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Dear Fellow Investor,
We were wondering last week if the big stock sell-off was going to be the beginning of a crash.
Well, at one point today — when the Dow was off nearly 1,600 points — it seemed that the answer was clear.
Although the stock market rebounded from its lows, this was still a bone-jarring day. But even in the midst of the hysteria, some important observations could be made...
Both the dollar and gold rose.
Gold prices were in the green all day long. And as the stock decline gained downside momentum, gold rose even higher.
This was a clear contrast to last Friday's 666-point sell-off, during which gold lost nearly $18.
What was the difference this time?
For one thing, people were genuinely nervous. Investors were turning to both the dollar and gold from the opening bell, so it was obvious that this was a flight to safety.
That said, this was unlike the credit crisis of 2008, which was characterized by a liquidity vacuum. Back then, facing margin calls and the need to sell something, anything, to raise cash, investors broke open their figurative piggy banks and sold gold.
It didn't happen today by any means.
Also, investors began to understand that the stock crash was getting to the point where it could scare the Fed into slowing its rate-hike campaign. To wit...
The Fed may blink once again.
The implied odds for a Fed rate hike at the March FOMC meeting were about 90% last week; it's since fallen to around 75%. Just as important, the odds for hikes later this year have also plummeted.
This is in line with what I've been saying in Gold Newsletter and our Alert service: Even if the Fed stays on track with its plans, they could finish their quantitative tightening program by the end of this year.
But I fully expect that their plans will be derailed, yet again.
Ever since the Fed's initial hike in December 2015, their well-laid plans for an orderly progression of hikes has been stymied by events. A sovereign debt crisis in Europe...disappointing U.S. economic data...and, yes, stock market volatility are all factors that have scared the Fed into pausing.
There's an old adage that the stock market isn't the economy. But note, that's an old adage — not one that reflects the new reality. Or rather, the reality perceived by the Fed, which holds the so-called "wealth effect" in high regard.
If the Fed believes that rate hikes will send the stock market tumbling further, odds are they'll blink once again.
I think investors realize, as I noted in this month's Gold Newsletter, that the Fed will come to the rescue once again if we run into trouble in the markets or the greater economy. They'll do whatever's necessary, whenever necessary to cushion any major decline.
The Bernanke put underneath the market became the Yellen put, and now the markets are testing Powell to make sure he'll play ball as well.
Make no mistake, he will. The first step would be to halt the rate hikes; the second step will be to cut rates; the third step would be to return to quantitative easing.
Knowing this, investors were buying gold today.
And they were right to do so. If the Fed under Powell takes just the first step described above, it will be tremendously bullish for gold. Step two or three would send the metal to record highs.
As it was, gold gained $6.30 today, and silver did even better on a percentage basis, which was an encouraging sign.
There will be more volatility to come, in both the stock market and precious metals. My advice is to keep your focus on the bigger picture — one that's very positive for gold.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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