Gold Is Exploding To All Time Highs
Summary
TLDRThe video script delves into the recent surge in gold prices, which is often misconstrued as an inflation hedge when it's actually a hedge against monetary errors and financial instability. It analyzes comments from Federal Reserve Governor Christopher Waller regarding the Fed's portfolio restructuring and quantitative tightening. The script challenges the popular notion of gold as an inflation hedge, instead positioning it as a safe-haven asset amid rising demand for safety and liquidity, potentially driven by recession risks, real estate concerns, and global economic uncertainties.
Takeaways
- 🔑 The surge in gold prices is not due to inflation concerns but rather a rising demand for safety and liquidity, signaling potential risks.
- 💰 Gold is not an effective inflation hedge; it historically performs well during periods of monetary and financial instability.
- 🗣️ Federal Reserve Governor Christopher Waller's speech sparked speculation about a reverse operation twist or future quantitative easing (QE), but he was likely just discussing mechanics of an ideal portfolio.
- 📊 Waller noted that household demand, not just hedge funds, is driving the deep appetite for U.S. Treasuries during quantitative tightening (QT).
- ⚠️ The broad and deep demand for safe and liquid assets like Treasuries and gold could indicate rising recession risks, deflation concerns, or global real estate issues.
- 📉 Treasury yields have been declining again, potentially signaling another leg lower and further demand for safety.
- 🌍 Global factors, such as China's real estate problems, may be contributing to the increased craving for safe-haven assets.
- 📈 Gold's recent rally aligns with the inverted yield curve and lower interest rates, reducing the opportunity cost of holding non-yielding bullion.
- 🤔 The analysis suggests there could be underlying risks or instability that the market is pricing in through the demand for safe assets.
- 🔮 Understanding the drivers behind the safety bid in Treasuries and gold could provide insights into potential economic or financial vulnerabilities.
Q & A
What was the main focus of Christopher Waller's speech that caused a stir in the markets?
-Waller mentioned that he would like to see the Fed shift its treasury holdings towards a larger share of shorter-dated treasuries, which sparked speculation about a possible 'reverse operation twist' or future quantitative easing (QE) program by the Fed.
Why did Waller's remarks about a potential future QE program concern the markets?
-The markets interpreted Waller's comments as a signal that the Fed might be preparing for another round of QE, which could be seen as an admission that previous QE efforts were ineffective or that the economic situation was deteriorating.
What was the main point Waller made about the demand for U.S. Treasury securities?
-Waller emphasized that the demand for U.S. Treasury securities is broad and deep, driven not just by sophisticated investors like hedge funds, but also by households and the general public, suggesting a strong appetite for safe and liquid assets.
Why is the increasing demand for safety and liquidity, as evidenced by the demand for Treasuries and gold, significant?
-The growing demand for safe and liquid assets like Treasuries and gold could signal concerns about recession risks, deflationary pressures, or other potential economic threats, which would explain the desire for safe-haven investments.
What is the misconception about gold being an inflation hedge?
-The video argues that gold is not truly an inflation hedge, but rather a hedge against gross monetary errors and financial instability. It cites examples where gold underperformed during periods of rising consumer prices, suggesting it is more a safe-haven asset than an inflation hedge.
What factors could be driving the increasing demand for safety and liquidity, as evidenced by the rising prices of gold and falling Treasury yields?
-Potential factors mentioned include recession risks, deflationary pressures, problems in the commercial real estate market, China's real estate issues, and other global economic uncertainties that could be fueling the desire for safe-haven assets.
How does the video interpret the recent behavior of gold prices and Treasury yields?
-The video suggests that the recent surge in gold prices and decline in Treasury yields are not necessarily driven by inflation concerns, but rather by a growing demand for safety and liquidity, potentially signaling broader economic risks or instability.
What is the significance of Waller's comments about the Fed's mortgage-backed securities (MBS) holdings?
