Central Bank Musical Chairs Continues…. Until It Can’t

Written by Gerardo Del Real
Posted September 16, 2019

I just returned from the 2019 Beaver Creek Precious Metals Summit.

The conference was well attended, with attendance up over 30% and it was clear that capital that has been elsewhere — crypto, cannabis stocks, etc. — is now looking to position itself in the precious metals space. 

The sentiment was one of cautious optimism. The good news for you, the reader, is that despite a $1,500 gold price, most gold juniors have yet to respond and we’re in the midst of a final pullback that will give the patient amongst you a final opportunity to finalize your gold juniors list.

Remember what I told you last month:

The ECB has a bazooka ready. Here in the U.S., at least one more and likely two more rate cuts are in the cards. Expect volatility. Expect a lower, then higher gold price pushing the $1,580 mark before an ugly pullback in mid-late September that shakes out remaining weak hands.

I suspect those of us who have seen these cycles before understand that gold moved up too quickly too soon. 

Just like there wasn’t a lot of resistance from $1,400 to $1,550, there isn’t much preventing a pullback to the $1,385-$1,400 level that scares weak hands out of the space.

That pullback is underway and despite the coordinated strikes on important Saudi Arabian oil facilities, which knocked out half of the country’s oil capacity, gold needs to pull back to create new support and build the energy needed for the next run higher.

That doesn’t mean the central banks won’t do everything in their power to make sure monetary policy is as accommodative as possible. 

Last week, the ECB cut interest rates for the first time since 2016. The new rate? -0.5%. 

It also pulled out its “bazooka” and announced it is restarting its quantitative easing program.

Starting in November it will buy €20bn-worth ($22bn) of bonds a month.

The real story is not the cut, it’s the public criticism leveled at departing ECB president Mario Draghi by Germany’s central bank chief Jens Weidmann. 

10 of the 25 members of the ECB governors were against relaunching the https://www.outsiderclub.com/the-shift-is-underway/93009.

Weidmann went on to say:

"This decision to buy more public debt will make it harder for the ECB to exit from this policy. The longer (such policies) last, the more the side effects and financial stability risks of the very expansive monetary policy will grow.”

Dissent is common. Such a public admonishing is not.

Not to be outdone by Draghi, Bank of Japan (BoJ) Governor Haruhiko Kuroda responded to the ECB’s action by reiterating that cutting interest rates further into negative territory is among the bank’s policy options.

Back to the U.S., all eyes are on, you guessed it, the Fed.

The market has priced in a 90% chance that the Federal Reserve will cut rates by a quarter point this week. 

The real fun will be watching the talking heads on CNBC pick apart every word hoping to decipher what’s next.

Let me save you some time. The Fed will cut, the BOJ — which also announces its policy decision 12 hours after the Fed — will have to communicate an accommodative stance (at the very least). That’ll be followed by more stimulus from incoming ECB president Christine Lagarde and the game of central bank musical chairs continues…. until it can’t. 

All this as the U.S. figures out how to finally get its war with Iran.

Volatility is the new norm. Get used to it.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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