Jim Rickards joined Bloomberg Daybreak to discuss the geopolitical headwinds facing gold over the next several months. The Strategic Intelligence Editor delved further into the French election, what Fed policy expectations could mean and where he expects the price of gold to be headed.
When asked about the May 3 statement from the Federal Reserve he urged, “It was as expected. No one thought they were going to raise rates. I took it as hawkish, which I think is a consensus. I’ve been indicating for a while that they’re going to raise in June. The Fed is raising into weakness for the first time since 1937. This is highly unusual. Usually the Fed follows the economy. When it gets stronger, they raise rates. When it gets weaker, they cut rates. This is the first time in eighty years where they are raising into weakness.”
Rickards remarked on the Fed policy stating, “They’re doing it not because of the business cycle but because they need to play “catch up” for the fact that Bernanke should’ve raised rates in 2010-2011 and never did.”
Jim Rickards is a Wall Street veteran who spent decades working in various roles at some of the world’s biggest banks. The economist is also the New York Times bestselling author of The Road to Ruin and is considered one of the foremost economic analysts on currency wars. As a currency wars expert he has advised U.S government officials and members of the government intelligence community.
When asked over the inflation data that is currently out that indicated the Fed is not entirely behind the curve he responded, “No. But that is the point. They’re not worried about inflation. Jobs can be below seventy-five thousand a month, the economy could almost hit the breaks, you could have mild disinflation – yet they would still raise rates. That’s what I mean when I say they’re raising into weakness. They’re probably going to cause a recession by the summer.”
The Bloomberg host then asked on Rickards’ latest call that gold could hit $1,300. The economist pressed, “Gold is at an interesting pattern of what they call “higher-highs” and “lower-lows” which relates to when it gets volatile and goes up and down but is still well above the last low. Every time it goes up, it hits a higher-high and every time it goes low it hits a lower-low. The important question is, what is the catalyst for that? The Fed is tightening now, but by summer the Fed is going to have to go to easing with forward guidance… That will be the ninth flip-flop since May 2013 when Fed Chair Ben Bernanke started the taper talks.”
“Every time the Fed gets tough they slow the economy, then they back off which in February 2016, September 2015 where they back off, then gold goes up with risk on with a flip flop [cycle.]”
The interview then switched focus to offer strategic intelligence insights on the Fed rates, French elections and what it means for gold.
When the host asked about Jim Rickards’ call on upcoming global elections he remarked, “Macron is going to win [in France.] I think Mr. Moon in the South Korean election is a much bigger deal. To connect the dots on the Fed and gold in June… I am saying that the Fed is going to raise in June. They have a major Fed conference in June where they will talk about normalizing the balance sheet.”
“People are dismissing this but I think it is a huge deal. You’re talking about taking the biggest buyer of U.S treasury’s out of the market and reducing the balance sheet. These are factors that are headwinds for gold. What the Fed is going to do is get the economy at or beyond the point of a recession by summer. Then they’re going to have to reverse course. That will be very bullish for gold in the late summer and through the rest of the year.”
Bill Gross of Janus Capital Management was on Bloomberg’s program prior where he clearly stated that the Federal Reserve would never reduce the balance sheet. Rickards’ position remained stern saying, “I agree that the Federal Reserve is not going to sell securities. They could even decrease the balance sheet by doing nothing. When a Treasury bond matures the Treasury just sends you the money, that’s the opposite of money printing. When the Fed gets money it disappears. They could just reduce the balance sheet without selling a single security.”
“To give Bill Gross credit, if he’s right that they don’t reduce the balance sheet it’s because they see that this is a form of tightening and if we’re in a full on recession by summer then they’re not going to reduce the balance sheet.”
When asked by another host about the reach of the Fed and what it means for emerging markets in Asia. Rickards offers his analysis of the Fed’s path and what it means globally noting, “At least in the short run looking at June, if they maintain on the tightening path it tends to make the dollar stronger. The Bank of International Settlements (BIS) estimates that there is over $9 trillion dollars of U.S dollar denominated corporate debt in emerging markets.”
“That’s not sovereign debt, because the International Monetary Fund (IMF) can always bailout sovereign debt, that’s corporate debt which is dollar denominated. So if you have local currency earnings and you’re trying to pay off external debt while the dollar is getting stronger that makes the debt harder to pay. So this is definitely a headwind.”
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