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NIRP vs Gold (Part 8): The Most Destructive Monetary Policy Of All-Time

August 24, 2016

The fact that this is my eighth “NIRP vs. Gold” article, spanning more than three years’ time, is all the proof you need that this unprecedentedly deformative policy is here to stay – in Peter Schiff’s words, a “roach motel” where once a Central bank checks in, it can never check out.  Per the table below, replete with links to each of the first seven articles, the first was written in July 2012, mere days before Draghi’s infamous “whatever it takes” speech – when ironically, he vowed to “save” the Euro by printing as much of it as he and his unelected board of hyperinflationists arbitrarily decided.

Fast forward to today, and not only has the Euro’s purchasing power been dramatically weakened, but the European Union – and many of its member states – are on the verge of political and economic collapse.  FYI, Schiff also said that ultimately, there will be more U.S. QE rounds than Rocky movies – of which there are now seven, including Rocky Balboa and Creed.  Well, there are now eight “NIRP vs. Gold” articles, and if Schiff is right, we’ll have at least five more QE rounds.  That is, if the teetering unsavable global monetary system hasn’t collapsed first.  Which inevitably, it will.

To that end, it’s getting downright comical – putting it mildly – that the MSM, and Fed “governors,” continue to pretend, amidst the expanding collapse of economic data, commodities and currencies that the Fed is “considering” a rate hike.  Let alone, ahead of a Presidential election Janet Yellen needs Hillary Clinton to win.  I mean, it’s just one week since I penned the “ The Ugliest Economic Data I’ve Ever Seen ” – referring to Japan’s July collapse of exports and imports by 15% and 25%, respectively (negative interest rates and equity monetization schemes notwithstanding); and three weeks since the U.S. “unexpectedly” reported first quarter GDP “growth” of just 1.2%.

Heck, even the MSM – and Fed – are aware that stocks, bonds, and real estate are at all-time high valuations, amidst the worst global economic conditions in generations.  Moreover, market volatility has plunged to 22-year lows, care of unprecedented PPT support and market participants “trusting” Central banks will provide ZIRP, NIRP, and QE “to infinity.”  Not to mention, surging “safe haven” flows, that have boosted the dollar to record, or near record, valuations against other fiat currencies; in turn, causing U.S. corporate earnings to plunge for six straight quarters.  A decline, I might add, that is much weaker than published, given the SEC’s ongoing refusal to crack down on fraudulent “non-GAAP” accounting.  Putting an exclamation point on the topic, yesterday’s stellar two-year bond auction – not to mention, money market expectations that no rate hikes are likely until mid-2017 – highlighted  just how dovish the market anticipates the Fed will actually be, starting with Whirlybird Janet’s ballyhooed “Jackson Hole speech” on Friday.

To that end, whilst the “Dow Jones Propaganda Average” has been propelled to all-time highs this week – amidst the most blatant PPT support ever; as the “oil PPT” desperately supported crude with non-sensical “production freeze” rumors, amidst an expanding collapse of supply/demand fundamentals; as Precious Metals were viciously attacked – in paper-thin holiday trading conditions, ahead of tomorrow’s COMEX options expiration, and Friday’s Yellen speech; Treasury yields are again challenging the all-time lows achieved amidst the post-BrExit chaos.  You know, when gold and silver were hitting three-year highs!

That said, the catalysts for today’s “NIRP vs. Gold” installment – notwithstanding the above “deformations,” and countless others – were twofold; as ominous, and shrill, as one can get on the “Danger, Will Robinson” scale.  The first is a “redux” of what occurred last week in the UK, when the Bank of England’s second QE auction failed to generate enough bids to cover the measly £1.2 billion auction tender , even at record low 10- and 30-year Gilt yields, of roughly 0.7% and 1.3%, respectively.  The reason being, that even at such paltry yields, European vultures – I mean, “investors” – know full well that the Bank of England, like the ECB and Bank of Japan, are 100% price insensitive.  In other words, willing to buy at any price – including the negative yields they know are inevitably coming.  Comically, the very next such tender, mere days later, was nearly 6x oversubscribed – as quite obviously, the order book was stacked with fake bids to make it appear that the previous auction’s failure was an anomaly.

