It is both one of the greatest contradictions and greatest frauds in the entire realm of markets: the U.S. interest rate contradiction. The facts are these. At the end of 2008; the Federal Reserve (with other Western central banks in tow) embarked upon the most-extreme monetary policies in Western monetary history: “quantitative easing” (monetizing debt), and 0% interest rates (i.e. free money).
A so-called 0% interest rate is a prima facie fraud. By definition; an interest rate is a positive number . It is the price of capital. The price for any good which has value must be greater than zero, in any legitimate transaction. To pay a price of $0 (or less) for something of value is an obvious fraud. It is upon this fraud that the U.S. has based its monetary system for the past eight years, mitigated ever so slightly by two, token rate increases from the Fed, in recent years.
Interest Rate Contradiction
In 2008; when the Federal Reserve embarked upon its legal fraud, it (along with the other central banks) promised to normalize interest rates, immediately in 2009. It was the “Exit Strategy” of which Fed Chairman B.S. Bernanke boasted at the time. There was no Exit Strategy, and after a few years of lip service, the phrase was abandoned altogether by Bernanke and the rest of the central bank liars. The same central bankers who had solemnly promised to “never copy Japan” were deliberately copying Japan .
However, starting in 2011, something strange began happening in markets. A divergence appeared which has persisted to this day. During 2009, 2010, and the early part of 2011; equity markets (and particularly U.S. markets) were rising, and so were precious metals markets – as this central bank insanity equated to the most-bullish fundamentals in the history of precious metals markets.
Bernanke and the rest of the Fed liars regularly talked about raising interest rates, something which is (supposedly) bearish for both equities markets and precious metals markets. The reason why higher interest rates are bearish for equities is simple: it raises the price of capital (i.e. credit), which is bearish for equities markets in several respects. The reason why higher interest rates are supposedly bearish for precious metals is more mythology than fact, but let’s put that issue aside.
The Fed talked about raising interest rates, over and over, but it never did anything, and so equities markets and precious metals markets continued to rise. Indeed, while the devious Bernanke was talking “Exit Strategy” out of one side of his mouth, he was boasting “wealth effect” out the other side – pointing out how his extravagant money-printing was pumping up U.S. markets.
Suddenly, in the spring of 2011, the Great Interest Rate Contradiction began. Suddenly, precious metals prices began to fall. Why? “Because the Federal Reserve was about to raise interest rates.” It was a mantra preached by the Corporate media every day, starting in the spring of 2011. It is a mantra which the Corporate media continued to preach every day. And precious metals prices fell, day after day, week after week, month after month.
From the spring of 2011 to the end of 2015; the price of silver fell from a high of $49/oz (USD) to a low of $13/oz, representing a decline of almost 75%. The price of silver fell by 75% because the Fed “was going to raise interest rates”, while during that time there was only one, token increase. The price of silver fell, every day , just on talk that the Fed would raise rates. Yet after each Fed meeting when it failed to raise interest rates, the price only rose for one day. The silver market moved every day on talk, it only moved for only one day on actions. Totally perverse.
The situation was similar in the gold market, except not as extreme. The price of gold fell from a high of over $1900/oz (USD) to a low of under $1,100/oz – a greater than 40% plunge. The price of gold fell every on Fed talk. It rose for only one day on its actions (i.e. the failure to act). Then for a brief period of time starting at the beginning of 2016, the “Fed hex” miraculously vanished.
For the nearly six months which regular readers now know as the Fake Rally , the same talk that had caused precious metals prices to fall, relentlessly, week after week, ceased to have any effect on these markets. Then, just like some crooked banker flipping some invisible switch, the talk of the Federal Reserve raising interest rates again began sending precious metals prices lower, every day.
Indeed, one of the primary reasons why readers were warned that the Fake Rally had ended was that the “Fed hex” was back. Once again, all it takes, any time, any day to send precious metals prices lower is for any of the two-faced Fed-heads to mouth the words “raise interest rates”.
