The price of gold went up $18, and that of silver 6 cents.
Looking at the ongoing stock market drop, someone asked us if this is “it”. So far in Q4, the stock market (S&P 500) has now lost more points than in any quarter during the great financial crisis (though so far less as a percentage). Is this it, will gold hit $10,000?
There is certainly something more serious happening than at any time post-2009. We mean: after all this time of falling rates and zero (short-term) rates, the Fed presumes to hike rates. They are trying to head something off which is not occurring. Commodity prices aren’t rising (witness the big drop in oil, again). Consumer prices, especially in some urban markets may be rising. Taxes, regulations, zoning, permitting, compliance, inspections, user fees, environmental impact studies, labor law, and litigation can push up retail prices. However, they are not a monetary phenomenon. The Fed cannot do anything about them, and should not try.
Meanwhile, everyone focuses on the effect of rising rates on the US government. They should instead look to the marginal debtor. The US government is not the marginal debtor. For a good list of candidates, one could start with all the firms that the Bank for International Settlements identified as zombies in 2015. A zombie is a corporation whose profits < interest expense. 2015 is before the Grand Interest Hike Gambit. If they were unable to service their debts even then (without borrowing more), just imagine what the change in 6-month LIBOR from 0.38% to 2.9% has done to them. Just think what it’s done to the firms that weren’t zombies then at 0.38%, but are now at 2.9%.
And this is not counting the decline in revenue to, e.g. the home builders. At higher rates, people can afford less house (assuming they want to buy a house when they see the market dropping). And move upstream to manufacturers of building products, furniture, etc.
And cars. Ford and the others are still advertising 0% financing for 72 months. We wrote this May about the increase in the cost of this subsidy to Ford–$1.4 billion or 28% of its net profit. Since that article, the cost has risen by more than another quarter billion. Ford still isn’t letting off the gas pedal, out of fear of the even-greater loss they will suffer from the drop in sales that would cause.
Even if the Fed were inclined to reverse itself immediately (which we do not see any signs of), we expect there will be some big bankruptcies and lots of smaller ones. Investors will regret moving out on the risk curve in the reach for yield, as many junk bonds default and the even the survivors incur big capital losses. The spread between junk and Treasury bonds has widened, it can widen a lot further.
But $10,000 gold? Collapse of the dollar? We don’t see it in our macroeconomic analysis—and we don’t see it in the basis spread. There is no sign of backwardation (in the USD—there is permanent backwardation in the Swiss franc). We would expect to see serious gold backwardation before a banking system or currency crisis.
Speaking of the gold basis, let’s look at the only true picture of the supply and demand fundamentals of gold and silver. But, first, here is the chart of the prices of gold and silver.
It is interesting to see a rise in scarcity (i.e. cobasis) along with fall in the price of the dollar (i.e. rise in the gold price). At least in the February contract. However, it did not occur in the Gold Continuous Basis.
The Monetary Metals Gold Fundamental Price rose $19 to $1,307.
In silver, we see the same pattern. And less. A small change in price. And a small change in scarcity.
And unlike in gold, the Monetary Metals Silver Fundamental Price fell 8 cents, to $15.11.