Bullish For Gold and Reflation Trade
The Federal Reserve’s latest policy update confirms no change to the Fed’s emergency monetary policy, which is likely to be bullish for gold and reflation trade.
Here are the key points;
The Fed’s 120 billion USD of the asset (mortgage-backed securities) a month continues with no indication of when it will stop.
The current Fed fund rate of 0.25% will not be increased until 2023 the earliest based on dot plot increases in rates.
Mainstream is putting a positive spin saying Fed is hawkish, but in reality, the Fed is still accommodating putting inflation worries in the back seat with the economic recovery and full employment taking priority, which is likely to be bullish for gold and reflation trade.
Fed Chair Powell played several dovish notes. “Recovery is incomplete and risk to the economy remain” said Powell
“Employment remains well below pre-pandemic levels” he added.
“Ongoing fears of virus appear to weigh on employment growth. New strains of the virus remain a risk and the pace of vaccinations has slowed” said Powell.
The Fed is no longer pushing inflation under the carpet, which is likely to be bullish for gold and reflation trade
“Inflation has increased noticeably in recent months a 12-month change in PCE prices was 3.6% in April and likely remain elevated in coming months before moderating” said Powell.
Fed chair Powell cited higher oil prices, supply bottlenecks, and rebound in spending as the economy continues to open as key factors contributing to inflation.
But while spending rebounded sharply in the first quarter of 2021, it is still below pre-pandemic levels due to persistently high underemployment, business restrictions, and continued health risks in social settings.
I believe the type of inflation which is persisting isn’t based on demand but monetary inflation, the debasement of the currency due to ongoing QE, which is a scenario bullish for gold and reflation trade
“So, inflation has been revised up. But as these transitory effects abate, we are likely to return to our long-run goal from 3.4% this year to 2.1% next year and 2.2% in 2023” said Powell.
“But inflation could be higher than we expect due to ongoing supply constraints” he added.
Here is the part of Powell’s speech that is bullish for gold and the reflation trade
“Whenever lift of comes policy will remain highly accommodative until the economy is strong and no longer requires rates near zero.
In addition, we are continuing to increase our holding of treasury holding by at least 80B per month and agency back securities by at least 40B per month until progress has been made to maximum employment and price stability goals.
An increase in our balance sheet is easing financial conditions and providing support to our economy” said Powell.
But maximum employment could be a pipe dream. What does a check-out chick in the supermarket do when her job has been replaced by automation and when white-collar jobs are being replaced by algorithms? Reading between the lines providing support to the economy could mean universal basic income.
In other words, skyrocketing Money supply M2 will continue, which is likely to be bullish for gold and reflation trade
“Skills gap is putting a speed limit on people gaining employment” said Powell.
Indeed, so how are tens of millions of average ability skilled people going to add value in a high-tech advanced economy?
Moreover, remember Yellen’s three-dot plot increases in rates, which Fed was forced to abandon when just one rate hike sent markets into a tailspin. I don’t believe we will see rate hikes in 2023 unless Fed decides to crash the markets.