-Waller stated that he doesn't want any more MBS in the Fed's portfolio, as he believes they are not a good fit, especially in the current environment. This suggests a potential shift in the Fed's asset holdings.
How does the video view the Fed's quantitative tightening (QT) program and its impact on the Treasury market?
-The video suggests that, contrary to concerns, the Fed's QT program has not disrupted the Treasury market, as there appears to be sufficient demand from various investors, including households, to absorb the supply of Treasuries as the Fed's holdings roll off.
What is the significance of the video's discussion about the 'basis trade' and hedge funds?
-The video mentions that the Fed is concerned about the risk posed by the 'basis trade' involving hedge funds buying Treasuries, but Waller's comments suggest that domestic hedge funds are not the primary buyers, alleviating some of the Fed's concerns about this specific risk.
Outlines
🔑 Federal Reserve Signals Potential Future QE and Portfolio Restructuring
This paragraph discusses comments made by Federal Reserve Governor Christopher Waller in a speech on Friday. Waller expressed a desire to shift the Fed's treasury holdings toward shorter-dated securities and mentioned the possibility of a future asset purchase program (QE). This raised speculation about the Fed's intentions, with some comparing it to the 2011 'Operation Twist' program, which was a way for the Fed to take action without appearing to do so. However, the paragraph suggests that Waller's comments may simply reflect an ideal portfolio composition for the Fed rather than signaling immediate policy changes.
🏦 Household Demand for Treasuries Mitigates Quantitative Tightening Concerns
This paragraph focuses on Waller's comments regarding the demand for U.S. Treasury securities. Waller stated that the increase in household demand for Treasuries is not driven by hedge funds but rather by actual households and nonprofit organizations. This finding reinforces the view that demand for Treasuries is broad and deep, suggesting that the pace of quantitative tightening (QT) and the Fed's balance sheet run-off is not a significant problem. Waller's interpretation is that the demand for Treasuries comes from a wide range of investors, not just sophisticated institutions, indicating a strong appetite for safe and liquid assets.
🏛 Gold as a Hedge: Misconceptions and Reality
This paragraph discusses the common misconception that gold is an inflation hedge. It argues that gold is actually a poor hedge against normal inflation or disinflation. Instead, gold's performance has historically been tied to periods of significant monetary and financial stress, such as the 1970s and the housing bubble of the 2000s. The paragraph suggests that gold's recent surge is not due to inflation concerns but rather a demand for safety and liquidity, similar to the demand for Treasuries. This demand for safe assets corresponds to lower interest rates and an inverted yield curve, indicating potential economic risks and a flight to safety.
⚠️ Rising Demand for Safety and Liquidity: Potential Causes
This paragraph explores the potential reasons behind the rising demand for safety and liquidity, as evidenced by the rally in gold prices and falling Treasury yields despite the Federal Reserve's stance on interest rates. It suggests that this demand may be driven by factors such as recession risks, deflationary pressures, commercial real estate problems, and global real estate issues, particularly in China. The paragraph posits that these risks and uncertainties are likely fueling the appetite for safe-haven assets like Treasuries and gold, indicating a potential economic slowdown or crisis on the horizon.
Mindmap
Keywords
💡Quantitative Tightening (QT)
💡Mortgage-Backed Securities (MBS)
💡Treasury Bills
💡Basis Trade
💡Reverse Operation Twist
💡Inflation Hedge
💡Safety and Liquidity
💡Inverted Yield Curve
💡Recession Risk
💡Deflationary Recession
Highlights
Gold is reaching an all-time high, which is often seen as a red flag, but it may not be related to inflation.
The recent move in gold seems to have been catalyzed by Federal Reserve Governor Christopher Waller's speech, but the focus should be on a different part of his speech related to treasuries and global bonds.
Gold is not actually an inflation hedge; it is a poor inflation hedge. Instead, it is a hedge against gross monetary errors and incompetence.
During the 1970s, gold was a hedge against inflationary circumstances caused by monetary errors, not inflation itself.
