Yesterday the Bank of England cut its main interest rate from 0.5% to 0.25% for the first time, marking its first interest rate change since March 2009, and provided all of us with more reasons to keep converting fiat currencies into physical gold and silver. In addition the BOE announced an increase in its QE bond-buying program of £60bn to £435bn. And in response, the British pound immediately fell by 1% to the USD and traders added to their British pound longs, exceeding previous record net long positions in the pound recorded three years ago. I understand that traders are seeking a stronger rebound in the British pound after its plunge post-Brexit, and since the process for the UK to exit the EU has not even begun since the yes referendum vote, traders may be right to assume that the British pound will eventually rebound significantly in strength following this rate cut after people realize that a Brexit yes referendum vote may translate into an indefinite stay of limbo for the UK within the EU.
However, believing that any strengthening of any global fiat currency will be sustained over time is folly as all Central Bankers have aptly illustrated for years that they have already moved beyond the point of no return from their indefinitely low-interest rate, weak currency purchasing power policy years ago and can not raise interest rates to anything close to a free market interest rate. Thus, even if the British pound rebounds much more significantly from its post Brexit and post BOE interest rate cut, and it should, the spiraling weakening of its purchasing power will resume long-term without a doubt. The same knee-jerk trader reaction happened in response to the US Federal Reserve raising their Fed Funds interest rate by a paltry amount from a 0.00% to 0.25% range to a 0.25% to 0.50% range on 16 December 2015. The very next day, traders responding by dumping gold and silver due to the silly Central Banker Janet Yellen’s talk of a strengthening economy spurring their interest rate raise. When she publicly announced this interest rate hike decision, Yellen stated that their decision was based upon “the committee’s confidence that the economy will continue to strengthen. The economic recovery has clearly come a long way, though it is not yet complete…but with the economy performing well and expected to do so, the committee judged that modest increase in the Federal Funds rate is now appropriate.”
In response, gold and silver both dumped in price, with silver suffering an especially hard fall of more than 3.5% the next trading day. This undeserved weakness in gold and silver prices persisted for a couple of weeks in gold and for an entire month in silver, even though this paltry raise in the Fed Funds interest rate was the first hike in over 9 ½ years since 29 June, 2006, simply because this interest rate “hike” (if one can call a measly ¼ of 1% increase a hike) was accompanied by silly claims of a strengthening, robust US economy made by Fed Reserve Chairman Janet Yellen. I, for one, have never understood why traders lose their minds over such policy announcements, instigating sharp asset price spikes and falls depending upon the announcement, that are often very sharply reversed in the near future. Certainly the gold and silver price dumps that occurred in reaction to Yellen’s announcement of a 0.25% raise in the Fed Funds rate has been sharply reversed through all of 2016. Of course, I understand that gold and silver traders don’t care about fundamentals and only care about profiting from any strong movement in asset price, even if the price move is very short-lived and counterintuitive.
However, does a 0.25% Fed Funds rate increase really change the Central Banker fiat currency destruction policy adopted for decades, and provide an impetus to sell one’s gold and silver in exchange for devaluing paper and digital fiat currencies? We’ve all seen massive spikes and falls in crude oil spikes happen within a span of days in recent years. Is it really possible for a trader to be on the right side of every unexpected intraday spike higher and lower, especially when sharp movements higher are often reversed just days later and vice versa? Why not just understand the long-term picture, and position yourself to be on the right side of this equation? I guess that may be too much to ask of a trader, however, and it may be tantamount to asking a newborn duckling not to take to water. In other words, during that press conference, Yellen stated the same bunk that Federal Reserve bankers had stated in their minutes eight times a year, for 7 years in a row in which they implied an interest rate hike could be coming, only to never raise interest rates. And after 7 years of deception in which they finally made good on their threat to raise interest rates, the interest rate “hike” turned out to be a measly 0.25% raise, because that’s all they could afford to raise it without risking greater ripples and sell-offs in the financial markets. In other words, bankers released somewhere around 55 statements in a row about possibilities of raising interest rates without actually raising interest rates, before executing what amounted to the lowest possible “hike” they could possibly execute. And today, analysts incredibly still wait upon the public statements of Central Bankers with unbridled anticipation, and still incredibly use their statements to guide their investment strategies.
For example, I randomly pulled a FOMC minutes statement from January 2011, more than five years ago, and that statement contained Central Banker affirmations of “strong” consumer spending, “improvements in household and business confidence and in labor market conditions [that] “would likely reinforce the rise in domestic demand”, talk of “gains” in employment and anticipation of “stronger growth” in the US economy for FY2011, with “gradual acceleration” of US economic growth in 2012 and 2013. In fact, one can pull any Federal Reserve FOMC statement from their archives over the past 5-½ years and you will find the same bunk and nonsense that they used to further inflate the US stock market bubble and to control gold and silver prices time after time after time. As I review the content of these statements every year, if one could go back and review years prior to 2011, though the Feds do not keep statements archived prior to 2011, one would discover that the Feds were using this same deceitful language since 2009. I, for one, at a complete loss for why big bank analysts still talk about “normalization” of interest rates and parrot Janet Yellen’s frequent press statements in regard to this topic as if this were even a remote, much less, a realistic possibility. If we stop and think about the definition of “normalized” interest rates, how high of a level should normalized rates be when Bank of Japan bankers adopted ZIRP (Zero Interest Rate Policy) for 16 years before deciding ZIRP was inadequate enough to stimulate their economy and plunged interest rates into negative territory this year, and US Federal Reserve bankers maintained ZIRP for 7 years before finally “raising” interest rates for the first time in nearly 10 years on 16 December 2015?
Thus, we’ve had 16 consecutive years of zero interest rate policy (and now negative interest rate policy) in Japan and 7 years of ZIRP (and now a paltry 0.25% to 0.50% Fed Funds rate) in the US to understand that normalization of interest rates is never happening, yet analysts from JP Morgan, Goldman Sachs, Citibank, etc. still frequently discuss the timeline for “normalized” interest rates in the mass media as if they will happen. That’s a whole lot of exhibited foolishness in not being able to read between the lines, especially when the lines are so clearly demarcated for all to see. Furthermore, my definition of “normalized” interest rates is the reinstatement of free market interest rates, which we all know will never happen during any of our lifetimes without Central Bankers being expelled out of nations. But what if we consider the Central Bankers’ definition of “normalized” interest rates, likely within a 0.50% to 1.00% interest rate range? Given the fact that the Fed Funds interest rates was as high as 20% in the early 1980s and consistently around 5% throughout most of the 1990s, a “normalized” 050% to 1.00% interest rate is not normal at all. Furthermore, if we understand how a rate hike today to 1.00% might cause a meltdown in the BIS last-reported figure of $493 trillion of global derivatives contracts and cause TPTB banks to fail, then we know that even an abnormally-low “normalized” interest rate is likely never to happen (furthermore, the amount of global derivatives contracts still outstanding in the world today, is in reality, still close to a quadrillion dollars and not the misleading figure reported by the BIS. Years ago, to arrive at their current figure of $493 trillion, the BIS cut the existing figure in half overnight by changing the metric to measure notional derivative contract valuations, which was tantamount to an Enron-like cooking of the books simply to significantly lessen the appearance of risk inherent in the global financial system.)
In the end, there is no end in sight to the fiat currency purchasing power devaluation objectives of Central Bankers, and for this reason, we should stop taking our cues from traders that try to profit on every single short-term move in gold and silver prices. Rather, we need to understand that the global currency wars still firmly remains a race to the bottom in purchasing power, and that converting fiat currencies into wealth preserving physical gold and silver still makes a whole lot of sense.
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