Gold Calls BS on Fed – Policy Mistake Locked In

As we previewed yesterday the US Fed last night raised rates by 0.25% to tackle rampant inflation.  Big deal right? However markets reacted strongly because the same markets who have been pricing in 7 rates hikes this year were surprised when…. the Fed agreed!! Yep, the Fed is now openly forecasting a rate hike at every one of its remaining 6 monthly meetings this year.  Buy the rumour sell the fact saw shares rip higher, the USD falling and the yield curve flattened like a pancake.  Gold called BS on it all and rallied.  The problem locally is the AUD rallied too and took all those gains…. For now…

First for context… The tag for the picture below is the last time inflation was this high the Fed’s rate was 13% (fire hose)... No ‘too little too late’ policy mistake here folks, move along, nothing to see…

In a classic yet well trodden path of jawboning it was a night of 2 halves.  The release of the Fed minutes showed their intention of 7 hikes this year and a Fed now belatedly calling both a surge in inflation (dropping ‘transitory’) and a big drop in growth – ala stagflation.

That saw everything drop, including gold, until of course Fed Chair Powell got the mic in the post meeting press conference and talked up the strength of the economy to be able to handle this and bravely declaring the probability of a recession is “not particularly elevated.”

Maybe no one told him the 5/10 yield curve inverted…


May we remind you this is the same guy who called inflation ‘transitory’, justifying not raising rates earlier.  Last night he described this as a "sudden, unexpected burst of inflation". Whilst he definitely didn’t start it, he has done his very big part in printing over $8 trillion of new USD since the GFC.  But this is “unexpected”…

Before the GFC and since the inception of the US Federal Reserve in 1913 they added just $800 billion to their balance sheet.  So around $0.8 trillion in nearly a century.  Since the GFC, in just 14 years, they have increased that over 10 times and all with freshly printed US dollars.  Now consider they only printed money, sorry implemented Quantitative Easing (QE) to use the less alarming phrase, for around 8 of those 14 years.  In other words they printed more money in each of those years than in the entire century beforehand.  Just digest that. “Unexpected”??

What the yield curves and gold’s action last night are screaming is that the market is already factoring in that they will need to reverse action after killing the market and ease again.

Coming back to the fact that AUD gold went down $22 last night whilst USD spot went up $9 lets close with Macro Business Fund’s Chief Strategist David Llewellyn-Smith’s succinct summary right now:

“It is now my base case that the global economy is late-cycle in 2022. Not 2023 nor 2024. Recella that this cycle is on speed:

  • US yields are already choking off the housing market and the giant post-COVID inventory pile is quivering as oil shocks households.
  • China is worse. Domestic demand is falling away chasing the property adjustment. OMICRON cannot be beaten without constant lockdowns and material damage to output. An external demand shock looms. It is terrified to cut rates lest CNY crashes. It will have no choice.
  • Europe is stuffed by an energy shock and war.
  • EMs are crushed by a tightening Fed and a loosening China.

Yet the Fed is cornered by runaway inflation and will tighten aggressively into all of the above. Jay Powell was unequivocal in the presser. Rates are going to rise every meeting until he aligns demand with supply and given the latter is falling then the former must too.

An end-of-cycle shock is now the base case and, yes, it will also hammer Australia in due course as asset price falls merge with a commodity price crash.

Sell the rips. Including AUD (not advice).”

i.e. AUD priced gold is looking very good indeed….