What have we seen, over the past several weeks? We’ve seen gold and silver prices falling on the talk that finally, this time, the Fed was actually going to raise interest rates – for the second time in eight years. To say that precious metals markets had already “priced in” this rate-hike would be one of the greatest understatements in the history of the English language.
Yet what have we seen since the Fed raised rates? Gold and silver prices have continued to fall. Why? Just ask the Corporate media. They have fallen, for several days, because the Fed raised interest rates. Despite prices falling week after week, month after month, year after year, on mere talk of raising interest rates; despite prices rising for only one day each time the Fed failed to raise rates; prices are supposed to continue to fall (we’re told), day after day, to “price in” the rate increase. Totally perverse. But it gets worse.
What have we seen in U.S. equity markets since the spring of 2011? Did they turn lower on mere talk of raising U.S. interest rates? No. They continued higher in 2011. They continued higher in 2012. They continued higher in 2013. They continued higher in 2014. They continued higher in 2015. They continued higher in 2016.
The same “Fed hex” that managed to torpedo precious metals markets day after day, week after week, month after month, year after year, has had absolutely no effect at all on U.S. equity markets. They rose when the Fed talked about raising rates. They rose even more strongly each time it failed to raise rates – and for several days afterwards.
Yet after eight years of these U.S. bubble markets going higher and higher, when the Federal Reserve finally announced its second, token increase, the U.S. markets paused for only one day – and then have immediately began bubbling higher again. Indeed, we have even gotten the totally absurd proclamation from the Corporate media that higher U.S. interest rates are no longer bad for U.S. equities – just gold and silver. Totally perverse.
Precious metals markets go down, for 5+ years, every day, on talk by the Fed liars of raising interest rates. Then they fall even harder for several days more, to “price in” any token rate increase which actually occurs.
U.S. equities markets go up, for 8 years, every day, despite talk by the Fed liars of raising interest rates. Then when a token rate increase actually occurs, they fall for one day. Given the “New Math” from the Corporate media, maybe U.S. equities markets will actually go up the next time a token Fed rate increase occurs?
Much more likely, however, is that this latest media and market perversity is simply the last gasp of euphoric insanity before the One Bank pops the bubbles which it has worked so hard to inflate – so it can shear the Sheep on the way down. Then start a new bubble-and-crash cycle.
For precious metals investors, you were warned. The Fake Rally wouldn’t last, prices would turn lower before gold hit $1,500, and the downturn would become part of a general “crash”, whenever the banking crime syndicate chose to detonate these bubble markets. Prices have turned lower, the bankers have ensured that precious metals “charts” look dreadful, and these U.S. bubble markets could not be more-ripe for detonation.
However, as has been explained previously, those readers hoping/waiting to “load up” on gold or silver at crash prices will almost certainly be disappointed. Anecdotal evidence that these markets have gotten increasingly tight surfaces often, from a multitude of sites and sources. Notably both the U.S. Mint and Royal Canadian Mint have been rationing the supply of silver to their customers.
During the Crash of ’08, when silver hit its $8/oz low, there was no silver to be had – except for the largest bars: 100 ounces and up. During the Crash of ’16 (’17?), we can only expect the situation to be significantly worse, after eight more years of supply deficits in the silver market.
To date, we have not seen similar signs of ultimate stress in the supply of gold. However, that situation could change in a heartbeat, at any time of general panic and rock-bottom prices.
Assume there will be little if any bullion available when the Next Crash ensues. In 2011, or even 2012; if we had been told we would be able to buy silver at $16/oz (USD) and buy gold at $1,130/oz (USD), then even with our Harper-debauched Canadian dollars, we would have leapt at the opportunity.
Now is certainly not the time for precious metals investors to get greedy. Assume that the “bottom” is here. For those who wish to buy; buy now. Because when the phony lows occur in the bankers’ ultra-fraudulent paper markets, it’s almost certain that all you will be able to buy there is paper.
Article by Jeff Nielson, Sprott Money