Gold Price Set for New Record High as Fed Gets Brutal Check From Bond Market
Even after going parabolic last month, the gold price is set for even higher returns with the Federal Reserve backed into a corner.
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The gold price has gone parabolic since the middle of August, it is up 10% in just the last few weeks.
It may not sound like much, but for a mammoth commodity like gold, that is a huge move. An asset that typically moves about 10% in a year, to see a return of 40% in just one year is simply mind boggling.
Well, it is to those who have been analyzing gold from the old historical lens. But given the new world order and paradigm shift, the returns add up. In fact, one can argue, even higher returns are to come.
Since the Russia-Ukraine war, most central banks outside of the western bloc have been diversifying their assets into gold, mostly out of mistrust with the institutions that can strip away their rights and privileges lest they are not aligned with the western world order.
China has been case in point, selling its U.S. treasuries and adding more gold, and so have other nations. Outside of geopolitics, this makes sense from a financial perspective, too. The debt burden in these western nations has reached such heights that there is simply no way out other than to print yet even more money to pay off their old debts.
This self-fulfilling logic has no end in sight, as now it is too big to fail. The U.S. national debt today stands close to $37 trillion, and has increased by $1.2 trillion since the debt ceiling was raised just two months ago! According to the CBO's own forecast, U.S. federal debt will reach $150 trillion by 2055 — that is about $1.6 million per American household, up from around $274,000 today. It would push the U.S. debt-to-GDP ratio to a record 169%, up from today's 123%. The pace of U.S. debt increase is at levels not seen since World War II. This is before a crisis has even emerged.
Therein comes the latest payroll report and BLS revisions.
The Fed has a dual mandate, one to keep the labor market at full employment and another to keep inflation sustainably below 2%. The labor market has shown signs of slowing down, as the past few months jobs numbers have been revised lower. On Tuesday, the U.S. labor department finally released its report showing a loss of 911,000 jobs over the past month, the largest revision in history. Even 2009 did not see this much of a cut.
About 1.7 million jobs for the last two years basically did not exist. This data needs to be taken with a pinch of salt, given President Trump's deportation push and the post-COVID world seeing less population growth. One can argue that the average breakeven rate to maintain stability is closer to zero and that payroll growth of 22,000 in August would suggest that the labor market has little to no excess capacity. So, if the Fed cut interest rates today, it would actually be boosting inflation!
But as we know, the Fed always looks in the rearview, it does not have the capacity to predict or forecast, which it should, since it is the basis for setting monetary policy for the entire world.
Today, CPI is averaging closer to 3.2%, and yet the Fed is still contemplating cutting rates. Such is the dilemma of an economy addicted to cheap money and loose monetary policy with heightened debt levels: there is only one path and that is of a world with even more debt and fiscal spending.
This environment makes bonds a hopeless investment alternative. One can argue that equities are chasing forward revenue earnings higher, but if inflation takes hold again, it can prove to be damaging to them once again, except for a handful of names.
It seems the Fed has been checkmated by the bond market as we are in a dilemma where long-term yields are actually rising globally and front end rates are falling. And that presents an even shinier future for the shiny yellow metal.
