Will the Fed Create Inflation This Time?

Will the Fed Create Inflation This Time_

Prices and Charts

Change from last weeks gold and silver prices

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NZD Gold at Top of Recent Trading Range

The price of gold in NZ dollars is just a tad higher than a week ago. Sitting at the top of the recent trading range. Whether priced in NZ or US dollars gold is in a multi-year bullish ascending wedge pattern. That is a bit of technical lingo which simply means the gold price has been bumping up against a horizontal resistance line overhead. While it has been steadily rising from the late 2015 lows – creating a rising support line below. Looked at together in the chart below, these 2 lines form an ascending wedge. This is a bullish pattern that more often than not results in a break out to the upside. Something that looked to be happening back in February for NZD gold. But didn’t quite eventuate. NZ Dollar Gold Chart

Silver Still Treading Water

NZD silver continues to tread water around the $22 mark and just below the 200 day moving average. So silver continues to lag gold. The odds are we will need to see a conclusive break out in the USD price of gold above $1350, before we see a breakout in silver too. Remember silver can do nothing for long periods of time, then dramatically shoot higher. It’s likely this is what silver is setting us up to do again this time. NZ Dollar Silver Chart

NZ Dollar Drops Sharply

Last week we reported how UK-based economist Andrew Hunt reported that a number of global risks were likely to require the RBNZ to cut interest rates:
“All these events have fed into the Reserve Bank of New Zealand’s calculations and Hunt says the central bank will sacrifice the New Zealand dollar – by cutting interest rates – to ensure nominal GDP growth. “If you’re a small, open economy, the easiest way to maintain GDP growth is through your currency – if your terms of trade remain quite consistent, it works very well,” he says.”
This comment of his proved very timely. Because only minutes after we sent last weeks email, the RBNZ announced that an interest rate cut is likely to be the next move they make. This was a marked change from previous announcements where the NZ central bank had said the next move could be either up or down.
“Economists believe the Official Cash Rate could be cut as soon as May or August, following the Reserve Bank’s comments last week. The RBNZ shocked the market last week by stating the next OCR move is “likely to be down”, due to weak growth here and overseas.” Source.
This announcement cut over 1 cent off the Kiwi dollar. Today the Kiwi has again dropped further on the back of worsening business confidence:
“The Institute of Economic Research’s quarterly survey of business opinion found a net 27 percent of firms expect economic conditions to deteriorate over the coming months compared with 18 percent in the last survey.” Source.
These falls this week have taken the NZ dollar back down close to the bottom of its multi month trading range. With the Kiwi also close to overbought, it might be surprising to see it fall too much further right now. But the risks of a further fall still remain… This announcement from the RBNZ may have shocked the market. But last October we stated: 
“As we’ve been pointing out for a while, we think the odds of the next move by the RBNZ being a rate cut are higher than most think.”
Even though the New Zealand dollar has been going sideways for some time, the sharp fall this week highlights the risk of a further fall. Of course gold is an excellent hedge against this risk of a further loss in value of the Kiwi dollar. See: The Number One Reason to Buy Gold in New Zealand Today NZ Dollar Chart

Need Help Understanding the Charts?

Check out this post if any of the terms we use when discussing the gold, silver and NZ Dollar charts are unknown to you:

Gold and Silver Technical Analysis: The Ultimate Beginners Guide

Continues below

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Federal Reserve Balance Sheet Reduction: Is it Over Already?

We’ve been tracking the Fed balance sheet reduction a.k.a quantitative tightening since 2017. This program of reversing quantitative easing has likely had quite an impact on global markets. On 20 March 2019 the Federal Reserve announced that there would be no further interest rate hikes in 2019. But on top of this, that the Fed would also cease its balance sheet reduction at the end of September. Source. The Fed has now set a reduction schedule of $50 billion in April and then a reduction to $35 billion for each of the next five months through September. This is an additional $225 billion in Fed tightening, which would take the balance sheet down to $3.731 trillion. This is quite a long way from their original aim of 2.9 trillion by the end of 2020. So we’ve updated our thoughts on this subject as this is quite a serious reversal.

Federal Reserve Balance Sheet Reduction: Is it Over Already?

Federal Reserve Balance Sheet Reduction: Is it Over Already? Interestingly share markets haven’t risen too dramatically since the Fed announcement (although US markets have bounced a bit more the past couple of days). Why is that a surprise? Because lower interest rates should attract more investors into the share-markets. But bond yields have fallen sharply. (More on this below). Perhaps this buying of bonds (which forces the bond yield down) is just a knee jerk reaction though? On fears that the US and global economy isn’t doing so well. We wonder if perhaps bond investors will soon come to realise that the risk of inflation is rising? Why? Because the Fed has stopped shrinking its balance sheet when the US economy is not yet doing too terribly. Any worsening will likely mean the Fed reverses course and once again starts quantitative easing. With that realisation we may then see a rise in long term interest rates (i.e. 30 year bonds). These are the rates which the Fed can’t manipulate through its bond buying schemes (the Fed can only buy the short dated bonds). Because investors should then require higher returns over 20 or 30 years if the risk of inflation is rising. So the Fed looks to be aiming to create inflation. They have stopped raising rates and will end their balance sheet reduction. Many people including us expected QE would create more widespread inflation than it did. Asset prices have definitely risen but to date we have not seen high consumer price inflation. But now the Fed has stopped its tightening even before the US economy appears to be markedly slowing. Last time the money printing was to repair the severely damaged bank balance sheets, Hence why the inflation never arrived. It simply kept the banks from failing. But this time we may see money printing kick off simply to support a weakening economy. With bank balance sheets in decent shape, this money may find its way into the general economy this time round. So we may see them get their wish and create inflation before too long. Or perhaps more likely Stagflation. See: Could Stagflation Happen Again?
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The Yield Curve Flattens Even More

