The Weird World the Fed Made

  • Falling inflation, rising gold price — what?!
  • Double dose of weak economic numbers on the day the Fed is raising rates
  • The easy way to beat the market by an average 24% a year
  • The case of the golden rooster, and Uncle Sam’s desperate scramble for gold
  • Oil tumbles (again)… a message for small-business owners who can’t find qualified help… gold and fine art as portable wealth protection… and more!

Here, in a nutshell, is the weird world we inhabit in the summer of 2017: The monthly inflation numbers came in lower than expected this morning… and the gold price jumped $10.

For real. The consumer price index fell 0.1% in May. The “expert consensus” among dozens of economists polled by Bloomberg was that the number would be flat.

Gold, traditionally seen as an asset that protects against inflation, is up as we write, to $1,276.

Hilarious. Last month, year-over-year inflation was running 2.2%. With this morning’s number, it’s down to 1.9%. And gold is rallying.

To be sure, we’re oversimplifying.

There was another important economic number this morning — retail sales. They fell 0.3% in May. Literally none of those dozens of aforementioned economists polled by Bloomberg expected a number that weak. On average, they were expecting a 0.1% increase.

Suddenly, the mainstream narrative of a second-quarter recovery in consumer spending is falling apart. And because consumer spending makes up 70% of GDP, the mainstream narrative of a second-quarter recovery in the economy is also falling apart.

And on the very day the Federal Reserve is set to raise interest rates again! You can’t make this stuff up.

The Fed will issue one of its every-six-weeks policy statements around the time this episode of The 5 hits your inbox. Then chairwoman Janet Yellen will hold one of her quarterly press conferences.

All year, our Jim Rickards has been warning that the Fed is “tightening into weakness.” Last December, the Fed began a cycle of rate increases every three months. The Fed is eager to raise interest rates so it has room to cut them again whenever the next recession or financial shock hits.

But these increases now appear to be pushing a fragile economy over the edge — perhaps causing the very recession the Fed was preparing to fight. That would force the Fed to reverse course and loosen policy — which would drive up the gold price.

Gold has sniffed out this very possibility from the start of this cycle. Rising interest rates are supposed to be negative for gold, because “hot money” flees an asset with no yield (gold) in favor of assets with a rising yield.

But look what’s happened to gold with each increase going back to the start of this every-three-months cycle…


The economy is weakening so quickly now that Jim is backing off his previous forecast of another rate increase in September. The Fed’s three-month cycle will take a rest.

That means gold is set to break through the $1,300 level any day now. “It fits a pattern of major gold rallies,” Jim says, “following Fed rate hikes that we saw on Dec. 14, 2016, and March 15, 2017. The next rate hike today could complete the trifecta. Today might be your last chance to acquire gold below $1,300. It looks set to take off from here.”

[Ed. note: In addition, Jim says a major shakeup is coming to junior gold stocks in the coming few days. Thanks to a first-of-its kind market anomaly, a new class of penny gold shares is about to come into being. There’s massive profit potential if you know how to play it right.

Jim intends to help you do just that — if you join him this evening for his latest live online event. It’s tonight at 7:00 p.m. EDT. This event is free… and it’s not too late to sign up for access. Drop us your email address at this link and you’re in.]

Gold’s rally is part of an overall “safety trade” today.

Treasuries are rallying, too — pushing yields down. The yield on a 10-year note is down to 2.12% — the lowest in seven months.

The weekly oil inventory numbers from the Energy Department reveal that U.S. crude stockpiles fell less than expected. That’s pushed down crude prices 3%; a barrel of West Texas Intermediate clings to the $45 level by closely cropped fingernails.

The major U.S. stock indexes are in the red, though not by much. The S&P 500 is at 2,436 — four points off its record close yesterday.

And now, a chart of the S&P 500 that shows how you could beat that index’s performance by 24% every year…


We showed you a prototype of this chart two months ago. It’s the S&P 500 “Kinetic Composite” as compiled by our Jonas Elmerraji.

“It’s not a typical price chart,” he explains. “Instead, it’s a special composite of the average calendar year for the last 20 years’ price action. Every single tick in the S&P 500 since the first trading day of 1997 is factored into that chart.”

Why “Kinetic”? It’s because the chart identifies the times when markets are most likely to be in motion year after year.

“It’s a way to visualize the seasonally strongest times year after year to own stocks,” Jonas explains. “In other words, from a statistical standpoint, when is the wind at investors’ backs?”

Glancing at the chart, you can see it’s generally a good idea to bail out of the S&P 500 shortly after Day 100 — around May 2 — and jump back in around Oct. 1. There’s truth to that old saw about “Sell in May and go away.”

“Just by avoiding the sideways period on the chart,” Jonas goes on, “you could increase your returns on the S&P 500 by 24% every year, while sitting on cash for 41% of the year.

