The massive global money printing that has gone on post the financial crisis has not resulted in massive inflation as might have been expected. As Pierre Lassonde says below it’s because the banks have been sitting on the money and not lending it out.
Read on to see why Stewart Thomson believes 2018 might be the year that money velocity finally picks up due to the US central bank increasing interest rates and undertaking accelerated Quantitative Tightening (QT). Plus as a result of the Chinese One Belt One Road programme…
Money Velocity: Historic Upturn Nears
By Stewart Thomson – GracelandUpdates.com
“The Federal Reserve and other central banks have piled up huge reserves. But there is no inflation because the money is sitting within the banks and they are not lending it. Therefore, you don’t get a multiplier effect.” -Pierre Lassonde, gold expert, interviewed by Finanz and Wirtschaft News, October 2017.
Because the world’s major central banks have moved so slowly to transition from QE and rates near zero to QT and higher rates, the huge bear markets in money velocity in Western countries have not ended.
Most Western gold bugs are more focused on gold stocks than bullion, and are eagerly awaiting a turn in money velocity that will usher in a new and lasting era of inflation.
The bad news is that Janet Yellen initially lied about the pace of rate hikes. She has moved vastly slower than promised, and that’s kept money velocity (and gold stocks) in the “dumpster”.
The good news is that the US central bank finally appears ready to increase the number of rate hikes per year. The plan is for three in 2018 and perhaps four in 2019.
It’s possible that she is lying again, but I don’t think so, mainly because of progress China is making with OBOR (The gargantuan “One Belt One Road” infrastructure program).
There are rumours that Janet Yellen cut a secret deal with the Chinese government behind the back of her own Fed governors when she started hiking rates.
According to the rumour, she agreed to cut the pace of hikes because China was struggling with long-term downside manipulation of its stock market and with a very slow start to its OBOR program. She then ordered the Fed governors to agree to a slow path of rate hikes until getting the green light from China.
I don’t know if the rumour is true or not, but I do know that OBOR is the largest infrastructure spending program in the history of the world. It makes Roosevelt’s “New Deal” look like a microscopic peanut play, and it is… inflationary.
With OBOR moving forwards now and Chinese stock market rule changes implemented to prevent “robber barron” shorting, the Fed is free to move more aggressively with rate hikes and accelerated QT.
Also, the ECB (European Central Bank) is poised to make a key announcement on Thursday about QT and rate hikes. In Japan, Abe just won re-election, and the stock market has been rising while the yen is steady. That opens the door to a potential reduction in QE there.
Mainstream media focuses on the “government economy” and the “stock market economy”, but the real economy is Main Street. The health of that economy is best measured by money velocity that relates to GDP.
Horrifically, more than twenty million people are employed by the municipal, state, and federal governments in America, while only ten million people are employed in manufacturing.
This is unsustainable. Banks have loaned companies money for stock buybacks that enrich company directors. Central banks are shareholders in some of these companies. Very little capital has been allocated to business expansion, despite a modest rise in bank deposits since 2011.
US money velocity is simply a ratio measurement of how frequently a dollar is used to buy goods & services. When government gets the money and wastes it on ridiculous wars, then money velocity obviously implodes.
Odds are probably near 90% that 2018 is the year that the giant bear market in money velocity is ended by the US central bank with more rate hikes and accelerated QT.
Trump’s tax cuts will ice that cake.
When gold traded between $1500 – $1800 repeatedly in 2011 – 2012, I suggested buying the $1577 – $1523 area and selling into $1650 – $1800. After it worked three times, I noticed that many amateur investors that didn’t take action wanted to finally buy the fourth touching of that $1500 – $1550 area.
I warned that it could be a “Three strikes and you are out” situation, and so it was. In the current time frame, I notice that many gold market investors are extremely worried about the possibility of lower prices. It’s starting to remind me of the 2011-2013 situation, but this time with a huge blast to the upside that could shock investors like the downside tumble shocked them in 2013.
Related: Want to understand how to read charts? Check out Gold and Silver Technical Analysis: The Ultimate Beginners Guide
The ECB announcement on Thursday could be the key to the next move for gold, but I’ll dare to suggest that it’s vastly more important to be a buyer of any price weakness than to avoid drawdowns on existing positions. The current time and price zone will be looked back on as generational lows for both money velocity and gold stocks.
I’m not sitting on a “25 bagger” in bitcoin right now because I predicted the price would rise. If bitcoin fell to zero today, I walk out of the arena with hundreds of percent books gains that I’ve parked in cash and gold bullion.
I’m not sitting in that position because I predicted bitcoin would rise to $5000 as it has, or to my long term $500,000 target. I’m in this position because I bought bitcoin at prices where I was 100% sure it was finished and I was emotionally destroyed.
Gold bullion has a tiny fraction of the risk that bitcoin has. There’s no need to be afraid of a minor $50 – $150 an ounce decline that probably marks the end of the multi-decade money velocity bear market. That decline might not even happen, depending on what the ECB says and does on Thursday.
This is the key GDX accumulation tactics chart. With OBOR, central bank, and tax cut winds at its back, GDX and the entire gold stocks sector need to be accumulated with a golden smile on any and all price weakness, in anticipation of a major reversal in US money velocity. GDX is flirting with my $23 – $18 buy zone, and the ECB on Thursday will determine whether investor buy orders get filled, or whether the price just soars shockingly higher. Obviously, if an investor has no buy orders in place, they cannot get filled. My suggestion to all gold stock enthusiasts is to take the order placement action to ensure they are smiling during the historic upturn in US money velocity!
About the Author:
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
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