King Report: Central planners fear their liquidity moving into gold


By Bill King
The King Report
M. Ramsey King Securities, Burr Ridge, Illinois
Friday, September 25, 2015

The most intriguing aspect of trading on Thursday was the surge in precious metals while stocks tumbled and the dollar declined modestly.

It's clear to most objective observers that the global economy is contracting. The mitigating factor for bulls is the hope and belief that central banks will increase or reinstitute QE. Obviously this yin/yang has been present for many months and it is the reason for the heightened volatility in markets.

We have argued that the recent sharp decline in global bourses is due to concern that further central bank largesse will not keep economies from contraction.

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Over the past few days the usual suspects demanded that the European Central Bank, People's Bank of China, and Bank of Japan increase their QE. As economic data continues to deteriorate, the hope for and belief in more central bank stimulus is growing.

If a critical mass of investors believes that the global economy is contracting and central banks will increase stimulus but it will not boost the real economy, they will eschew stocks.

Eventually investors will move to tangible assets out of fear of currency debasement. If the fear of economic contraction is high, investors will favor precious metals over industrial commodities and stocks.

Over the past two weeks gold has rallied sharply while copper and stocks have declined. This is a resumption of the asset allocation of selling stocks/buying gold that first appeared in early August.

Central banks can tolerate and rationalize excess liquidity flowing into stocks; that can't get into the real economy directly. But the central planners become checkmated when the excess liquidity flows into gold.

Ergo, if the burgeoning shift in preference for gold over stocks develops into a trend, Yellen, Draghi, Kuroda, et al. will have a very serious problem -- a late-'70s environment that will be remedied only by Volcker-like policies.

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