“For a $100,000 portfolio invested in the S&P 500 over those last 20 years, simply following the Kinetic Composite and making an extra two trades a year would add up to an extra $124,830 in investing profits versus buy and hold!”

But the real magic starts to happen when you apply this Kinetic model to individual stocks. Which is exactly what Jonas has been doing since early last year — identifying the ideal entry and exit points for every publicly traded U.S. company.

And even that doesn’t tell the whole story about the strategy Jonas has developed here, with the help of some massive computational power. We’ll pull back the veil over the next several days, so stay tuned…

Now it can be told: Uncle Sam was worried about his dwindling gold stash years before you might have thought. And we know this because of a golden rooster.

Perhaps you’re familiar with the background leading up to President Richard Nixon’s decision to cut the dollar’s last tie to gold in 1971: Up to that time, foreigners could turn in their dollars to the U.S. Treasury at any time and collect gold at the rate of $35 an ounce. Foreigners had less and less confidence in their dollars by the late 1960s, thanks to the expense of the Vietnam War and the Great Society welfare programs. Led by the French, foreigners were draining Uncle Sam’s gold stash at a record pace. Nixon chose to “close the gold window” in August 1971.

But it turns out Uncle Sam was already worried about the gold drain in 1960 — when it pursued a case titled United States of America v. One Solid Gold Object in Form of a Rooster.

As you’re probably aware, ownership of gold by private U.S. citizens was illegal after 1933. And that extended to a 9½-inch-tall, 14-pound bird made of 18-karat gold. It was a featured attraction of the Nugget Casino in Sparks, Nevada — until it was confiscated by U.S. marshals during a raid in July 1960.

“Unbeknownst to the bird, he had become the latest–and most severe–action taken by a federal government that was terrified of running out of gold,” writes author James Ledbetter.

Contraband in 1960, it sold at auction for $234,000 in 2014
[photo from The Coeur d’Alene Art Auction]

Mr. Ledbetter has penned a new book called One Nation Under Gold: How One Precious Metal Has Dominated the American Imagination for Four Centuries. The rooster story told therein has been adapted for an article at Quartz.

“As the United States imported more goods and services in the postwar boom,” he writes, “governments and companies outside the country rapidly increased their holdings in dollars and U.S. securities, and those holdings represented potential gold redemptions, payable immediately.” Those claims doubled between 1953–56 alone.

Long story short: The San Francisco Mint granted permission for the golden rooster to be cast. Then the Secret Service got wind and said it violated the law — hence the 1960 raid. The case went to trial and the rooster survived. “It would be a terrible shame to see this rooster confiscated, melted down and put into the gold stocks at Fort Knox,” said defense lawyer Paul Laxalt — who went on to two terms in the U.S. Senate.

If the rest of the book is as interesting as the rooster story, it should be pretty good…

“Umm, hello there, and duh to small-business owners!” a reader writes after we noted yesterday that many of them are having trouble finding qualified help.

“Where do you think these workers are going to get those ‘skills’ if you don’t provide them with on-the-job training? Unless a student in high school or college is pursuing a STEM degree, they are not going to graduate with any real-world skills. Anyone with a STEM degree is unlikely to be interested in employment with a small business, or even a larger one, if it’s not a fit. You may be able to find what you seek in trade school graduates, but you are going to have to reach out to the schools proactively.

“So if you have been, still are and still plan on waiting for skilled graduates to magically appear, then you are going to remain disappointed. If you are hoping some other company will train them for you and they will magically drop their résumé off, then you need to put down the bottle, bong or mushrooms and come back to reality.

“You need to develop your own training program, and that does have advantages. If you train your own employees, then you likely won’t need a college graduate that will be demanding a large paycheck so they can pay back the loans on their useless degree. Also, if you train a high school graduate, they will be less inclined to leave, knowing their prospects elsewhere are limited without said degree.”

“Hi, Dave. I just want to respond to the reader yesterday who asserted there are no advantages to having physical gold in your possession.

“I’ll ask this question: Do we want our entire portfolio in just paper/digital money and paper assets and even real estate?

“Look at Zimbabwe and Venezuela and their currencies. Also, even real estate (a hard asset) is no good when the s*** hits the fan as you won’t be able to carry it with you.”

The 5: Yup. That’s why Jim Rickards is fond of both gold and fine art — the portability.

“Gold can be gathered up and stuffed in a saddlebag or sewn into the lining of a coat and moved. Art can be removed from frames, rolled up and carried in one’s luggage.”

Which is exactly what wealthy families of old did in the most dire circumstances when they were forced to pick up stakes…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. This is your final reminder: Jim Rickards reveals “The Great Gold Anomaly” during a live online briefing tonight at 7:00 p.m. EDT.

He will explain exactly why some penny gold stocks are in grave danger… at the very moment others will soar to unimaginable heights.

Access is free, but we need you to RSVP so we can set aside enough bandwidth to accommodate everyone. Click here to sign up.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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