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Fed to Markets: Got Gold?

Fed to Markets: Got Gold?
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Friday, 14 June 2019 11:45 AM Current | Bio | Archive

Mr. Market started seriously pricing in the possibility of interest rate cuts.

To be fair, the signal came from the top of the economic politburo that matters: the Federal Reserve.

Speaking at an event at the Chicago Fed last Tuesday, Chairman Jerome Powell hinted that the Fed would likely cut rates to keep the economic expansion going.

With stocks still within 10 percent of their all-time highs, the soothing words may just be enough to avoid another selloff.

But it may also finally spark the final late-bull market rally that gets fearful investors to throw away the fear and embrace the greed. That’s how bull markets die—not of old age. They die on speculative greed, as in 1929, 2000, and 2008 among other dates in between.

Consequently, the market is vastly increasing the odds of a cut in interest rates by the end of the year—maybe even two.

Given that interest rates are at 2 percent, and at this stage in past market rallies they’ve been averaging closer to 4-6 percent, that’s not a huge vote of confidence on the economy right now.

In other words, the Fed is spiking the punchbowl while we’re still riding the euphoria of the near-zero percent interest rates of 2008-2015.

The job of the Fed is to be just the opposite. Fed Chairman William McChesney Martin, who headed the agency from 1951 to 1970, is best known today for saying it’s the Fed’s job to take away the punchbowl as the party gets going.

But that’s the Fed at work. Rather than try to act as a brake on the economy when it’s running hot, or getting things going when it seems cool, as designed, it just doesn’t happen that way.

The Fed is the biggest blower of bubbles—as any government agency with little political oversight and top-down decision making is apt to do. The Fed’s structure is more at home in the failed Soviet Union, not the land of the free.

But when the Fed says dance, Mr. Market does the hustle. Stocks had their second-best day of the year when Powell spoke, and continued to rally all of last week.

Powell also mentioned that the Fed’s other monetary tools—which were unusual when first used during the housing bust a decade ago—will likely see use again.

We can’t eliminate the economic cycle, as it runs in part on human fear and greed. But we can curb it and its effects if we want to. But why would we want that? It means lower stock prices now, even if it means a milder recession later.

In a market where a 5 percent pullback from the top sends fear soaring, the Fed is laying the groundwork for the kind of market where greed can potentially lead to the last, big, speculative top of this current cycle.

With thinking like that, it’s no surprise that gold has started to catch a bid in the past week. The metal is now at a two-month high, and has continued moving higher even as the markets have bounced in the past two days as well.

At $1,340 now, it may not get above our maximum buy price of $1,400 anytime soon… but it might. The Fed just gave you one huge and powerful reason to buy some market fear and inflation insurance, exactly what gold delivers.

Another possibility? Cryptocurrencies.

After dropping 80 percent peak-to-trough from 2017 to early 2019, they’re now double off their recent lows—but still have more potential upside.

Cryptocurrencies, unlike gold, aren’t being accumulated by central banks with vast reserves of the stuff already. If a central bank wants to sell their gold reserves and send prices plummeting, they can do so. That’s not the case with bitcoin, litecoin, ripple, or any of the other widely-held tokens out there.

It’s not as attractive as it was a few months ago when I was pounding the table on the opportunity, but relative to the increasing risks in the economy and the Fed’s sudden interest in cutting interest rates, it looks like one of the better bets to avoid those big, nasty monetary risks.

This isn’t the end of the long-running bull market rally in stocks. But it may be the beginning of the end. A small move to defensive assets like gold, and a speculative bet in the crypto space, may be a solid opportunity here.

Whenever there’s a rush in the market, figuring out the suppliers can often show you a better place to make profits. That’s why the best profits ahead may not be in one of the dozens of companies working on self-driving cars, but on companies that supply the parts like Micron Technology (MU).

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2019 Newsmax Finance. All rights reserved.

   
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Mr. Market started seriously pricing in the possibility of interest rate cuts.
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2019-45-14
Friday, 14 June 2019 11:45 AM
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