There can be little doubt that negative interest rate policies (NIRP) are now a distinct possibility after the Fed backed down from raising the Fed Funds Rate at their September meeting, having prepared markets well in advance for the event.
Those who have followed the advice of the major investment houses must be badly bruised.
The sudden end of the Fed’s ambition to raise interest rates above the zero bound, coupled with the FOMC’s minutes, which expressed concerns about emerging market economies, has got financial scribblers writing about negative interest rate policies (NIRP).
For the moment investors are in shock, seeking reassurance and keenly intent on preserving their diminishing assets, instead of reflecting on the broader economic reasons behind it.
While gold consolidated its recent gains, silver was sold down this week along with other metals and energy.
This week market relationships underwent a sea-change, with a sudden realisation that the global economy is in a deepening crisis.
On the New York Stock Exchange margin debt has hit all-time records at $500bn, roughly double that at the top of the dot-com bubble in 2000 when valuations rose to the highest ever recorded.
Crucially, the assumption in capital markets that gold is no longer money but just an asset or commodity has all but destroyed our understanding of its monetary relationships.
In the media warm-up for Wednesday’s UK budget, we were told of Britain’s poor productivity and Chancellor Osborne subsequently confirmed that his priority is to address it.
As I wrote last week, in the run-up to the half-year precious metals’ prices face a conflict between window-dressing for the lowest possible valuation, and the systemic risk that is Greece.
Hedge funds and high-frequency traders have finally forced gold into a US dollar loss this year as shown in our introductory chart, but silver is still in positive territory.
Currency devaluation is seen by nearly every macro-economist to be the cure for trade deficits. This widespread assumption is easily demonstrated to be incorrect.
The common error of confusing growth with progress goes largely unnoticed, though it permeates all macroeconomic analysis.
At its centre will be a shift of emphasis away from trade with the advanced nations, whose prospects are bound to subside towards their level of economic growth.
Markets this week have been all about renewed dollar strength, with precious metals side-lined.
There appears to be little or nothing in the monetarists’ handbook to enable them to assess the risk of a loss of confidence in the purchasing power of a paper currency.
Statistics have become very misleading: in particular we are being badly misled into believing that the US is teetering on the edge of price deflation.
Gold and silver rallied strongly last Friday and into Monday’s overnight trading (UK time) before spending the rest of the week drifting lower from initial highs to consolidate above notional support at $1200 and $17 respectively.
The US dollar continued to lose ground this week, contributing to a firmer trend for precious metals.
When interest rates are zero and it costs a bank to look after your money it becomes an unattractive asset.
Financial markets are becoming aware that the US economy is stalling, so investors increasingly take the view that with demand likely to stagnate or even fall, prices for goods and services will soften.
This week started well for gold and silver, but it turned out that the peak for both was on Easter Monday, since when prices have drifted lower.
The reason this matters is unemployment is one of the three key variables macroeconomists use to formulate policy, the other two being GDP and the rate of price inflation.
Though the Fed would deny it, it is clear from the minutes of the last Federal Open Market Committee (FOMC) meeting that a rise in interest rates has been put off indefinitely.
The Commodity Futures trading Commission’s (CFTC) Commitment of Traders Report released last Friday conveniently shows the positions of trading categories the night before the FOMC minutes were released.