Economist: Gold To $6,000 As Economy Implodes, Fed Loses Independence | Steve Hanke

The recent actions of major central banks, including the Fed, ECB, Bank of Canada, Bank of England, Bank of Norway, and Bank of Japan, are analyzed. The discussion highlights that while some banks are cutting rates, the Fed's actions are not directly dictating mortgage rates, as longer-term yields are influenced by market expectations of inflation. A key point is that quantitative tightening by the Fed is seen as a contractionary policy that the speaker believes should be halted to properly loosen monetary policy.

The conversation shifts to the importance of the money supply as the primary driver of the economy, with a focus on a potential "regime change" at the Fed if its composition shifts towards those who prioritize the money supply. This perspective is contrasted with a report suggesting gold could reach $5,000 an ounce if Fed independence is compromised, with the speaker offering an alternative, more straightforward methodology that projects gold peaking around $6,000 an ounce at the end of a secular bull market.

Finally, the speaker addresses the question of whether to refinance homes and buy crypto, deeming crypto highly speculative. The overall outlook suggests a continued weakening of the dollar against the euro, with a fair value range of 120 to 140. The core message reiterates that a steady money supply growth around 6% is crucial for economic stability and achieving inflation targets.

• A secular bull market in gold is expected to continue, potentially peaking around $6,000 per ounce.
• The effectiveness of central bank interest rate cuts on mortgage rates is questioned, with focus shifted to quantitative tightening and money supply.
• The money supply is identified as the key driver of the economy, and its growth rate of around 6% is considered ideal for economic stability and hitting a 2% inflation target.
• A potential shift in the Fed's policy approach, prioritizing the money supply, could lead to different monetary outcomes.
• The dollar is predicted to weaken against the euro, moving into a fair value range of 120 to 140.

Related Video Summary

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Central Bank Actions and Fed's Role [01:03]

• In the past week and a half, major central banks globally have taken action.
• The European Central Bank held rates steady on September 12th.
• The Bank of Canada cut rates by 25 basis points on September 17th.
• The US Federal Reserve cut rates by 25 basis points on September 18th.
• The Bank of England held rates steady on September 19th.
• The Bank of Norway cut rates by 25 basis points on September 19th.
• The Bank of Japan held rates steady on September 19th, while announcing a sale of $250 billion worth of ETFs.
• The US Fed is considered the central driver for other central banks due to the dollar's international currency status and the US's economic size.
• The Fed's rate cut of 25 basis points was anticipated by the market, with a 94% probability.
• Market expectations, based on Fed funds futures, suggest a 77% probability of another 25 basis points cut in October and a 70% probability of a similar cut in December.

The speaker analyzes recent moves by global central banks, noting the Fed's rate cut and market expectations for further reductions. However, it's emphasized that the Fed's control over the federal funds rate doesn't directly dictate longer-term yields or mortgage rates, as market forces play a significant role.

The central driver always is the the the US Fed. I mean the the the the dollar is the is the international currency.

Impact of Fed Actions on Mortgage Rates [05:30]

• Rate cuts by the Fed may not significantly stimulate the housing market.
• A year prior, a 50 basis point cut in the Fed funds rate was followed by an increase in the 10-year yield and mortgage rates.
• The market's expectation of future inflation influences yields, even when the Fed cuts rates.
• To lower mortgage rates, the Fed could stop quantitative tightening, which involves selling mortgage-backed securities.
• Stopping quantitative tightening would bolster the price of mortgage-backed securities and consequently lower mortgage rates.
• The speaker suggests focusing on stopping quantitative tightening rather than solely adjusting interest rates.
• The money supply is growing at an anemic rate of 4.8%, which is below the "golden growth rate" of over 6% needed for a 2% inflation target.
• The obsession with the Fed funds rate is considered misguided, and the money supply should be the primary focus.
• Quantitative tightening is identified as a factor keeping the money supply growth rate anemic, indicating a tight monetary policy despite some rate cuts.

