Gold is poised as, with stock market declines, US funding of deficits gets severely pressured. As a result, Fed will have to reverse course, sacrificing the dollar to maintain asset prices and ability to finance government.
We'll see if dollar has a short term rise, though as a flight to safety, though I think unlike in past downturns, the dollar and US economy is in a much worse position.
How does the stock market declining affect US funding for deficits? Deficits are funded by bonds, which (almost always) move in the opposite direction from stocks. This also means that your second sentence doesn't follow.
> ... though I think unlike in past downturns, the dollar and US economy is in a much worse position.
I'm a bit undecided, but I fear that you are right on this one.
I've been following the thesis of @LukeGromen, (here's a sampling)[0].
Here I think he covers it mostly in full [1].
Definitely worth a listen..
Also, here is a great 5 part podcast from December where he (and other Dollar bears) talk about the dollar decline[2].
Because of US dollar reserve status, government spending has been financed by foreign buying of treasuries, especially China. In recent years, they have rightly seen the fiscal situation of US, with massive liabilities, as being fixed only by devaluation of the dollar and therefore in real terms holding treasuries, or especially continuing to stockpile them not prudent. And he points out many examples of how they have recently been declining their purchases of treasuries and stockpiling gold (them and Russia).
He argues their recent opening of a Oil futures market as their avenue to moving away from dollar, eventually (long long term) pushing Renminbi to gain reserve status but in medium term using gold / oil as their leverage away from dollar.
On the stock market/taxes connection, he points out usually a yr over yr decline in tax receipts occurs in recessions. But last month, in the midst of an "everything bubble" (stocks, real estate, bonds, etc.) we saw a year over year decline of tax receipts. [3]
Also that stock market is increasing % of GDP & most taxes paid by wealthy whose income increasingly based on stocks market returns implies a dependence at the margin of government spending on high equities valuations. [4]
If the market continues to decline, and future months tax receipts decline, the "fed put" will get called into action, as China has stopped funding deficit (enough to match it's increase) so it has to be funded by rising rates in the private market. Libor shows this, as does the decline of the dollar.
Here's a link his slide deck covering all of this [5].
See slide 26 for a chart showing that when tax receipts fall "enough", US quickly takes action to weaken the dollar.
Slide 25 shows that declines in tax receipts usually correspond to recessions, but except recently..
"Price stability": sounds like no inflation or deflation to me, but in fact they pursue some non-zero amount of inflation, usually 2-3%.
"Full employment": sounds like 0% unemployment to me, but in fact they target some non-zero value, around 5% I think.
Targeting equity prices or other asset prices is not officially within their mandates, but given their behavior at times (e.g. suddenly dropping dovish comments when the market drops), one might start to think this is a de facto or shadow mandate. :)
I think worrying about the price of the dollar is closely related to the level of inflation or uh "price stability" they are aiming for.
"Let me start with the Fed’s mission. It’s often said that Congress assigned the Federal Reserve a dual mandate: maximum employment and stable prices. But, that’s not quite accurate. In fact, the Fed has a triple mandate..."
> "Full employment": sounds like 0% unemployment to me, but in fact they target some non-zero value, around 5% I think.
3-5% sounds plausible. Even with full employment, people will be unemployed for short periods of time while they're between jobs. And these phases are going to get more significant in a gig economy, where you don't stay at the same company for 40 years anymore.
Similarly, as a large-scale landlord, you can always expect some 3% of your apartments to be vacant even in markets with high demand because some time passes between the old tenant moving out of an apartment and the new tenant moving in. (Source: My father is working in that business.)
If i remember macroeconomics, a little bit of deflation can spiral out of control quickly. It's hard to guarantee it'll never go less than zero if they target exactly zero. So they shoot for a little bit over. Also a little bit of inflation encourages people to find things to do with their money other than stuff it in the mattress.
Fed only controls overnight rate. QE happened because overnight rate hit the floor and is now being unwound. If investors are not willing to fund the Treasuries there is not much the Fed can do. But that is not the case, certainly not now.
We'll see if dollar has a short term rise, though as a flight to safety, though I think unlike in past downturns, the dollar and US economy is in a much worse position.