"The Federal Reserve Is Clearly Trapped"

Submitted by QTR's Fringe Finance

Friend of Fringe Finance Lawrence Lepard released his most recent investor letter this week. He gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.

Larry was kind enough to allow me to share his thoughts heading into Q2 2024. The letter has been edited ever-so-slightly for formatting, grammar and visuals.

QUARTERLY OVERVIEW 

Globally, the stock markets continued their 45-degree angle rise during the first quarter. Crude oil, and  commodities broadly, also had a stair-step rise consistently during the quarter. Gold and silver and the  miners were an interesting dichotomy. Bullion prices were flat to slightly down in January and February,  and the miners were clobbered during those early months of Q1. However, in March the price of gold  broke through the long-standing $2,070 ceiling and the miners responded, driving the Fund up by 25.4%.  Gold miner indices were down 17% in the first two months before the March move. 

Note that the gold mining stocks still have not provided any leverage to the price of gold. In fact, in the  first quarter they did not even keep pace with the increase in the price of gold. With gold up 8.1% in the  quarter, the gold mining indices were up 2%. Typically, gold miners provide 2x to 3x leverage in terms  of returns; so with gold up 8%, the miners would typically have been up 16% to 24%. This supports our  thesis that the miners are still undervalued and are going to mean revert with a vengeance as this bull  market in gold continues. The gold mining shares have a long way to go before they reflect fair value.

THE MARKETS SPEAK: GOLD BREAKS OUT

We have been waiting for a conclusive Federal Reserve loosening of financial conditions (monetary  expansion) to light a fire under our Fund’s assets. While we have seen some hints that the Fed is going in that  direction, they are sending mixed signals. In our view, the big story in Q1 was that the markets said, “OK,  we have seen enough, we know what’s coming, so let’s get going.”  

In the first quarter, the price of gold definitively broke out from its long-term price cap of ~$2,070 per ounce.  Gold’s price had bumped up against this cap four times over the past four years. Notably, gold topped out at  $1,900 in 2011 before starting a multi-year correction. Breaking through a top that had been in place for over  a decade is a big deal.

And it was not just gold. The other sound money assets have participated too. Bitcoin started the year at  $42,802 and hit an all-time high of $72,740 in early March (up 67% in the Quarter!). Silver also broke  through long-term resistance, although it has much further to go to hit an all-time high. 

Markets reflect current conditions, but more importantly, they price in future expectations. We strongly  believe that...(READ THIS FULL LETTER HERE).