Nothing is Free. Especially Government Printed Money.

The Fed’s response to the Great Financial Crisis changed the world of economics forever. We live in the age of free money, which tends to sacrifice long-term economic stability for short-term reward.

Key Takeaways:

Gold is holding above its Point of Control, but needs to break through a couple of resistance lines before confirming a long-term bullish trend.
Thomas Hoenig, the Fed’s famed dissident during the accommodative monetary shift of the 2010’s, brings light to our modern monetary malaise.
Intrinsic value, limited supply, outside of the financial system – the reasons we love gold as a defensive asset.

The Fed’s Doomsday Prophet

If you haven’t yet, you should check out Christopher Leonard’s recent article in Politico News: The Fed’s Doomsday Prophet Has a Dire Warning About Where We’re Headed.

Leonard tells the story of Tom Hoenig, former president of the Federal Reserve regional bank in Kansas City. While serving on the Federal Open Market Committee (FOMC) from 1991 to 2011, Hoenig helped shape Fed monetary policy around quantitative easing and interest rates.

He was also a staunch dissident and anti-inflation hawk, constantly warning against the dangers of accommodative monetary policy. During Hoenig’s tenure, the Federal Reserve made a monumental shift toward money printing and heavy intervention in the U.S. economy. Under Ben Bernanke, the Fed printed more than $3.5 trillion between 2008 and 2014, more than the Fed’s first 95 years in existence.

As the author describes:

“This money poured through the veins of the financial system and stoked demand for assets like stocks, corporate debt and commercial real estate bonds, driving up prices across markets. Hoenig was the one Fed leader who voted consistently against this course of action, starting in 2010.”

“The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.”

“On all of these points, Hoenig was correct. And on all of these points, he was ignored. We are now living in a world that Hoenig warned about.”

The article does a fantastic job of laying out the long-term impact of easy-money policies. Leonard connects the Great Inflation of the 1970’s, the bank failures of the 1980’s, and the quantitative easing of the 2010’s to our modern monetary problems. Negative externalities can usually be delayed, but doing so only exacerbates the fundamental problem. This drives a wedge between balance sheets and economic reality (not to mention, between the mega rich and the middle class).

Gold as a Hedge

What kind of solutions exist for those who are concerned about monetary mismanagement in the upper echelons of the global financial system? Economics is everything – jobs, salaries, consumption, goods and services, political stability, global prosperity.

If the whole thing lives on shaky ground, the solution might be to allocate some assets outside the system. Nearly all assets are inextricably tied to the strength of a fiat currency – everything except precious metals (and possibly cryptocurrencies, but the jury is still out).

We love our industry because we have the opportunity to provide financial independence for thousands of retail investors. The world’s favorite yellow metal rents so much mind space because, apart from its beauty, it protects investors from inflation and other massive economic risks that lie outside their control.

With that said, let’s look at gold’s performance.

Gold above its Point of Control

The histogram on the right shows gold’s 2021 volume profile, which tracks buy and sell volume at certain price levels over this year. Gold is holding above its Point of Control, which lies at $1,788/oz. No one seems to be able to push gold outside of this range, either on the upside or downside.

On December 2nd, the 50-day moving average moved above the 200-day moving average, creating a “golden cross.” A golden cross is usually a bullish indicator, and has only occurred three times in the last three years.

The golden cross on January 16th, 2019 resulted in a 60% rise to its all-time high of $2,075/oz. The golden cross on June 24th of this year went almost nowhere.

Headed for Declining Trendline

The price is approaching the declining trendline, which has provided a ceiling several times this year. We will be watching this level as well as the $1,833 resistance line.

The European Energy Crisis

The negative externalities of free money are not confined to the United States. One of the biggest inflation stories from the past couple months has been the European energy crisis.

According to energy company S&P Global Platts, U.K. energy costs are up 35% in December. As a result of skyrocketing wholesale prices, domestic energy bills will rise an additional 45% in the spring. Inflation in the United Kingdom is expected to hit a three-decade record of 6% early next year.

The situation in the U.K. has been dubbed “the year of the squeeze.” Remind anyone of Hoenig’s warning about central bank intervention? When huge banks and investors get a taste of free money, it is extremely painful to take it away. Inflation, rising interest rates, exorbitant debt, and tax increases squeeze the life out of the financial system.

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As always, thank you so much for reading – and happy investing!