In the 1980s and 1990s, as consumer prices continued to rise, gold prices were flat or declining, showing that it does not hedge against normal inflation or disinflation.
Gold's surge in the 21st century was likely due to the housing bubble and monetary policy errors, not inflation risk.
During the pandemic, gold acted as a hedge against lockdowns until August 2020, but then declined as consumer prices rose in 2021, contradicting the inflation hedge belief.
Gold started rising in October 2022 when the yield curve heavily inverted, indicating demand for safety and lower opportunity cost of holding gold.
Waller's speech mentioned a "reverse operation twist," but this was likely just mechanics about an ideal portfolio, not a signal of future actions.
Waller recognized that quantitative tightening (QT) is not a problem because there is broad and deep demand for U.S. Treasury securities, contrary to concerns.
According to Fed data, the increased demand for Treasuries is driven by households and non-profit organizations, not just hedge funds engaged in the basis trade.
The key question is why there is such a strong demand for safety and liquidity in Treasuries and gold, which could indicate recession risk, deflationary pressures, or other global issues.
Treasury yields are falling again, potentially signaling another leg lower and further demand for safety and liquidity.
The rise in gold prices, along with falling Treasury yields, could be driven by increasing demand for safety amid recession risks, deflationary pressures, or other global concerns.
The discussion highlights the importance of understanding the true drivers behind market movements and asset prices, rather than relying on common misconceptions or surface-level narratives.
Transcripts
gold is screaming to an all-time high
which is a pretty big red flag and has
nothing to do with inflation the most
recent move seems to have been catalyzed
by Federal Reserve Governor Christopher
Waller who gave a speech last Friday but
the part of the speech that everyone has
latched on to that's not the part to
focus on that's not the one that
actually explains what's happening here
instead it was something else Waller
said that gets us closer to the actual
truth and it has to do with another big
move being made just now too and that's
in treasuries and Global bonds the
markets are telling us something is in
motion here there's Rising need to hedge
but contrary to popular perception gold
isn't actually an inflation hedge in
fact it is a poor inflation hedge so we
need to understand what it is that first
of all Waller said and most of all what
it is that gold is really about that's
what we'll talk about today in the
context of of maybe another big move
starting in the treasury market but
Christopher Waller Friday speech in New
York City it was titled thoughts on
quantitative tightening including
remarks on the paper quantitative
tightening around the globe what have we
learned it couldn't have been a more
exciting presentation in paper but what
Waller said that everyone really focused
on was in his concluding remarks he said
a couple things in his conclusion the
first one he doesn't want any more NBS
in the fed's portfolio he doesn't think
they're a good fit uh NBS especially low
prepayments in this environment a whole
bunch of stuff about MBS that's not the
issue here either instead it was what he
said about the fed's treasury Holdings
that set off this well mini Firestorm of
oh God what's really happening here what
he said was second I would like to see a
shift in treasury Holdings toward a
larger share of shorter dated treasury
Securities prior to the global financi
ccial crisis which was not Financial we
held approximately onethird of our
portfolio in treasury bills today bills
are less than 5% of our treasury
Holdings and less than 3% of our total
Securities Holdings moving toward more
treasury bills which shift the maturity
structure more toward our policy rate
the overnight federal funds rate and
allow our income and expenses to rise
and fall together as the fomc increases
and cuts the target range this approach
could also assist a future asset Pur
program because we could let the
short-term Securities roll off the
portfolio and not increase the balance
sheet so from that set that that passage
people are getting a couple things out
of it first of all he just mentioned QE
a future QE is the Fed now starting to
think about another QE in 2024 and the
other thing was what people have called
a reversed operation twist the FED would
allow its long-term bonds to roll off
and buy short-term bonds if you remember
the operation twist back in 2011 which
was itself a Reincarnation of an earlier
Twist from a long period a long time ago
back in 2011 operation twist wasn't
really about twisting the yield curve
that's what they told the public when
you have to remember the the
circumstances behind all that in
September 2011 when they announced
