In today’s Exponential Investor

  • Challenging the narrative
  • Seeing things differently
  • Gold’s three great bull markets

Today I have a special piece of editorial from one of our wonderful paid services to share with you.

Usually, this research is reserved for paying customers, but as it’s Christmas…

And given the bearish views expressed in our last two pieces, it makes sense to share some fascinating research on one of the main safe havens investors can access today – and at very attractive prices too.

My colleague Nick Hubble, editor of Gold Stock Fortunes, our publication focused on gold mining stocks, has spotted in the markets something that most people are missing. And it’s so brilliant I couldn’t resist asking him if I could share it with you as an end-of-year treat.

I hope you find it as insightful, valuable, and interesting as I did…

A turning point for gold

Nick Hubble, Gold Stock Fortunes
Originally published on 14 September 2021

Are you getting worried about tighter monetary policy?

Inflation is out of bounds. Unemployment is low. GDP has recovered.

Surely interest rates will have to rise soon, causing the gold price to fall?

Gold failed to hit new highs in the best possible circumstances for the yellow metal to outperform, and those circumstances may now be over.

Has gold missed its moment to shine and is it doomed to decline during a new phase of tighter monetary policy?

As you’re about to discover, periods of (seemingly) tighter monetary policy have actually signalled the beginning of gold bull markets – all three of the big ones.

And, if history is anything to go by, the gold price will rise fourfold from here.

As for gold stocks… well… can you imagine?

I’m sure this sounds counterintuitive. To claim that rising interest rates and less quantitative easing (QE) are good for gold goes against what you’ve been told by the mainstream media for decades.

Well, there is plenty of counterintuitive action to be had in the market these days. But a soaring gold price during a tightening of monetary policy would actually be perfectly normal and easy to explain, for those who know their history.

This month, I’ve made it my job to set the record straight and explain why gold bull markets begin when monetary policy is tightening… appears to be tightening, I should say.

But before we get to that, a caveat.

Frame it or bin it

You’ll do one of those two things with this monthly issue in a few months’ time.

It’ll either trigger an explosion in your wealth, or lie forgotten in the dustbin of your hard drive.

You see, I’m far from convinced that central banks will be able to tighten monetary policy at all. Plenty of the investors, commentators and analysts whom I respect and follow have argued carefully and elegantly that it is impossible for central bankers to go cold turkey on stimulus now. Even the House of Lords has warned the Bank of England may already be addicted to QE.

The point is that the gold bull market signal and the analysis below might not play out at all. We might be in an age of QE infinity and negative interest rates might be more likely than positive ones in the future.

This would also be a bullish signal for gold, because it would signal a complete breakdown in the monetary order. But that’s a very different story (and not a very nice one).

So, I am not arguing that monetary policy definitely will tighten in this monthly issue. But I don’t share the complete confidence of those who claim it definitely won’t either.

Either way, it’s obvious which of the two is a more immediate concern for gold stock investors given the news you’ll be reading each day – news of the coming tighter monetary policy around the world and how this will be bad for gold.

So I dedicate this monthly issue of Gold Stock Fortunes to the inflation hawks at the Federal Reserve, European Central Bank and Bank of England, if there are any left, and to those gold investors who are getting worried about what tighter monetary policy will mean for our favourite monetary metal…

If tight central bankers really do take over, the implications for gold are immense. The beginning of a new gold bull market may soon be upon us. But first, what has everyone so worried about tighter monetary policy in the first place?

Inflation calls the central bankers’ bluff

All around the world, inflation is surging, even by the governments’ own measures.

The United States’ Personal Consumption Expenditure (PCE) index, which is viewed as a more reliable indicator of inflation than the Consumer Price Index (CPI) we usually hear about, recently rose to the highest level since 1982. The 6.5% inflation rate falls to 6.1% when you strip out volatile parts like food and energy… which is still the highest since 1983.

In Germany, inflation is now well above target and accelerating – 3.4% for August year over year is the highest level since 2008. The highest selling tabloid in Germany is all over this news, on its front page, no less. The Bundesbank predicts 5% inflation in Germany by Christmas. Frohe Weihnachten from the European Central Bank…

Germans have responded by increasing their gold purchases. In the first half of the year, German bar and coin purchases rose 35% compared to the previous six months and the rest of the world saw a 20% increase. That’s not supposed to happen in a civilised Western culture that has nothing to fear from its monetary system… but Germans know better.

For the euro area as a whole, inflation is also well above target at 3% – the highest level since 2011. The Telegraph reckons this “Eurozone inflation shock piles pressure on Lagarde” and “Prices rise at fastest pace for almost a decade this month, causing “sweaty palms” for the European Central Bank, warn economists”.

Here in the UK, the Bank of England has finally caught up with its recently retired chief economist and announced that it now expects inflation to rise to 4% by Christmas. That’d be a ten-year high. And double the 2% target.

Despite all this inflation…

Monetary policy remains extraordinarily loose

So far, central bankers have stuck to their line that inflation is transitory, for a long list of reasons. And so they’ve kept their extraordinary monetary policy in place. This amounts to a whopping level of QE and record negative interest rates in bond markets as a result.

The Federal Reserve is still purchasing a minimum of $120 billion bonds a month, which has consisted of $80 billion of Treasury notes (short-term government bonds) and $40 billion of agency mortgage-backed securities (MBS) recently. Interest rates remain at 0%.

At the European Central Bank, interest rates remain at zero and QE at a rate of €100 billion a month.

The Bank of England is expected to complete its current round of QE by injecting the remaining £50 billion by the end of this year.

