If you’re like me and you follow gold closely, you’ve been waiting for this moment for a long time. It’s the moment where the Federal Reserve finally gave up the charade of being an independent actor and the lie that gold is not an important part of the global monetary system was shattered.
And this is why now, more than ever, you should be asking yourself one simple question over and over again: “Do I have enough gold?”
For the past couple of weeks gold has been screaming that there is a problem with the physical market, that demand at current prices far outstripped available supply. The hint has been in the huge premium between the front month futures price and the spot price as gold trades in the forex markets.
It started before the end of March where the premium blew out to nearly $54 and was driven relentlessly down into the end of he month to suppress as many longs standing for delivery on the COMEX as possible.
I wrote about this that week:
And with the COMEX raising margin requirements earlier in the week, that arrested the rally in gold, forcing longs to liquidate. And since then, the price has settled back down into the $1,630’s after flirting again with $1,700.
The official story was there was, finally, a shortage of 100-ounce COMEX deliverable bars and the rules of delivery had to be changed to accept 400-ounce LBMA bars instead because those LBMA bars couldn’t be smelted down. The Swiss gold refineries are all shut down thanks to COVID-19.
That’s the official story.
I’m sure someone believes it. Since the demand for physical gold is currently off the charts. And while all of the analysts were telling us that there’s plenty of gold out there the reality is quite different.
But it only lasted through the end of the quarter, because only even-month contracts are deliverable months on the COMEX in gold. That means the April, June, August, etc., contracts are settled int physical metal while the others not necessarily so.
And the interventions worked to get the exchange through April’s delivery apparently. But it’s clear that since gold opened in April, no one believes the lie that there is enough gold on the COMEX to cover future demand.
And with this explosion of the futures price over the spot price, gold is being pulled inexorably higher by market forces. This is, frankly, music to my ears. The price-fixers on the COMEX are the same criminals using the Fed and the U.S. Treasury departments as their personal playgrounds to bail them out of their bad bets on the markets.
So, watching this racketeering operation wither in broad daylight like this is far better than anything currently playing on Netflix or Amazon Prime. This is one of the longest and most sustained and dramatic periods of backwardation in gold I’ve ever seen.
Given the backdrop of the takeover of the Federal Reserve by the Trump administration amidst unprecedented collapse of global economic activity it should, honestly, come as no surprise to anyone.
Gold Soars as Fed Goes Into Full MMT Mode
With the Fed’s announcement of its latest series of capitulations to President Donald Trump, it’s clear now that the U.S. government is in the process of buying up trillions of dollars in private assets to backstop their value.
Jim Bianco of Bianco Research, writing in Bloomberg, covered it in plain English for everyone to understand back on March 27.
To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee…
…So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.
In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades. (emphasis mine)
This, folks, is pure MMT — Modern Monetary Theory. The Fed is creating money out of thin air having bought the debt it never intends to sell from the Treasury so that it can buy whatever it wants and will have Blackrock (NYSE: BLK) be the fund manager, to make the whole thing quasi-legal.
The only functional difference between this and Lincoln’s Greenbacks of the Civil War year (1861-63) is the accounting fiction of the asset (U.S. Treasurys) on the Fed’s balance sheet. Functionally, there is zero difference.
And the funny part about this is that it was done by the so-called fiscally responsible Republican president. Now Trump is happy with his Federal Reserve Chairman, Jerome Powell. In order to save the stock market, the frackers, the municipalities, the 16 million people who have lost their jobs in the past three weeks (and possibly the stink bugs hounding my blueberry bushes), they will print whatever money is needed to forestall the cure for what ails the world — deflation.
No wonder gold jumped $75 on this news.
And still this will not quell the demand for the dollar in the near term — such is the extent of the damage done to the world economy. Such is the extent of the dollar short position in the world. On the same day the Fed finally gave up what little independence it had left, OPEC+ met to announce a 12 million barrel per day production cut and the oil markets shrugged.
Because there’s still likely between 10-12 million more barrels that have to come off the market to balance it.
No matter how much the Fed — I mean the government — prints, they won’t be able to stave off asset deflation. Trump’s obsession with the stock market being a barometer of his presidency and the economy will be his undoing in the end.
But it won’t be today. Today the markets are happy. Today the bull is back because it demands dollars to throw at stocks which will be bought at obscene prices by a broke government without a lick of scruples or common sense.
A world run by insecure madmen with access to the cookie jar will not safeguard the value of anything they are in charge of. They will panic and reach for the easiest thing that affords them the greatest comfort in the shortest time horizon.
And this is why now — more than ever — you should be asking yourself one simple question over and over again: “Do I have enough gold?”
• Money & Markets contributor Tom Luongo is the publisher of the Gold Goats ‘n Guns Newsletter. His work also is published at Strategic Culture Foundation, LewRockwell.com, Zerohedge and Russia Insider. A Libertarian adherent to Austrian economics, he applies those lessons to geopolitics, gold and central bank policy.