operation twist and voted for it the
economy had been unexpectedly weak the
banking system had fallen into a another
liquidity problem in fact they were
talking about bailing out the repo
Market dollar shortage around the rest
of the world banks on the brink just
like in 2008 and let's not forget QE QE
number two had just ended a couple
months before all of this took place so
the last thing the Federal Reserve
wanted to do though they did want to was
do another QE so soon after the the one
the run that had just ended had ended in
other words they couldn't do another qe3
so quickly because that would be an
admission that QE doesn't work which
would have been actually helpful but
they also knew they had to do something
because the situation was getting pretty
Grim what they came up with was a way to
do something which remember in the fed's
world view and how they operate doing
something and more so announcing that
they're doing something is what mon
monetary policy is supposed to be
remember Haru hio coroa from Japan it's
all about Peter Pan it's about whether
or not you get people to believe in that
you can fly
so operation twist was we don't have to
admit we're doing another QE just be
just after QE2 ended while at the same
time we're doing something we're going
to be buying some assets don't worry
about it don't ask too many questions so
in the context of Waller speech in
2024 some alarm Bells Are Ringing here
because operation twist in 2011 was a
way to do something without appearing to
be doing something so it natural to
wonder especially given the passage that
included a reference to the FED doing
another QE is that what the fed's doing
here are they doing something in the
same way as 2011 getting prepared
because there's other things going on
beneath the surface that maybe the FED
is privy to that nobody else is is this
a 2011 style scenario a reverse
operation twist just to put another spin
on doing something while that might be
something that it it sounds reasonable
and understandable to think that way but
my personal opinion is that I don't
think Waller is doing anything more than
exactly what he said in an Ideal World
this is what our Soma portfolio would
look like we wouldn't have any NBS
because MBs are cumbersome and they're
not they're not ideal for a central bank
at the same time he would like a lot
more treasury bills in the S portfolio
remember why they took treasury bills
out of the S Som portfolio it goes back
to 2019 as the Fed was rebuilding its
Bill Holdings and it led to remember we
had all that repo problems which the FED
never colle never connected to
Collateral but that also led to a do
something that isn't QE remember October
of 2019 the fed's not qe5 which was a
focused purchase on only treasury bills
because the FED didn't want to be seen
doing QE back then either they had
already started cutting rates and they
really didn't want people to start
panicking especially when we had a
recession scare inversion of the cures
and a whole bunch of repo problems so
again it's understandable what people
would make more out of what said because
every time the FED seems to do something
like this it corresponds to less than
desirable circumstances but again the
FED Tre purchased treasury bills
exclusively treasury bills in QE not qe5
but then March of 2020 they realized
what a big mistake that was and so March
of 2020 during that collateral shortage
period they stopped buying bills and
moved all of their QE elsat purchases
down the Curve
and they have been rolling off bills not
voluntarily they've rolling off bills
during its QT as well so what Waller is
basically saying is we're looking ahead
as if we think things are going to be
normal and in a ideal environment we'd
have a lot more bills and no MBS that's
pretty much all he said he did mention
about how that would affect a future QE
because the FED could then just roll off
its short-term treasury bills and use
the proceeds to to to fund their
purchases of longer term notes which
would be part of the future QE and the
reason he brought that up is because
earlier in the speech he said QE is no
longer an unconventional program it's
just part of what we do around here and
therefore from his perspective If the
Fed wants to manipulate the yield curve
down the road what better way to do it
then to roll off bills and use those
proceeds to fund purchases of long-term
rates and with the intent of getting
long-term rates to go down never mind
that all of this stuff is just nonsense
it doesn't work that way from wallers
perspective that's all he was
saying so if this is not the FED
restarting something because they're
worried about the way the world is then
what did what else did Waller say that
was act that would actually be helpful
in understanding what's going on in gold
and treasury bonds well part of his
speech was dedicated as the title made
clear to QT and one of the things that
people have been talking about with QT
