Musings on the Federal Funds Rate and Gold
Mis à jour
TLDR: While interest rates are negative gold will be exploding in value.
I have been mulling over this chart for a while and this write up as well, almost six months, trying to find the balance between keeping it simple and fundamental and throwing in everything until tradingview limits the size of my post and I go into the comments. This is a chart that could be useful for the next decade as we test support and then see the wedge perform and interest rates explode.
First things first: The wedge resistance has held and we are starting to see our move to wedge support. This clearly has the effective federal funds rate going below zero
Second, as I noted, I cloned the last move down to estimate the fall in EFFR to assist with timing and reaching a target date. If you look at the comparison of the other two moves to support this seems a reasonable estimation of our rate of decent and target.
Thirdly, we have had a couple of people that destroyed the economy before (looking at you, Greenspan) saying there is no barrier to negative interest rates for the United States.
Finally, gold is still a long way away from its acceding triangle technical target above 1700. The gold bugs got us through consolidation and now the chartists, early trend adopters people paying attention to the economic news are going to be moving into precious metals and their derivatives.
I don't think most traders would be surprized at some sort of half mast continuation pattern emerging on golds performance. I would not even be terribly bothered by a throwback at this point, due to the fundamentals between the EFFR and gold are pretty strong.
Gold doens't have a yield or dividend, its main property is a store of value based in its intrinsic properties and so it has a pretty strong negative relationship to interest rates. Why would anyone pay to store money in a bank when, with a little operation security, they could store gold and silver for free. I literally know someone that hid his (now ex) wife's birthday presents at the bottom of her dirty laundry. She loved searching for her gifts and never found it. If you can keep your mouth shut and you live in a reasonably safe environment you can store gold and silver without a safe.
The interest rate yield curve has already inverted, soon it will hit Wall Street and then it will cascade into main street. I have been pretty bearish on the S&P, and you can see some of my linked ideas on this. You can also see the linked post to how I think Bitcoin will be going to within a few percent of 1.2K (depending on exchange) based on its price behavior.
The most controversial idea I have right now, in that it may not fit everything els, is how I think DXY, the dollar index, will perform during this recession. Based on my charting I have it appreciating because of Fiat TINA:There Is No Alternative. Gold and silver have exploded against most other fiats but only recently started to move against the dollar. Policy changes with the dollar are going to steer the boat with other fiats and so the save haven for demand may lead to the very curious situation of gold and DXY both increasing. To a certain extent it sounds like madness that US interest rates will go negative, gold will appreciate, and DXY will still go up. But, the dollar is fiat TINA.
More complicated, is the potential of a new round of quantitative easing being deployed by the United States, which leads to the United States "exporting inflation"
claudiograss.ch/2016/06/08/united-states-exports-inflation/
>In the past, international investors would gladly hold USD as a store of value or as a means to trade in American markets, but as the dollar began flooding the world economy, its charm and value shrunk, and it fell out of favor, as preferences shifted to other currencies. The unwanted, surplus dollars were thus left for many countries’ central banks to “clean up” from their markets, to preserve the balance in their local economies. When central banks are forced to intervene and to print more of their own currencies in order to buy the excess dollars, domestic interest rates go down, inflation is generated and primary commodity prices are quick to increase. The consequences of this can be seen in a global scale today, as these pressures can be amplified by and even threaten the most vital of resources: Food.
>The factors leading up to the food crisis are, of course, intricate and complex. One of the main factors is increasing populations, which is particularly prevalent in nations which lack self-sufficiency in food production and supplies and in countries with little food security. Those countries need to import basic food supplies such as grain, which have high nutritional value from countries like the US. They have therefore little bargaining power and in order to access those essential supplies, they have to sell off the dollars of their reserves, causing depreciation of their own currency and thus generating inflation.
>The first symptom of this course of “necessary evil”, is that the wages of domestic workers in those countries drop. This effect is particularly intensified when the country is heavily dependent on imports and has a weak industrial base, as is the case with most developing nations. Decreasing purchasing power ensues and the economy stagnates. Workers produce more for less, while those who hold USD receive more value for less money, and thus inflation is imported through higher prices, or in other words, lower real wages.
Of course, this isn't an instantaneous thing. QE, in part, lead to DXY breaking out of this consolidation triangle... eventually. So more QE means we export inflation and other banks need to buy dollars and then eventually spend them. It is a macroeconomic mess which is why I say its my riskiest idea.
