Fed’s Bostic hints next leg of sharp M2 expansion may be around the corner, Gold breaks $1800

<p>Gold futures climbed above $1800 level after one of the architects of the Fed’s current monetary stance, Rafael Bostik, made a less optimistic assessment of the US economic recovery than Fed Chairman Powell. Right in the midst of surprising economic updates in May and June, the head Atlanta’s Federal Reserve Bank said he sees signs that the recovery is moving into plateau. To save the room for maneuver in the future, he said that he hasn’t figured out whether it was just a pause or recovery in activity is changing regime.</p>
<p>But the most important statement, from the perspective of market impact, was the following:</p>
<p><em>“Given that possibility, to start thinking about what the next relief package should look like.”</em></p>
<p>As the latest examples of policy easing and fiscal stimulus have already shown, fiscal programs in 2020 are not only large in size but are also aggressive. In other words, the government is not just accumulating a lot of debt, but it is doing it intensively. This requires a so-called “coordination of monetary and fiscal policy” – increased supply of government bonds should be absorbed by the Fed to keep borrowing costs low. When the Fed buys Treasuries from private investors, this leads to an increase in money supply in the economy. A side effect of this process is suppression of market interest rates, the elimination of market price discovery (trading and investing turns into guessing a next Fed move), the flight of investors to the only class of assets that still have positive real yield – stocks. It is also known from macroeconomic theory that in the medium and long term, inflation path is almost solely determined by growth of money supply, so the signal from Bostic that M2 may start to rise again soon propels demand for assets which offer protection which is precisely gold:</p>
<p><img class="alignnone size-large wp-image-46737" src="http://blog.tickmill.com/wp-content/uploads/2020/07/1-6-1024×421.png" alt="" width="1024" height="421" srcset="https://blog.tickmill.com/wp-content/uploads/2020/07/1-6-1024×421.png 1024w, https://blog.tickmill.com/wp-content/uploads/2020/07/1-6-300×123.png 300w, https://blog.tickmill.com/wp-content/uploads/2020/07/1-6-768×316.png 768w, https://blog.tickmill.com/wp-content/uploads/2020/07/1-6.png 1377w" sizes="(max-width: 1024px) 100vw, 1024px" /></p>
<p>As the latest examples of policy easing and fiscal stimulus have already shown, fiscal programs in 2020 are not only large in size but are also aggressive. In other words, the government is not just accumulating a lot of debt, but it is doing it intensively. This requires a so-called “coordination of monetary and fiscal policy” – increased supply of government bonds should be absorbed by the Fed to keep borrowing costs low. When the Fed buys Treasuries from private investors, this leads to an increase in money supply in the economy. A side effect of this process is suppression of market interest rates, the elimination of market price discovery (trading and investing turns into guessing a next Fed move), the flight of investors to the only class of assets that still have positive real yield – stocks. It is also known from macroeconomic theory that in the medium and long term, inflation path is almost solely determined by growth of money supply, so the signal from Bostic that M2 may start to rise again soon propels demand for assets which offer protection which is precisely gold:</p>
<p>If you look closely at the recent gold behavior, we can see domination of bullish forces with short corrective pullbacks. There are really no expectations of a bear market in gold because there are no expectations that the key contributing factor will change the sign – i.e. the Fed stance and its pledge to cooperate with government to help the Treasury market to weather increased supply. The bias of the government to borrow more in order to soften landing of the economy is huge now and it’s unlikely that we see a U-turn in the government’s fiscal policy.</p>
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