Rudi Fronk and Jim Anthony, co-founders of
Seabridge Gold, discuss the markets in the aftermath of the Fed's interest
rate decision.
On Wednesday, the Fed raised the Fed Funds rate by a quarter point as
expected. The FOMC statement was suitably "dovish" by reducing the
consensus forward guidance on future rate hikes from three to two. The Fed
also signalled that its Quantitative Tightening program would continue on
"autopilot" as planned. The response was not what the Fed expected.
Stocks fell hard and bonds soared.
Financial markets are about to revisit some important questions.
First, does QE actually work? Does it boost the real economy or does it
simply drive up valuations by encouraging speculation? We think the weakest
economic recovery in two generations provides the answer.
Is the Fed right when it raises interest rates and continues to sell $50
billion in assets every month because the economy is strong? Or are the
credit markets right when they buy Treasury debt despite Fed hikes, driving
down yields and flattening the yield curve because they think the economy is
weakening fast? We vote with markets.
Can a weakened economy sustain Fed balance sheet and interest rate
normalization? The stock market is saying no.
For 10 years, these have been central bank markets. Printing money in America,
Europe and Japan has, in our view, created the biggest financial bubble in
history. Now that the printing has come to an end, the bubble is beginning to
burst. Investors are beginning to lose confidence, they are beginning to flee
risk. Aversion to risk means conversion to gold. We think the gold rally of
the century is soon to begin.
There is one last test. When central banks reverse their tightening plans
and turn back to QE, which we think is coming soon, will the good times roll
once again? We think not. After 10 years, we can see that QE does not
translate into a stronger economy. We can see that monetary stimulus cannot
be painlessly withdrawn.
Furthermore, the real issues are not in the stock market but rather in
credit. QE has generated a further massive increase in the debt load that far
exceeds the ability of the economy to service it. In our view, the corporate
bond market is going to implode, exposing historically weak balance sheets
and zombie companies that only survived because of plentiful credit priced at
5,000 year lows.
Perhaps the Fed will ride to the rescue and flood the corporate bond
market with fresh liquidity. We are confident that would kill the dollar.
Perhaps the Fed will decide to resist further attempts to reflate in an attempt
to return to monetary sanity (which we doubt). Massive defaults and
unemployment would then ensue, in our view. There is one effective response
to either possibility. We think investors will reach for the security of the
only asset that is no one's liability and cannot be printed: Gold.
This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold,
and reflects the thinking that has helped make them successful gold
investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one
of its largest shareholders. Disclaimer: The authors are not registered or
accredited as investment advisors. Information contained herein has been
obtained from sources believed reliable but is not necessarily complete and
accuracy is not guaranteed. Any securities mentioned on this site are not to
be construed as investment or trading recommendations specifically for you.
You must consult your own advisor for investment or trading advice. This
article is for informational purposes only.
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