In yet another tribute to how Central bankers are not omniscient geniuses, but Keystone Kops seeking to kick the can each and every day, yesterday’s BOE QE auction was an equally miserable failure.  As not only did they barely receive enough bids to cover this week’s £1.2 billion tender, but unlike last week, when they were able to purchase the £1.2 billion at a modest discount to prevailing market prices, they were forced to pay a premium.  In other words, yet another blaring sign that all European sovereign bonds will shortly have negative yields, along with all Japanese government bonds.  And inevitably, all US Treasuries, despite record Treasury bond sales by cash-desperate governments – as said vultures, I mean, “investors,” seek to “arbitrage” the global “QE to Infinity” movement.  Which, by the way, is not only a myth due to the inevitable hyperinflaiton it will spurn, but because eventually, Central banks run out of assets to buy.  Not that they won’t try everything in their hyperinflationary arsenals – such as the most recent Central bank lunacy, of bringing Mussolini-esque fascism back into fashion, by monetizing not only equities, but corporate bonds.  Including, in some cases, low rated, borderline junk credits.  Which is exactly what the ECB has started doing, as part of this Spring’s increase in its monthly QE rate, from the €60 billion/month it launched in March 2015, to the current, mind-blowing rate of €80 billion/month.

To that end, much speculation was put forth regarding how this unprecedented policy would be conducted, in combining the worst imaginable aspects of money printing, market manipulation, and conflict of interest.  And sure enough, just a few months in, markets have “adapted” in the same hideous, destructive, bubble-forming manner as previous hyperinflationary Central bank tactics.  You know, like corporations borrowing as much cheap money as possible to buy-back stock, acquire competitors, or speculate in real estate, knowing full well that the Fed (and PPT) “had their back.”  Or mortgage lenders, circa 2005-07, knowing that “quasi-government agencies” like Fannie Mae and Freddie Mac would monetize any loan they originated – and thus, loosening lending standards so low, a massive subprime mortgage crisis erupted.  Which is exactly, I might add, what is now occurring in the student and automobile sectors, now that “Joe Sixpack” can no longer afford a home.

In that spirit, this incredible article, from last night, describes how not only is the ECB monetizing thinly-traded, highly risky private placements, but European corporations are literally crafting bond offerings with the sole purpose of getting the ECB to monetize them.  In other words, adding more debt to an historically over indebted continent  – amidst a massive recession, to boot – for the simple purpose of capital gains they know the ECB will bestow on them – just like the Bank of England buying Gilts at any price.  And who will wind up paying for the inevitable defaults, you ask?  Joe Sixpack, of course – either via further money supply (hyper)inflation, or higher taxes.

Which, I might add, will also occur due to the upcoming, guaranteed default of trillions of global pension fund obligations – per this horrifying article,  also from last night, of how the imploding state of Illinois is about to set in motion an historic, catastrophic trend, by lowering the “assumed return” on its government employee pension funds from the comically high, anachronistic level of 7.5% – when current returns in today’s ZIRP/NIRP environment are closer to 1%.  Unless, of course, one is willing to accept the astronomic, in most cases prohibited, risks of “chasing yield” into junk bonds, stocks, and other decidedly non-pension fund suitable asset classes.

According to the article, U.S. pension funds are already underfunded by roughly $2 trillion – and depending on how low assumed rates are taken, such underfunding could rise to as much as $10 trillion “with the stroke of a pen.”  Let alone, if QE/NIRP/ZIRP/PPT-supported asset classes – as noted above, trading at record high valuations, amidst record low economic fundamentals – actually decline in value at some point.

In other words, barely two years after the ECB made the fateful decision to embark on a suicidal, lunatic “negative interest rate policy,” the entire world is on the verge of economic and monetary collapse.  Moreover, social revolutions are exploding everywhere, as political and geopolitical instability surge in lockstep with unprecedented money printing and market manipulation.  Thus, I don’t think it’s a stretch to call the lowering of rates to negative levels – like the mystical, “unnatural” practices of the Dark Side of the Force – the “most destructive monetary policy of all time.”  Nor do I consider it a “stretch” to assume that the only asset class that has been “immune” to such practices throughout history – much less, when they (Precious Metals) have been purposefully” suppressed to equally “unnatural,” and uneconomic levels – will continue to be so in the coming months, and years.

And FYI, putting an exclamation point on the unprecedented anger I have experienced watching the Cartel do its blatantly obvious dirty work this week  – whilst the rest of the world, and PPT-supported stock investors, were enjoying their summer vacations – just as I finished this article, “someone” unleashed $1.5 billion of paper gold onto the COMEX (yes, 20 minutes after the COMEX opened) in one minute – causing this unnatural plunge to occur, with not a shred of actual news (other than weak mortgage applications), or a single other market (stocks, Treasuries, oil, currencies) so much as budging.

My friends, something very big is clearly on the verge of occurring – and equally clearly, it “ain’t good.”  And whether it reveals itself imminently – or somewhat later on – such heinous Precious Metal suppression, amidst historically bullish fundamentals, will ultimately lead to the unprecedented supply shortages that MUST inevitably occur in such a tight supply/demand environment, just as occurred in 2008, 2011, 2013, and 2015.  Not to mention, terrifying economic, financial, monetary, and political dislocations, as the “most destructive monetary policies of all time” wreak their unprecedented havoc.

Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

Gold weighs 19.3 times as much as an equal volume of water.
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