John: I expect the Fed's next discount rate move is lower, but I'm guessing that won't happen for months (as long as possible, maybe >1 year). Reversing direction will slam many dollar bond buyers/holders with the idea that more exposure to our paper isn't such a good investment plan. China and Japan have bigger reasons (strategic, macroeconomic) than ROI to buy our paper, but they don't have to sell off USD holdings for us to hurt.
If big USD bond buyers just slow down or stop adding to their holdings for a while, the buck tumbles. What they've been willing to do in the rate stability/hike regime of the last many years doesn't tell us what they'll do in the future. China, the key player, can be expected to change its attitude about holding/buying our paper if US foreign policy moves further into collision with theirs over Taiwan, mineral rights in "our" hemisphere (or worse, Iran), and current account balance posturing by the spendthrift toward the creditor/supplier.
I've always thought the key for gold is the market's perception that the Fed is or will soon get behind the curve on inflation. Cutting rates to stave off or dilute recession, consistent with a gradual devaluation of the dollar, will turn eyes to gold. Gold will become all the more common a refuge if our trading partners engage in a tit-for-tat beggar-thy-currency response to thwart our attempt to devaluate ourselves out of as much of our pile of debt as our politicians figure they can get away with. That will send our junior PM stocks a lot higher.
Despite recent action, I don't think that is imminent. I see a lot of sorry charts among gold stocks, and I've learned to respect them. I'm waiting with lots of cash for another leg down. If it doesn't come, I have enough in junior PM stocks to be happy with another leg up. |
