by Dave Kranzler, Investment Research Dynamics:
Yesterday (Wednesday, December 13th) the Fed signaled the end to interest rate hikes and, in so many words, implied that now the timing of rate cuts is being informally discussed. While stocks and bonds staged a rally, the precious metals sector sprinted higher. Gold and silver rose 2.4% and nearly 5%, respectively, while the mining stocks as represented by GDX soared over 6%. Across the board, the precious metals sector and mining stocks in terms of percentage price gains ran circles around the rest of the stock market. This should be the start of a long, sustained bull cycle in the precious metals sector that could take even seasoned gold bugs like me by surprise with the size of the moving coming.
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Based on the FOMC policy statement from the December FOMC meeting, combined with what I believe are the key comments from Powell’s post-FOMC media circus, for all intents and purposes the Fed has pivoted toward easing with respect to its interest rate policy. In addition, I believe there was a subtle signal – intentional or not – that points to the potential for an eventual pivot from QT to more QE. As such, I believe the Fed has triggered the next big move higher in the precious metals sector.
As an aside, I have to believe in order for the Fed to lay itself out like it did Wednesday, it must be seeing highly adverse events unfolding “behind the curtain” in the banking and economic system.
Here are the salient comments from Powell (sometimes my English major comes in handy):
“Policymakers are thinking we have done enough.” Translation: “put a fork in the rate hikes”
“We haven’t worked out if we will follow a threshold-based path for cutting rates.” Translation: “We’re already discussing the implementation of rate cuts.”
“You need to reduce restriction on the economy well before 2%.” This last statement is measured confirmation that the Fed will soon start to cut rates. But the term “restriction” is intentionally nebulous. The meaning can encompass both rate hikes and the expansion of the money supply. Rate cuts in 2024 are a foregone conclusion. However, based on the Fed’s actions this year in response to the banking crisis, I believe “reduce restriction” means that the Fed will take further action in 2024 to increase banking system liquidity though it will likely be forms that are different from overt QE.
Though the Fed reaffirmed that QT program will remain intact (for now), it has used other means to inject liquidity into the banking system. In March the $400 billion it printed to prevent even more regional banks from collapsing is one example. The Bank Term Funding Program, which increases in size almost weekly, hitting an all-time high last week, is another form of QE (the Fed takes long-maturity fixed income assets at par value from the banks in exchange for giving the banks capital – that’s QE).
In addition, the Reverse Repo Facility has declined from $2.55 trillion in December 2022 to $823 billion, or $1.7 trillion as of December 13th. While this does not affect the size of the Fed’s balance sheet, it has enabled the dissemination of that $1.7 trillion into the financial system. The facility served as a “holding tank” for a couple trillion dollars worth the over $4 trillion the Fed printed during the pandemic period.
The facility was a way to withhold that money from the financial system and real economy in order to avert even worse inflation. The Fed could incentivize the retention of funds in that facility by raising the rate it pays. Instead it has let it leak out over the last 12 months because it is needed either to help fund new Treasury debt issuance or shore up banking system liquidity. Though the CPI will be rigged to hide it, this liquidity will stimulate price inflation.
More opaque is a $500 billion bailout facility created in 2021 called the Standing Repo Facility. This facility was the successor to the repo operations that began in September 2019. Establishing it in 2021 was done to make sure that the start of bailout measures are already in place when the next big bank crisis hits. This is different from the BTFP because the BTFP is open to any and all banking institutions. The Standing Repo Facility is limited to the list of primary dealers, which are the big banks, domestic and foreign, that have been approved to help underwrite and fund Treasury debt auctions. The SRF is, in effect, a ready-made QE facility the banks determined to be systemically important.
The Fed thus has in place a couple different avenues available by which it can inject liquidity into the domestic and international banking system as needed and it can direct this liquidity at specific banks. Just recently, a little-known bank outside of Japan was added to the list of banks on the Standing Repo Facility. This is why I maintain the view that the Fed has already been engaged in subtle forms of quantitative easing.
The point I’m making is that, despite the FOMC’s affirmation that it will continue with its balance sheet reduction plan, it’s an optical illusion. The next phase of quantitative easing, also known as “money printing,” has begun and precious metals investors have been given the green light to invest aggressively in the sector.
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