbered privately off grid of no third party risk and is a 


For dividend growth compounding and litigation exemption I am doing the whole life insurance, for litigation exempt property

I am doing the roth equity annuity. I have not converted 401k to roth yet by paying taxes and am waiting for prices to be

down to pay less tax, but also looking at a possibility in 9 months to transfer it or part of it to roth equity annuity available to me

at age 59-1/2.

I like that the whole life and annuity are private mutuals, not wallstreet banks.

I do stock trading too but mostly my brokerage is concentated in mining stocks now and should be for 5 years if it works

how I think.

Since I started buying metals in the lowpoints of the last three years, my gold return has exceeded the 401k return.

I used my cycle calculations to buy just right, worked remarkeably. A couple times the exact low was one day after I 

bought and each time I bought again double. A couple times the lowpoint was $40 less and by buying again the next low day

my worst average was about $20 high. I didnt do that so much on silver and just continuously cost averaged silver.


Takeaction2's picture
Takeaction2 (not verified) Bill of Rights Apr 9, 2017 7:10 AM

I AGREE.....No more riding this horse into the pasture.  I am out too.  To liquidate what I have will take years....

Yog Soggoth's picture

Stay away from paper metals unless you are into guilding things. Also keep it away from other people that can lend against it, like banks. How do you think they manipulate it? Do really think they can continue doing so forever? Stackers are not in it for a quick turnaround. That would be nice but it only happens when the current sytem fails.

Doug Eberhardt's picture

It's all about the dollar. You got a move over 100.57 on Thursday and despite the missiles and bad unemployment data, gold fell after the quick fear bounce. We sold JNUG +7% and bought JDST and rode it for 5% as dollar broke 101. Went home flat.

We will jump back in JNUG this week but need to get dollar below 100.57 again (futures).

Non-Corporate Entity's picture

The US dollar awaits the effects of the EU's demise, and the outcome of the two pipelines to go through Syria. China and Russia are slowly bypassing the dollar with gold, and we could soon be drowning in a sea of legal tender. This could be one reason why Yellen's getting her sheet in order. Or maybe it's the newest audit the fed bill floating around.

Doug Eberhardt's picture

non-Corporate, yes, lots of things in play. But if dollar goes up it puts more pressure on gold and miners. So we trade accordingly and take profit. Of course I am 100% bullish gold longer term. I mean I do sell it, lol. 


Cheers to profit!