The stock market starts its hissy fit and gold gets caught in the cross-fire.

April 27, 2022

Dear Fellow Investor,

It hasn’t been a good week for gold.

Actually, more than a week. As you can see on the chart below, gold was threatening to break through $2,000 again as recently as April 18th.

It hasn’t been pretty for gold bugs since then, with the metal losing about $100...and a true waterfall beginning last Thursday.

The drop in gold — and silver and mining stocks — coincided with a similar sell-off in equity markets. Stock investors have begun delivering their “hands off” message to the Fed and other central banks, and the result was a liquidity event that affected all asset classes.

So from that standpoint, I wasn’t too worried, since these kinds of situations are eventually followed by accommodation by the Fed that typically launches the metals.

In fact, gold bounced about $8 higher yesterday, while the Dow was falling over 800 points, giving me some encouragement that the broad-based flight to gold that I had been talking about was back in force.

That turned to discouragement today, as some brief follow-on strength in gold was beaten down by yet another bear attack that sent the metal down another $20.

It’s hard to be positive after this kind of shellacking...but there is some room for hope.

Things Are Moving Much More Quickly Now

As you know, I’ve been preaching that the Fed will eventually have to pull back from its rate-hike campaign for one of two reasons:

1) The stock market would force it to stop.

2) It would hit a brick wall in the form of rising costs to service the monstrously large federal debt that has been built thanks to years of over-spending and record-low interest rates.

While the first factor could come at any time, I didn’t expect it to emerge for another few months, once higher rates really began to have an impact.

And while the second factor truly is an impassable barrier for the Fed, it would take some time for the effective interest rate on the debt to adjust to the higher rates. I predict that 2% on the fed funds rate is the limit, since it would imply about $1 trillion in annual debt-service costs, but it could take about a year for those costs to come to bear.

In short, I expected we’d see the pressures on the Fed begin to have an effect sometime over the next six to 18 months.

It isn’t playing out that way.

In retrospect, I should’ve known better. Things are happening so much more quickly, and to a much greater degree, these days. Consider that once the pandemic hit, the Fed accomplished more monetary accommodation in a few weeks than it did over a few years after the 2008 financial crisis.

The lesson?

The next crisis is coming more quickly...and the reactions will be much more severe...than before.

Another lesson? Stocks, bonds and crypto are being revealed as speculative assets — not safe havens.

The U.S. dollar, despite its on-going erosion at about a 10% annual clip, remains one short-term safe haven for investors.

The other, of course, is gold.

We haven’t seen gold live up to that role over the last week or so, as the bear attacks in the paper gold markets have driven the price lower. But it is interesting to note that physical buying in the gold ETFs has remained buoyant, and even grown, despite gold’s price decline.

Smart money is seeing through the games being played on the Comex and other paper markets, and is continuing to shift allocations toward the yellow metal.

I suggest we continue to do the same.

All the best,

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