The speaker argues that the Fed's actions on interest rates have little direct impact on mortgage rates, citing historical data where rate cuts led to higher yields. The proposed solution for lowering mortgage rates is to cease quantitative tightening, as it's believed to be a more effective tool for loosening monetary policy by influencing the money supply.

Whatever the Fed is doing with the interest rates, I it it isn't dictating what's going to happen in the market. The market is something else.

The Importance of Money Supply [08:42]

• The money supply is the key driver of the economy.
• Quantitative tightening influences the rate of growth in the money supply, keeping it anemic.
• The Fed's current monetary policy is considered tight due to quantitative tightening.
• Loosening monetary policy should involve stopping quantitative tightening.

This section reiterates the central thesis that the money supply, not just interest rate adjustments, is the critical factor influencing the economy. Quantitative tightening is highlighted as a policy that constricts the money supply and is seen as a barrier to effective monetary easing.

Look at the money supply. What is going on with the money supply and what's affecting the money supply big time?

Gold Market Outlook and Investment [09:20]

• Gold is currently priced above $3,600 an ounce.
• A new service allows investors to earn income from gold holdings, offering up to a 4% yield paid in gold.
• This means savings grow in actual ounces, not just dollars, in addition to potential price appreciation.
• Yields are deposited monthly in physical gold, which can be redeemed for delivery.
• Thousands of investors are already generating yield in silver and gold.

The discussion pivots to gold as an investment, introducing a platform that allows holders to generate income on their gold and silver. This "earning yield" model is presented as a way to grow savings in physical ounces beyond just price appreciation.

Now, you've heard me talk a lot about how gold and silver are smart ways to grow your savings over time. But what if I told you you can now do more than just hold gold?

Fed Independence and Monetary Policy under a New Administration [10:18]

• A post on Truth Social suggests the Fed should have raised rates in early 2021 and criticizes their perceived disregard for the money supply.
• The idea that the Fed doesn't believe money supply matters is likened to the Pope not believing in Jesus Christ.
• If a future administration appoints Fed governors loyal to them, and these individuals recognize the importance of the money supply, monetary policy would loosen.
• Loosening monetary policy would involve stopping quantitative tightening.
• The speaker believes the money supply is the key to the economy and that Trump has grasped this concept.

This section explores the potential implications of a shift in Fed leadership, particularly if appointments prioritize the money supply. The speaker agrees that a focus on money supply is crucial and that a change in leadership could lead to a loosening of monetary policy and an end to quantitative tightening.

The Fed not recognizing the money supply is like the Pope not recognizing Jesus Christ.

Market and Economic Impact of Loosening Monetary Policy [12:33]

• Loosening monetary policy is viewed as a positive development for markets and the economy.
• Targeting money supply growth at approximately 6% per year would stabilize the economy and help achieve a 2% inflation target.
• This would lead to an end of the current economic volatility.
• Stability is presented as essential for overall economic well-being.
• Buying crypto is considered a highly speculative play.
• A slight loosening of the money supply is not expected to negatively impact asset prices; it should be a positive.
• The stock market is described as being in a bubble, but its deflation timeline is uncertain.
• Cutting rates into a slowing economy can signal panic, whereas cutting into a growing economy can be beneficial for markets.

The speaker asserts that loosening monetary policy, particularly by targeting money supply growth, would stabilize the economy and bring it closer to inflation targets, ending the current volatility. They also caution against viewing crypto as a safe investment and note that while the stock market may be overvalued, its eventual correction is uncertain.

Stability might not be everything, but everything is nothing without stability.

Economic Slowdown and Historical Recessions [16:07]

• The Fed is cutting rates into a slowing economy, evidenced by a weakening labor market.
• This necessity-driven cutting can signal panic.
• Historically, contractions in the money supply have led to recessions.
• Since early 2022, there has been a significant contraction in the money supply.
• There have been four such contractions in the US since 1913, all resulting in recessions, with one leading to the Great Depression.