ever since the which the second one in
2019 2018 and 2019 which is it was
really the second one not the first one
it was the first official one the first
official QT everybody said well without
the Federal Reserve the treasury
Market's going to blow up here
especially since deficits appear to be
rising and so part of Waller speech that
was focused on QT was well we aren't
really expecting the treasury market to
go to blow up because there is a deep
pool of buyers what Waller said was as
currently categorized the financial
account household category includes
hedge funds the Federal Reserve board is
working to segregate hedge funds in this
data set in the interim the board
publishes separate data on the balance
sheets of domestic hedge funds that's a
key key Point here using the supplement
supplemental data I find that it is not
the hedge funds that are responsible for
the increase in household market share
this means the increase is driven by the
other household investors including
actual households and nonprofit
organizations because that's another big
part of
QT as the feds push F fed no longer buys
any long-term bonds or short-term bonds
or any bonds it's R letting them roll
off its balance sheet this passive
quantitative tightening that means other
people have to step up other funds
institutions or households to buy what
the FED isn't buying and while people
have worried that there's going to be a
limit especially with the treasury
Department issuing so much debt and the
federal government going completely
insane thus far it hasn't been an issue
and one of the reasons it hasn't been an
issue as Waller was alluding to is the
basis trade for from hedge funds and
I've talked about this before in a
previous video except a couple previous
videos what that what the basis trade is
and what it means but for as far as
officials are concerned they hate the
basis trade they think it's a big huge
risk and so if it's only hedge funds
that are buying treasuries that's an
enormous problem at least in their mind
but what Waller was saying is that when
you look at the data what data we do
have we find that well no it isn't it
doesn't appear to be domestic hedge
funds that are actually buying all these
treasuries that the FED no longer is
instead what he says according to the
FED data it is actually households that
are stepping up and buying not through
hedge funds but households themselves
now what I would add and I I bet Waller
would too if he if he felt like talking
more the truth what he would say is that
overseas hedge funds is another story
offshore hedge funds that are indeed
engaged in the basis trade but the
overall point remains regardless there
is demand for for treasuries independent
of hedge funds in the basis trade let's
go back to Waller one more time what do
I make of this finding my interpretation
is that it reinforces the view that the
demand for US Treasury Securities is
Broad and deep the buyers are not a
narrow set of deep pocketed
sophisticated investors but rather of
the American public as a result the pace
of runoff is not a problem as I've
talked to as I've said and pointed out
all numerous times rates are despite the
huge is issuance and treasuries rates
are actually a little bit lower than
they were at the end of 2022 despite
another another bunch of Fed rate hikes
in between and quantitative tightening
there is demand for treasuries so all
that's well and good but it should cause
everyone to ask the next logical and
obvious question why is demand for
treasury so Broad and deep that's the
part that we need to think about Waller
is basically saying there's seemingly an
endless demand for safety and liquidity
which you would then think that people
would would realize why is there demand
for safety and liquidity if we're
heading into a soft Landing or if we're
heading into an inflationary environment
the last thing that's going to be in
demand is safety and liquidity but we
see time and again demand for safety and
liquidity in form of government bonds
but also in the form of safety that's
gold so demand for safety and liquidity
in treasuries demand for safety in
gold as far as treasuries go treasury
yields are falling back to back down
again in fact the the 10year treasury
today was about
4.14% which is its lowest in over a
month which rais raes a couple of
questions here a couple possibilities as
we've been saying all along after an
enormous huge historic rally in the bond
market we expected interest rates would
back up and go maybe sideways to
slightly higher for a couple months well
it's been a couple months and unless
something substantial has changed we do
expect another leg lower in interest
rates could we be seeing that now and if
we are what would that mean well if we
do see another leg lower in treasury
rates that would mean demand for safety
and liquidity and that if if there was
other corroborating evidence for
especially the safety part that make
