What Might Be Behind Today’s Gold Price Jump

Over the years, I have written occasionally about the connection between the demand for U.S. government debt and quantitative easing. My contention is straightforward.  The primary determinant for quantitative easing is not, as we are constantly told, to keep the unemployment rate down, nor is it to stimulate the economy. (I emphasize the word “primary” as opposed to the word “only”) It is to support the government debt market and keep government in business – not just in the United States but wherever it is employed.

So when you see the price of gold suddenly shoot up over $20 in a single day, these days you look in the direction of the debt market and by extension interest rates to see if that is what driving interest in the metal.

I happened to see this article yesterday (linked above), which did not get a lot of attention, and pulled the url to my desktop for future reference. I was going to use it for a blurb in our upcoming newsletter, but with today’s events I thought a quick post might be in order.

Citigroup reports that the ‘bid for U.S. Treasuries is over.” Sounds terminal and in a certain sense, it is. The commercial banks aren’t buying Treasuries, but central banks are, and according to this Asia Times article,  central banks can be fickle and unreliable. (Think of China’s exit from the U.S. Treasuries market.)

“A shift in central bank purchases,” says AT, “or currency preference, could produce a sharp rise in Treasury yields due to diminished appetite from private investors.” It’s the part about a sharp rise that will cause some squirming around the FOMC meeting table.  Such a development could upset the current plan for low and slow interest rate increases.

Attach all this to spreading worries about overall bond market liquidity and concerns, registered by some, that the Fed might be losing control of monetary policy and interest rates (once again),  and you get the feeling that the psychology underpinning the current market paradigm is getting a bit wobbly.  Alan Greenspan, for example, is warning this morning about the possibility of another taper tantrum.  To insiders, such a change amounts to a bond market standing on shaky ground and might be what’s behind the sudden surge today in the gold price.

In the absence of demand for government debt, the most logical course of action in the Keynesian pantheon of choices is to print money – or to use the more polite term reintroduce quantitative easing. What we are seeing today in the gold market could be driven by insiders who understand the connections just outlined and looking to get ahead of the next big change in monetary policy. Don’t forget too that key American corporations are taking a big balance sheet hit because of the strong dollar, Apple (the stock market’s big kahuna) being at the forefront.  There has to be some pretty strong pressure coming from corporate America on dollar policy.

That said, there has been some interesting activity in the monetary base of late with it showing some signs of moving higher thus far in 2015 – at one point up nearly 6% on the year at $4.167 trillion before coming down a bit in the last report.  The monetary base is a direct reflection of the Fed expanding its balance sheet (QE), so things behind the scenes might already be in motion though you are unlikely you will hear an announcement of such anytime soon.  In fact, an announcement, as far as I know, is not required.

Change is in the air. . . . . . . . .

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