Kevin Warsh is taking over the Federal Reserve with a clear mission to kill the "easy money" policies that the Fed has used since 2008 and bring down 3.8% inflation rate.
Powell vs Warsh
The Old Way/Jerome Powell - kept a massive stockpile of bonds ($6.8 trillion balance sheet), reacted to short-term price changes, and printed money (Quantitative Easing, or QE) whenever the economy had issues.
The New Way/Kevin Warsh - wants to shrink that stockpile (Quantitative Tightening, or QT), limit how much cash is circulating in the economy (M2 Money Supply), and focus heavily on long-term stability.
To achieve that Warsh might keep interest rates steady to avoid upsetting politicians, but he will quietly tighten the economy by pulling cash out of the financial system.
1. What This Means for the US Dollar
Stronger Dollar due to Scarcity
When the Fed shrinks its balance sheet, it literally deletes dollars from the banking system. Basic supply and demand relationship
More supply (2020–2022): Fed printed trillions, dollar became less valuable.
Less supply (Warsh Era): Fed creates artificial shortage of dollars, hence more valuable.
Even if the Fed stops raising interest rates, making dollars rare makes them more valuable. Furthermore, because the Fed isn't buying bonds anymore, bond yields will rise. This will attract international investors to buy US bonds, driving up the value of the Dollar.
2. What This Means for Gold
Gold is Caught in inbetween
Gold traders are facing two massive, opposing forces.
Bad News for Gold
Gold doesn’t pay interest or dividends, you only make money if the price goes up. When the Fed steps away from the bond market, bond yields go up. If an investor can get a guaranteed, high return from a US Government bond, they are less likely to hold onto Gold. Hence downward pressure on Gold prices.
The Good News for Gold
Even if the Fed tries to cool down the economy, they can't control global events. Gold is a safe haven after all and countries will still buy Gold as insurance.
3. How to Trade XAUUSD
Watch the Balance Sheet, meaning check the Fed's weekly balance sheet report. If it's shrinking fast, expect the Dollar to jump and Gold to drop.
If a global crisis hits and oil prices spike, don't blindly bet against Gold just because the Dollar is strong. Buy the Dollar against weaker currencies, and buy Gold at the same time to protect against inflation.
Also Track Money Supply (M2) growth. If the Fed successfully keeps it locked at a slow, stable growth rate (around 6%), the Dollar’s long-term strength is guaranteed in theory - If the US economy grows its real output by about 2% to 3% a year, and the M2 grows at roughly 5% to 6%, the resulting inflation should naturally hover around a stable 2% to 3%.
Comments
Log in or sign up to join the conversation.