There are several events, big events that are directly in front of the financial markets. Of course we still have to hear from the Fed today and my guess is that we do get an announcement of some sort of minor tapering of QE. As I’ve said before, I don’t think the markets will react positively after any knee jerk reactions, especially in the credit markets. I don’t think any real tapering can last more than a month without the financial markets going spastic which will lead to Bernanke coming forward with “I was just kidding, here comes QE 5 to save the day.”
The upcoming events include budget talks (when was the last time we actually had a budget?), debt ceiling debate and the Republicans will try to defund Obamacare as part or parcel of the deals. We are maybe 2 weeks out from the “sequester” possibly turning into a government shutdown. Today President Obama is speaking on these subjects and says, “I will not let the ‘full faith and credit of the United States’ to be negotiated over or endangered by the Republicans.” I see all of this as “coming to a head,” collectively and pretty much all at once. All of these negotiations will probably be occurring with the backdrop of the Fed (overtly at least) with less monetization by the Fed (what they are actually doing behind the scenes may be another thing altogether as the monetization may actually increase).
One other “backdrop” which has gotten almost no Western press at all is the energy deal recently concluded between Russia and China. In fact, I did not hear anything about this deal last week at all and it purportedly occurred on Sept. 6th. Basically, Russia is offering as much energy as China needs while China has logistically set up a payments system that would allow oil and gas to be purchased using Yuan as payment. This has HUGE ramifications as potential demand of Gulf oil could diminish and demand for dollars will definitely drop…at a time that demand is already dropping as illustrated yesterday by the TIC report showing the 4th month in a row of capital outflows.
Interestingly the TIC report showed that the only true foreign buyer of U.S. Treasuries were the Japanese. When I say “interestingly” I am alluding to the fact that the Japanese are printing and monetizing comparably far more than the U.S. is. Think about this for a moment, none of the countries who were buyers in the past are buying now, they are liquidating. The ONLY buyer of any size is Japan which is printing money out of thin air at a rate greater than anyone else on the planet. So, the biggest debtor in the world is borrowing from a nation with 240% debt to GDP, which is printing money to pay interest, printing money to purchase their own bonds and now printing money to buy U.S. Treasuries. They purchased over $52 billion worth of Treasuries in one month…please do the math on this one, annualized this is over $600 billion! …truly insane! Oh, and even with this $52 billion inflow the net was an OUTFLOW!
I will leave you with a chart that illustrates just how dirt cheap gold currently is:
Historically the price of gold in U.S. dollars has tracked very closely to the rise in our debt ceiling as a formula between how much gold we “purportedly” have compared to the total debt ceiling. Gold has since the beginnings of QE 4 broken away and far under this ratio. Looking at the chart tells me that one of two things will occur to restore the past relationship. Either the debt ceiling is lowered by some 30% (which would mean paying down debt which we have not done in 53 years since 1960) OR the price of gold will rise well above $1,900 …and then some to account for the raising of the ceiling. As a side note, if this chart has any validity then what the price of gold should be were Congress to do away with the debt ceiling and make it “unlimited?” …Unlimited is a lot!
No matter what the outcome of today’s Fed meeting or the upcoming circus events in Washington, gold is now grossly undervalued. A run up to and beyond the old highs of $1,900 is warranted and in my opinion will happen VERY quickly when it begins. Do not be fooled or shaken from your positions no matter what volatility is forced upon gold and silver. Know the true value and refuse to be shaken.