The analysis connects the Fed's rate cuts to a slowing economy, which is often seen as a negative sign. Historical data is presented to show that contractions in the money supply have consistently preceded recessions, suggesting a potential economic downturn is looming.

I do think a slowdown is baked in the cake because we've had this big contraction in the money supply since early 2022.

Gold Price Projections and Fed Independence [17:21]

• A Goldman Sachs report suggests gold could reach $5,000 an ounce if the Fed loses its independence, attributing this to potential higher inflation, lower asset prices, and dollar erosion.
• The speaker, using a more straightforward methodology based on US disposable income growth, projects gold to peak at around $6,000 an ounce within its secular bull market.
• This projection is based on historical relationships and is not dependent on assumptions about Fed independence or market turmoil.
• The current gold bull market is mid-cycle, with a projected peak by the end of the cycle.
• The speaker's methodology focuses on endogenously driven income growth rather than exogenous shocks like geopolitical events or Fed policy changes.

A Goldman Sachs report forecasting a $5,000 gold price due to compromised Fed independence is discussed. The speaker offers a contrasting view, projecting a higher peak of $6,000 for gold based on a simpler model tied to disposable income growth, independent of external market shocks.

The gold secular bull market will continue and maybe end up at $6,000 an ounce, not 5,000.

Fed Independence and Policy Changes [24:08]

• Concerns exist that if the Fed is governed by loyalists, it could lose independence, leading to money supply growth exceeding 6% and higher inflation.
• Changing the composition of the FOMC with individuals holding different views will result in different monetary policy.
• The notion of the Fed being independent is questioned, with the speaker suggesting it has never truly been independent.
• A change in the views of the people on the FOMC will lead to a change in monetary policy, making this a pivotal time for central bank policy and potential regime change at the Fed.

The speaker expresses concern over the potential loss of Fed independence, arguing that a shift in its governing body could lead to policies that favor money supply growth and higher inflation. They assert that the Fed's independence is largely a facade and that changes in personnel will inevitably alter monetary policy.

It's a simple game. If you change a bunch of bunch of people on the Federal Open Market Committee to and they have views that are much different than the current members of the committee, you you'll get a monetary policy that's different.

Global Economic Slowdown and Central Bank Policies [26:13]

• The global economy is slowing down.
• Inflation has slowed and stabilized, leading to discussions about changing interest rate stances.
• The money supply is identified as the key indicator of monetary policy, not just interest rates.
• The Bank of Canada cut rates, citing the removal of retaliatory tariffs, but the speaker disagrees with this reasoning, emphasizing the importance of the money supply.
• The Bank of Japan is given an "F" for its actions, as its money supply growth is significantly below the rate needed for its inflation target.
• The Bank of England is facing a dilemma with sticky inflation (3.7%) and anemic money supply growth (3.7% vs. a target of 5.7%).
• The ECB's inflation rate is close to its 2% target, but its money supply growth is also below the ideal rate (3.3% vs. 6%).
• The money supply is the key determinant of inflation, with a long and variable lag in its effects.

This section reviews individual central bank actions, highlighting a global economic slowdown and differing approaches to monetary policy. The speaker critiques some justifications for rate cuts and consistently emphasizes the money supply as the crucial factor, assigning grades to banks based on their adherence to these principles.

The money supply is the key determinant of the inflation rate but what money supply?

Dollar Weakening and Fair Value [37:44]

• The dollar is expected to continue weakening due to a divergence in central bank policies.
• The fair value for the dollar-euro rate is estimated between 120 and 140, with the current rate around 1.17-1.18.
• The dollar is considered strong but is expected to weaken into its fair value range.
• The dollar has been weakening for about six to nine months.

The dollar's future trajectory is predicted to be one of weakening against the euro, moving towards a fair value range of 120-140. This trend is attributed to the diverging policies of central banks around the world.

Dollar is going to keep keep weakening and get into my the the key the key dollar price is a dollar euro rate and and I think the fair value is 120 to 140.