I have been mulling over this chart for a while and this write up as well, almost six months, trying to find the balance between keeping it simple and fundamental and throwing in everything until tradingview limits the size of my post and I go into the comments. This is a chart that could be useful for the next decade as we test support and then see the wedge perform and interest rates explode.
First things first: The wedge resistance has held and we are starting to see our move to wedge support. This clearly has the effective federal funds rate going below zero
Second, as I noted, I cloned the last move down to estimate the fall in EFFR to assist with timing and reaching a target date. If you look at the comparison of the other two moves to support this seems a reasonable estimation of our rate of decent and target.
Thirdly, we have had a couple of people that destroyed the economy before (looking at you, Greenspan) saying there is no barrier to negative interest rates for the United States.
Finally, gold is still a long way away from its acceding triangle technical target above 1700. The gold bugs got us through consolidation and now the chartists, early trend adopters people paying attention to the economic news are going to be moving into precious metals and their derivatives.
I don't think most traders would be surprized at some sort of half mast continuation pattern emerging on golds performance. I would not even be terribly bothered by a throwback at this point, due to the fundamentals between the EFFR and gold are pretty strong.
Gold doens't have a yield or dividend, its main property is a store of value based in its intrinsic properties and so it has a pretty strong negative relationship to interest rates. Why would anyone pay to store money in a bank when, with a little operation security, they could store gold and silver for free. I literally know someone that hid his (now ex) wife's birthday presents at the bottom of her dirty laundry. She loved searching for her gifts and never found it. If you can keep your mouth shut and you live in a reasonably safe environment you can store gold and silver without a safe.
The interest rate yield curve has already inverted, soon it will hit Wall Street and then it will cascade into main street. I have been pretty bearish on the S&P, and you can see some of my linked ideas on this. You can also see the linked post to how I think Bitcoin will be going to within a few percent of 1.2K (depending on exchange) based on its price behavior.
The most controversial idea I have right now, in that it may not fit everything els, is how I think DXY, the dollar index, will perform during this recession. Based on my charting I have it appreciating because of Fiat TINA:There Is No Alternative. Gold and silver have exploded against most other fiats but only recently started to move against the dollar. Policy changes with the dollar are going to steer the boat with other fiats and so the save haven for demand may lead to the very curious situation of gold and DXY both increasing. To a certain extent it sounds like madness that US interest rates will go negative, gold will appreciate, and DXY will still go up. But, the dollar is fiat TINA.
More complicated, is the potential of a new round of quantitative easing being deployed by the United States, which leads to the United States "exporting inflation"
claudiograss.ch/2016/06/08/united-states-exports-inflation/
>In the past, international investors would gladly hold USD as a store of value or as a means to trade in American markets, but as the dollar began flooding the world economy, its charm and value shrunk, and it fell out of favor, as preferences shifted to other currencies. The unwanted, surplus dollars were thus left for many countries’ central banks to “clean up” from their markets, to preserve the balance in their local economies. When central banks are forced to intervene and to print more of their own currencies in order to buy the excess dollars, domestic interest rates go down, inflation is generated and primary commodity prices are quick to increase. The consequences of this can be seen in a global scale today, as these pressures can be amplified by and even threaten the most vital of resources: Food.
>The factors leading up to the food crisis are, of course, intricate and complex. One of the main factors is increasing populations, which is particularly prevalent in nations which lack self-sufficiency in food production and supplies and in countries with little food security. Those countries need to import basic food supplies such as grain, which have high nutritional value from countries like the US. They have therefore little bargaining power and in order to access those essential supplies, they have to sell off the dollars of their reserves, causing depreciation of their own currency and thus generating inflation.
>The first symptom of this course of “necessary evil”, is that the wages of domestic workers in those countries drop. This effect is particularly intensified when the country is heavily dependent on imports and has a weak industrial base, as is the case with most developing nations. Decreasing purchasing power ensues and the economy stagnates. Workers produce more for less, while those who hold USD receive more value for less money, and thus inflation is imported through higher prices, or in other words, lower real wages.
Of course, this isn't an instantaneous thing. QE, in part, lead to DXY breaking out of this consolidation triangle... eventually. So more QE means we export inflation and other banks need to buy dollars and then eventually spend them. It is a macroeconomic mess which is why I say its my riskiest idea.
Note
Hit play on the top chart and you will see that everything is progressing as charted. I am actually surprised we got full performance on the acceding triangle in gold. The wicking we see confirmed that the target was reached and shores up my idea that it is time for retracement (for the bulls) or outright reversal (for the bears).
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