This combination of inflation and QE would likely give central bankers of the past a heart attack, let alone sweaty palms.

But the stimulists aren’t getting a free ride.

Central bankers now disagree almost as much as epidemiologists 

Europe may be everyone’s favourite monetary battleground thanks to the dynamics of the European Central Bank, where the Germans share a currency and monetary policy with the Greeks. However, over in the United States, there has been just as much disagreement.

Nick Frappell, a colleague of our Hard Money Council member Shae Russell at ABC Bullion, did a great job of summing up the disagreements in a recent analysis.

He explained that the inflation hawks James Bullard and Eric Rosengren, who will join the Federal Open Market committee (FOMC – the Federal Reserve’s monetary policy setting body) in 2022, have been vocal about scaling back QE soon. Even Federal Reserve vice-chair Richard Clarida agrees on that. This quote is the most interesting one from Frappell’s analysis:

However, the broad brush and cautious approach adopted in Powell’s Jackson Hole speech could run into heavy opposition if data continues to show growth and rising prices. Seven out of 18 policymakers indicated that they want tightening to begin in 2022, according to the June ‘Dot Plots’. That number could grow as growth does and expose some serious cracks underneath the new approach to ‘Flexible’ targeting. 

President Joe Biden is even facing pressure to replace Federal Reserve chair Jerome Powell over inflation according to the Telegraph:

[…] there are powerful voices still ranged against him as inflation hits a 13-year high of 5.4pc long after the economy has regained its pre-Covid peak. Meanwhile, the Fed continues to pump $120bn (£87bn) a month into the economy through a quantitative easing programme which has doubled the size of its balance sheet to $8 trillion.

This is baloney, if you ask me. Any replacement is more likely to be more inflationary than Powell. But still, it’s in the news, so it must be true.

Bloomberg summed up the growing drama in the euro area for us: “Europe’s Waning Crisis Sparks ECB Debate on Ending Stimulus” and “Divergent views go public after consensus during recession”. Yes, in the science of economics, debate is still permitted… for now.

I won’t bore you with what Bloomberg called “a tit-for-tat assessment of the economy” between ECB hawks and doves. Each nation’s leading central banker took turns pointing out how inflation was too high or the economy too poor in their national media outlets. The fact that they’re all right and that this exposes the underlying problem with the euro was, as ever, ignored.

Piet Christiansen, chief strategist at Danske Bank, sees the background story like this: “The hawks have been very silent in the past year and a half as they have supported the ECB policy response. Now as ‘normality’ is coming back, they’re seizing the opportunity to make their voices heard again.” And they’re looking to slow down the various forms of QE, as a start.

In the UK, the Bank of England is preparing to lay out its plan to “wean” the economy off QE and normalise policy. Only one of eight policymakers voted against continuing QE at a recent meeting.

So central bank tightening is now top of the agenda, especially for gold investors. It’s still a matter of both “if” and “when”, but we’re focusing on the latter for now.

A taper tantrum for Christmas?

According to an analyst at Japanese investment bank Nomura, the European Central Bank will announce a tapering schedule in December. But relying on a Japanese bank for tighter monetary policy forecasts can make you feel like you’re watching the film Groundhog Day. Bank of Japan rates have been stuck near zero since the mid 1990s…

The vague prospect of tighter monetary policy has led to renewed fears of a taper tantrum. Back in 2013, then Federal Reserve chair Ben Bernanke surprised the markets by announcing he planned to reduce QE. All hell broke loose in financial markets, globally. And gold plunged in price too.

Will central bankers repeat this mistake? That’s the question underlying all the coverage of monetary policy today.

As you can tell from the above, central bankers are being very careful to signal well in advance when they will even begin talking about tapers, let alone doing them. The aim is to avoid a surprise for the market, which should in theory prevent large moves in response.

The same goes for actually raising interest rates – a much more distant prospect and one distinguished from ending or reducing QE.

Whatever the specifics and the timing, tighter monetary policy is what many gold investors are most worried about. The end of the loose monetary policy which will… is… was supposed to make the gold price rise during the last few months.

And you might think that tighter monetary policy means gold is going to struggle too. But the opposite is true. In fact…

Major gold bull markets occur during tightening cycles

And, more specifically, the prospect of tighter monetary policy can be a signal that a gold bull market is about to begin.

Brien Lundin, the current editor of Gold Newsletter, which has been running since 1971 (when the United States left the gold standard and gold became an investable asset), recently pointed out this simple fact in an interview with Wealthion. 

Here’s what he said, as transcribed by me, with my emphasis (and any errors) added:

These kinds of tightening moves by the Fed have in the past proven to be launching points for the metals.

You know, when the Fed actually tightened – started to tighten rates – in December of 2015, finally trying to normalise rate policy post 2008, the market bottomed for gold. Gold, really, the price declined up to that point. And we predicted in Gold Newsletter that that would provide a launching point for gold, that would provide a turn around on gold. And it did.

Indeed, US interest rates finally began ticking up in 2015 and gold surged alongside them.

The same goes for the other two major gold bull markets. Both occurred during rising interest rates.

US interest rates hit a low of 3.7% in 1971 and surged to almost 13% by 1974 as the gold price went from $35 to almost $183.

And again from 1976 to 1980, when interest rates bottomed and quadrupled to over 17%, while the gold price surged from $109 to $677.

Those are gold’s three great bull markets, as Lundin counts them anyway.

Each one occurred during a monetary policy tightening cycle.

To see what that means for the gold price, and your wealth, tune in again on Thursday, for Part II.

Until next time,

Kit Winder
Co-editor, Exponential Investor