As noted above, bond yields fell again on the back of the Federal Reserve announcement that there would be no more rates increases and that their balance sheet reduction was finished. As a result the yield curve flattened further and we saw more reports this past week like the one below. Capital Economics Neil Shearing points out the whole curve has already flattened substantially – and that this has typically been a reliable indicator of cyclical economic downturns, if not recessions. But as the graphic also shows it’s not only the yield curve flashing warning signs at the moment…
“…while it’s true that the yield curve doesn’t have much to say about the timing of any future downturn, this feels like an odd argument to make when the economic data are deteriorating at an alarming pace. A few months ago I remarked that we had looked at the past 30 cyclical downturns in the G7 and identified key indicators that had signalled shifts in the cycle. What’s striking is just how many of these are now flashing amber or red, both in the US but also the rest of the developed world. (See Chart.) Against this backdrop, it would be a brave investor that downplays warning signs from the bond market. Chart: Heat Map of Turning Points in Key Indicators around Cyclical Peaks (latest data) Heat Map of Global Risks Source.
Want to learn more about the yield curve and what it indicates as far as a recession and its impact on gold? Then check out…

The Yield Curve Recession Predictor: Impact on Gold?

The Yield Curve Recession Predictor: Impact on Gold?

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Low Demand for Gold in New Zealand, Australia and UK – Time to Buy?

Here in New Zealand there has been very little interest in buying gold or silver this past month. Latest reports show the demand for gold is pretty subdued in other countries too.
“Australia’s Perth Mint says it sold 9.6% more ounces of gold in March than Feb, but the first quarter of 2019 was still the weakest since at least 2015 on data compiled by Reuters, running 10.8% below Q1 2018.   BullionVault saw an upturn in private-investor sentiment last month, but UK households in particular remain shy of buying gold despite the approach of Brexit.”
Past experience tells us these times when no one is buying are often the very best times to buy. So if you want to go against the grain get in touch today.
  1. Email: orders@goldsurvivalguide.co.nz
  2. Phone: 0800 888 GOLD ( 0800 888 465 ) (or +64 9 2813898)
  3. or Shop Online with indicative pricing

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This Weeks Articles:

The Yield Curve Recession Predictor: Impact on Gold?

Wed, 3 Apr 2019 12:40 PM NZST
The best predictor of a recession we have seen is the yield curve. While the yield curve may sound like something only economists would know about and discuss, it’s actually a surprisingly simple measure. In this post we’ll cover: What is the Yield Curve? What is an Inverted Yield Curve? What Does an Inverted Yield […] The post The Yield Curve Recession Predictor: Impact on Gold? appeared first on GoldSurvival Guide.
Read More…

Federal Reserve Balance Sheet Reduction: Is it Over Already?

Tue, 2 Apr 2019 3:55 PM NZST
In September 2017 the US Federal Reserve announced that it would finally begin shrinking its $4.5 trillion balance sheet. So how has the Federal Reserve balance sheet reduction affected asset prices since then? How has the Fed stance on its balance sheet changed so far in 2019? Firstly, What is the Federal Reserve Balance Sheet […] The post Federal Reserve Balance Sheet Reduction: Is it Over Already? appeared first on Gold Survival Guide.
Read More…

UK Economist: NZ Central Bank Will Sacrifice the New Zealand Dollar

Fri, 29 Mar 2019 11:08 AM NZST
Prices and Charts Looking to sell your gold and silver? Visit this page for more information Buying Back 1oz NZ Gold 9999 Purity $1831 Buying Back 1kg NZ Silver 999 Purity $680 Gold Consolidating Very little change in the price of gold in New Zealand dollars this past week. Gold is consolidating around the $1900 […] The post UK Economist: NZ Central Bank Will Sacrifice the New Zealand Dollar appeared first on Gold Survival Guide.
Read More…

New Zealand Dollar Third Best Performing Currency Since 2001 – So Why Does it Still “Suck”?

Mon, 25 Mar 2019 6:21 PM NZST
New Zealand Dollar Third Best Performing Currency Since 2001 – So Why Does it Still “Suck”The New Zealand Dollar has been up and down over the last 18 years. It has seen a lot of volatility since 2001. Trading in a wide range, with 0.40 being the low in 2001 and at a high of 0.88 in 2014. However from the chart below we can see that the overall trend […] The post New Zealand Dollar Third Best Performing Currency Since 2001 – So Why Does it Still “Suck”? appeared first on Gold Survival Guide.
Read More…
As always we are happy to answer any questions you have about buying gold or silver. In fact, we encourage them, as it often gives us something to write about. So if you have any get in touch.
  1. Email: orders@goldsurvivalguide.co.nz
  2. Phone: 0800 888 GOLD ( 0800 888 465 ) (or +64 9 2813898)
  3. or Online order form with indicative pricing

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We look forward to hearing from you soon. Have a golden week! David (and Glenn) GoldSurvivalGuide.co.nz Ph: 0800 888 465 From outside NZ: +64 9 281 3898 email: orders@goldsurvivalguide.co.nz
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One thought on “Will the Fed Create Inflation This Time?

  1. Pingback: The RBA is Destroying The Australian Economy…and No One Cares. Is the RBNZ Destroying the New Zealand Economy Too? - Gold Survival Guide

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