make that may make the possibility even
more compelling so let's talk about gold
gold is commonly cited as an inflation
hedge when in truth it is a terrible
inflation hedge that is a misconception
that has developed over many years now
you go back to the 1970s the great
inflation gold was a terrific hedge but
not against inflation it was a hedge
against broadly speaking some of the
worst monetary and financial
circumstances that just so happened to
be inflationary real inflationary so it
isn't that gold was a hedge against
inflation gold was a hedge against gross
monetary errors and incompetence and you
can see this in any number of ways think
about the 1980s plot the price of gold
against the CPI the CPI vastly
outperforms gold in the 198 80s Now
consumer prices were still rising at a
relatively decent unhealthy rate but it
was nothing like the great inflation but
still consumer prices were rising and
gold prices were at best flat to lower
depending upon where you start your
measurement if you start measuring
before the last surge in 79 and 80 gold
prices were relatively flat through the
1980s even as consumer Prices rose and
that continued in the 1990s consumer
prices they more disinflationary they
didn't stop Rising gold prices actually
declined and got down to around $300 an
ounce by the year 2000 even as consumer
prices continued to move higher so as a
hedge against normal inflation or
disinflationary levels of consumer
prices gold underperformed drastically
and it wasn't really until July 2005
that gold finally caught its big bid the
21st century bid was that because of
inflation risk or was it because gold
investors and its demand for its hedging
properties understood the risk of the
housing bubble another gross massive
monetary error just in the opposite
direction as the 1970s gold surged
heading into the global not financial
crisis the pandemic era or the 2020s era
is it behaved contrary to the popular
misconception about gold being an
inflation head gold served during the
pandemic and lockdowns up until August
of 2020 and then once consumer prices
really started to go go up in 20121 gold
was flat to lower and it was flat it was
flat to lower until March of 2022 got a
little bit of a rally and then sank with
Rising interest rates up until October
of 2022 once the yield curve really
started to invert and more heavily
invert and not just the US Treasury
curve but around the rest of the world
that's when gold started to rise now it
looks a lot like the stock market has
behaved over the last couple years but
that's because gold corresponds to the
safety bid lower interest rates not only
is it higher demand for safety the
opportunity cost of holding gold is safe
instruments that yield that yield
something so as as the bond market and
interest rates in the bond market
started to level off and invert you can
see the demand for gold rise lower
opportunity cost but also also the same
demand for safety gold and treasuries
are in one sense two sides of the same
coin so Christopher Waller's twist last
week the reverse twist was really a big
nothing it's the FED talking mechanics
of an ideal portfolio however he did
recognize that QT isn't a problem
because I wish he would recognize the
next step or maybe he does he doesn't
want to say it
demand for safety in liquidity seems to
be un no bottom to it but as we've seen
the big rally last year and into this
year and now gold price is reaching a
record high we have to ask there's this
bottomless demand for safety and
liquidity that seems to be even more
bottomless just recently why might that
be demand for safety and liquidity
treasury yields go down even as the FED
says we have no plans to cut rates well
maybe that's the case but the the market
is moving lower anyway gold prices are
moving higher what would cause demand
for safety and liquidity to increase
over and above what it has been for all
this prolonged period to begin with and
there's any number of reasons for it
that's the recession risk the
deflationary recession risk the problems
in commercial real estate may be
starting to Bubble Up China China's real
estate problems we just talked about
this yesterday with China vany any
number of reasons that would that would
explain beond Christopher Waller's uh
concluding remarks what's really
happening in the marketplace why is
there so much demand for safety and
liquidity in form of treasuries but also
safety in the form of gold with
everything from recession to real estate
globally it actually makes a lot more
sense than a reverse operation
twist money risks and money Evolution
well I just had a good conversation with
Manny ringcon Cruz about that very topic
the crypto bubble what's actually behind
it and where the Boom is in the crypto
space that's the video I've got link
below as always I thank you for joining
me huge thank you your doll University
members and subscribers until next time
take
care
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