Fed QE Taper And Gold

And realistically how high is the USDX likely to climb on the mere slowing of the Fed’s colossal money-supply growth? This leading dollar benchmark has hit major resistance around 93 several times so far in 2021 including this week. So far this year the USDX has averaged about 91.5. Dollar bulls abound, with plenty arguing that the USDX should mean revert back to 2019 levels where it averaged a much-higher 97.4.

That seems one heck of an optimistic stretch though, especially if Fed monetary policy is really a major driver of the dollar’s fortunes. This year the federal funds rate is going to average sub-0.1%, ZIRP reigns. Not only does the US dollar have no nominal yield, but its real yield is deeply negative due to the colossal headline inflation the Fed’s radical money printing has unleashed. ZIRP will prevail for almost all of 2022 too.

In 2019 pre-pandemic-monetary-deluge when the USDX was much higher, the federal funds rate was also way higher averaging almost 2.2%! And real yields then were slightly positive with much lower inflation. There were also far fewer dollars in existence in 2019, making them more valuable. That year the Fed’s balance sheet averaged $3,931b. So far in 2021 it has literally doubled that averaging $7,879b!

With vastly more dollars now than in 2019, and nominal and real yields way lower and negative, why on earth should the USDX rally on the Fed just slowing its money-supply growth? Far more logical would be for the wildly-oversupplied US dollar to reverse lower to resume its 2020 downtrend and plumb fresh new depths. While actual Fed QT or a new rate-hike cycle would be dollar-bullish, they aren’t on the table today.

So I’d argue this year’s US-dollar upside on Fed tightening has likely already mostly run its course. The Fed’s balance sheet will continue surging into mid-2022, and that’s if the FOMC actually carries through on fully tapering QE4. The Fed isn’t even tightening at least until the end of next year, it is just slowing the pace of easing. This remains very dollar-bearish fundamentally, which of course is great news for gold.

The gold-futures speculators fleeing in response to sharp USDX rallies on perceived Fed tightening has probably already largely exhausted their selling potential. They need to normalize their excessively-bearish bets, which means big buying that will catapult gold much higher. The gold miners’ stocks will be the main beneficiaries of gold recovering, as they tend to leverage their metal’s upside by at least 2x to 3x.

The bottom line is the Fed tapering QE4 isn’t bearish for gold at all. Slowing extreme money printing is a far cry from actual Fed tightening. The FOMC isn’t even considering unwinding QE monetary excesses through QT or launching a new rate-hike cycle. Even if the Fed carries through on QE tapering, money-supply growth will remain fast into the middle of next year. And the FOMC’s tapering plans could be derailed.

A big stock-market selloff or intense political pressure to monetize Democrats’ huge deficit spending could easily prematurely slay tapering. Whether the Fed actually finishes it or not, the dollar’s deep sub-zero real yields and recent doubling of its supply remain very bearish for this currency. So fundamentally a weaker US dollar is much more likely than a stronger one. And that would really boost gold demand and prices.

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William K. 2 months ago Member's comment

How about, instead of some slight reduction in purchaes, a "cold Turkey" Halt of the purchases, along with a friendly note to congress that they need to look elsewhere for funds, OR cut back spending. Certainly it would make waves, but tht is OK.