The Fed To The Rescue...Again

The Federal Reserve took another big step toward full central planning of the economy by announcing they’ll now buy individual corporate bonds.

While this reversed yesterday’s big U.S. stock sell-off, sent gold stocks into the green and erased most of gold’s losses for the day, what are the longer-term implications for the yellow metal?

Dear Fellow Investor,

Yesterday the Federal Reserve once again swung a wrecking ball into the edifice of free-market capitalism, announcing that it would begin buying bonds of individual corporations.

Put aside the compelling real-world implications of this public subsidy of private assets and the market distortions that will result. While certainly worrisome, this aspect of the move isn’t what bothers me the most.

Here’s what makes my blood boil: The very principle that free and open markets best allocate resources and determine prices has been thrown out the window. The current consensus, met with little opposition, is that centralized economic planning by bureaucrats who have been properly educated in the proper schools is necessary to correct the evils of inevitable free market excesses.

No mention that those excesses were spawned by the previous tinkering of those bureaucrats.

I call these people the “freedom but-ers.” They’re the ones at cocktail parties who say, “Of course I’m for individual liberty, but....” And then they go on to repeat the obvious exceptions to the rule, confident that you’ll naturally agree, since no one objected to the statement at their last three cocktail parties.

Most often this view is held and expounded in regard to the economy, and it is here that the advocates feel most confident, as the “free markets are fine, but...” view was essentially unopposed during their academic experience.

Because who could object to the obvious conclusion that free markets eventually go haywire, since they are reflections of the mass confusion — and greedy pursuits — of the uneducated masses?

A little freedom — just the right dosage — is fine...but too much and things get out of control.

This is the essence of the Fed’s progressive march, step by step since 1971, toward essentially complete control of the U.S. economy.

Yesterday’s move was less a step and more of a hop and a skip. Make no mistake, the Fed’s decision to nationalize the securities of a select group of private U.S. companies has crossed an important philosophical bridge.

As for the real-world effects, our friend Peter Boockvar summarized it this morning in his typically cogent fashion:

Someone needs to ask the Fed these questions, but few are. And no one to my knowledge is asking about the dangers of this unceasing progression toward central planning and the philosophical foundation it is based upon.

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The Markets React

Of course, the unstated rationale behind the move is that the U.S. financial markets, which have been explicitly pumped up by the Federal Reserve to create their vaunted “wealth effect,” were in danger of collapsing.

So the Fed was forced to scab another support onto its house of cards, this time with public purchases of private bonds.

It had its intended effect: The U.S. stock market was in the throes of yet another deep sell-off, with the Dow down over 700 points, when the Fed announced its decision. The Dow ended up 157 points yesterday and is up over 600 points as I write. (Today’s move is also being credited to a report on the efficacy of steroids in treating Covid-19 patients and a rebound in retail sales.)

Spot gold, which had its losses of around $20 halved yesterday by the Fed news, is up a few dollars as Fed Chairman Powell testifies before Congress.

As you know, as of a couple weeks ago I was predicting a soft patch for gold and silver with a stock market rally to be followed by a serious equities correction.

Frankly, everything’s moved so quickly that I’ve been right, then wrong, then right...and it’s impossible to say where that prediction stands today...or will in the next hour.

Perhaps that’s the important lesson to take away. In a world where five years of monetary stimulus can be enacted within five days, and everything is moving at warp speed, it’s futile and even dangerous to analyze short-term market moves.

This is advice I so often give but, as the past two weeks show, often fail to take myself.

The bottom line: If we maintain our gaze on the horizon, where it’s apparent that gold, silver and mining stocks will be trading at far higher levels, we’ll make better investing decisions and save ourselves a lot of grief.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference

P.S. Our weekly Gold Newsletter Podcast provides a wealth of entertaining and enlightening conversations with thought leaders in investing, economics and personal liberty.

But one often-overlooked benefit of these podcasts is our interviews with CEOs of companies in the serially-successful Discovery Group. This week’s episode features my talk with Steve Swatton, CEO of K2 Gold Corp. (KTO.V).

Our talk was timely because K2 Gold has started to move with recent exploration results and application for an expanded drill program. To hear all about it, check out these links:

CLICK HERE for the Gold Newsletter Podcast.

CLICK HERE for the latest K2 news release on the discovery of five new targets and a gold zone.