Nothing Complicated, Everyone Just Believes It’s The End Of The World

That sure didn’t take long!

We wrote on Monday that the gold chart had broken down, indicating that the market believed, at the time, in the ability of central banks to print the economy through a short-term jam. Under Monday’s paradigm, the inflationary effects of the fiat money creation would end up in the gold price slowly, through a relative de-valuation of the dollar. But that was Monday’s column, based on Friday’s gold price, and it’s been one hell of a 48 hours.

Hat tip to The Deep Dive‘s Editor in Chief Jay, who did the legwork to detail shutdowns by most, if not all of the major gold producers. We make those shutdowns’ effect on supply to be one of two catalysts for the yellow metal remembering that there’s a global financial apocalypse going on here, making up for lost time, and getting back on trend where it belongs.

Gold smashed into the $1660s more quickly than it left them. The relatively low volume leaves little doubt: this is a fear trade, and it’s no wonder. There’s plenty to be scared of.

This really happened

An associate of The Deep Dive‘s West Coast field office, who has been listening to us talk the standard gold-bug script for a good 20 years, went to the bullion shop to top up his ounces today (Tuesday). When he saw that it was closed for COVID, he hustled over to the nearest branch of a certain Canadian chartered bank, because it was beginning to feel like meltdown weather.

The teller told him that, yes, they sold gold, but only to account holders, to which our field operative replied, “Alright. That seems fair. Let’s get the paperwork started.”

The teller tsked and said that she wasn’t going to let him open an account just so that he could buy gold, but he only got 1/3 of the way thorough threatening to report the whole racket, have the CDIC pull their charter, etc., when a young manager with some sense who had heard all of the commotion interceded. He worked in wealth management. Of course they’d welcome him as a client. He’s a gold bug himself, etc.

The bank’s computer was quoting gold at $1,579/ounce so our man, who knows the spot price better than the bank manager, held a perfect poker face and said that would be fine. Following the opening of the new account, further investigation revealed the price in the computer to have been an old quote, vintage March 20th. Gold was presently quoted at $1666/ounce… and they had none in stock. The manager is going to call when they get some more. No word yet on when he expects that will be.

That lack of stock may be related to some current struggles exhibited in the futures market. Ultimately, it would appear that everyone meant to turn up with actual gold is suddenly full of excuses.

Method acting: The Fed isn’t selling their buying

The second catalyst for this sudden gold move, in our estimation, is a widespread lack of faith in the Fed’s ability to properly contain this runaway collapse in fixed income securities.

Those of us who were around in 2008 remember Ben Bernanke going on television and explaining in even tones that the Federal Reserve had a plan. It knew which of these products were in trouble and, yeah, there was a lot of them. But their fundamentals were sound and by bringing the assets onto the Fed’s balance sheet, the bank could provide the liquidity necessary to put the economy back on track.

Image result for ben bernanke
“…stabilize it. With money. Sure we’ve got enough. We’re the bank.”

That scanned. It made sense. There was plenty to complain about, socialism being suddenly not such a bad idea when it benefited the banking class and such, but those objections didn’t prevent it from being able to stop a widespread collapse in the near term, and it did. It used the same Costanza-principle logic that all markets work on: It’s not a lie, if you believe it.

As Smallcap Steve told us Monday, the Fed has elected to prop up the bond market through the wholesale buying of bonds through the same ETF products that this column has been using as examples of a disturbing weakness in the bond markets for the better part of a month. And while we’re flattered to learn that Jerome Powell and his team are readers, it’s apparent that none of them have ever worked on or managed an IR desk, because they aren’t going about this in a way that inspires much confidence.

“It’s not as if I got the money back here in a safe, and I can just buy the trash bonds from Boeing and American Airlines directly! The bonds are all tangled up in ETFs! The money’s gotta go through BlackRock and Vanguard! The fine American banking institutions who securititized the whole thing in the first place! Oh don’tcha see…”

This might not have really happened

It’s as if the Fed called their broker over at Canaccord and asked about getting into the bond market, but the broker has the job because he’s someone’s idiot nephew, and he doesn’t have the faintest idea how to evaluate or even quote fixed income products. But if he passes them over to that one guy in the firm who’s always hogging the Bloomberg terminal, they’re liable to become that guy’s client before long, so he goes with what he knows, right out of the firm playbook. “You know, they make ETFs now that give you good, broad coverage on various bond classes. Best just to buy those, because that way you’ve got built-in diversity!”

Bond ETFs aren’t the raw goods. They’ve been stepped on at least once by whoever packaged them, and doubtlessly contain bonds that are not in danger of default, mixed in with the ones that are. Naturally, there’s no sense in a company not sticking their hand out when the Fed is going to spill money over the side to anyone who asks for it so, rather than trying to detangle it all and figure out what really needs saving, the bank is acting like they’re just going to buy the lot of ’em. To hell with efficiencies.

To anyone who understands that that isn’t practical or possible, the central bank’s method is telegraphing that they have no earthly idea what’s in real trouble and what isn’t, and are without a near-term means of finding out. They’re pouring cash into that bond market with a rented fire hose. Ultimately, it will inspire confidence if it works which, from our vantage, is completely backwards.

LQD closed yesterday on its first 2 day rally since October. RSI creeping up. It’s got a ways to go.

The author has no securities or affiliations related to any organization mentioned. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.