Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold Price Trend Forecast 2018 - 24th Sep18
The Stock Market Has Been Exceptionally Strong this September. What’s Next for Q4 2018 - 24th Sep18
Gold / US Dollar Inverse Trend Relationship Video - 23rd Sep 18
US and Global Stocks, Commodities, Precious Metals and the ‘Anti-USD’ Trade - 23rd Sep 18
Gerald Celente Warns Fed May Bring Down the Economy, Crash Markets - 23rd Sep 18
Top 3 Side Jobs for Day Traders - 23rd Sep 18
Gold Exodus to Reverse - 22nd Sep 18
Bitcoin Trader SCAM WARNING - Peter Jones, Dragons Den Fake Facebook Ads - 22nd Sep 18
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Powell's Excess Reserve Change and Gold

Commodities / Gold and Silver 2018 Jun 15, 2018 - 03:21 AM GMT

By: Michael_J_Kosares

Commodities

Why a seemingly run-of-the-mill announcement yesterday by Fed chairman Powell might signal a major turning point for the gold market. . . and perhaps ALL markets.

At the end of Fed chairman Jerome Powell’s opening statement for his press conference yesterday he dropped a major surprise on the markets that immediately sent the dollar and stocks tumbling and gold, silver and bonds vaulting higher. All the markets mentioned experienced sudden sharp reversals at the time of the “surprise.” Those trends have carried over to today’s market action.


To understand what caused such a strong reaction in the markets you have to go all the way back to 2009, the credit crisis and the launch of the quantitative easing program. That bail out of the commercial banks pushed more than $4 trillion of printing press money into the U.S. and global economy through Federal Reserve purchases of U.S. Treasuries and mortgage-backed securities. Those purchases left the commercial banks with a boatload of cash and the Federal Reserve with its largest balance sheet procurement in history. At the time, the standard analysis had been that the newly placed cash would migrate to the economy in the forms of commercial and consumer loans, push-up the money supply dramatically and launch a virulent inflation.

It never happened and here’s why:

Instead of leaving those reserves at the commercial banks, the Fed encouraged the commercial banks to redeposit that bailout capital at the central bank as what it called “excess reserves.” Up until Mr. Powell’s low-key reference to excess reserves at yesterday’s news conference, few people had ever heard of this little-known Federal Reserve balance sheet item, yet it consists of almost $1.9 trillion at present and peaked in 2014 at almost $2.7 trillion, and a large percentage of the original bail out. The Fed incentivized commercial banks to maintain those deposits by paying a rate of interest slightly higher than the Federal Funds rate, an advantage it kept in intact from 2009 until yesterday. To make a long and rather complicated story short, the “excess reserves” program in effect sterilized the bailout and kept it from igniting inflation.

All of that though may have changed with Mr. Powell’s low-key announcement yesterday, that the Federal Reserve would move the excess reserve deposit rate at a par with the fed funds rate – a policy that removes the long-standing rate advantage on excess reserves and, in effect, formally signals a deliberate desterilization process. That is why the Fed chairman’s seemingly innocuous statement yesterday caused such an immediate stir. What he signaled is that the Federal Reserve is now interested in incentivizing the banks to take that capital back onto their own balance sheets as reserves so that they can be leveraged and loaned into the economy. (Please see today’s Quote of the Day immediately below.)

The market reaction was immediate. The announcement was made about 35 minutes into the press conference (See chart below). Gold immediately headed north and the dollar south. Stocks plummeted and the yield on the 10-year Treasury, which had advanced sharply to over the 3% mark before the press conference, promptly dropped to 2.97%. It has dropped another 0.027% this morning to 2.95%.

Obviously, a healthy number of market participants share our view that the Fed is interested in stimulating the money supply and inflation, or in the very least, interested in letting the markets know it will stay out of the way should both begin to increase. That message was received loud and clear, though it might take some time for the impact to be completely understood and priced into various markets.

As it stands, the Federal Reserve will indeed hold back the rate on excess reserves by five basis points – raising it by 0.2% – and push up the Fed funds rate by 0.25%. Though not a monumental juggling of the numbers, it is the message, as outlined above, that the Fed is trying to send to the markets that is important. In the end, it is not a very glamorous incentive for the gold market to move higher, but it is an strong incentive nevertheless.

We believe that in future years we might look back at yesterday’s events as an important turning point for the gold market. Yesterday gold pushed back to the $1300 level almost immediately and it is up another $8 and firmly above the $1300 level at $1307.50 as this report is written. Silver has had an even stronger reaction moving up 1.3% yesterday and up another nearly 30¢ this morning at $17.30


SPECIAL OFFER – Limited quantity remains available

In keeping with this analysis, we believe that now is good time to add to one’s holdings if you happen to be a long-time participant in the market or to begin purchasing if you are a newcomer. Prior to chairman Powell’s announcement, we had launched special offer of old, historic Swiss 20 franc Helvetias, a popular item among gold investors that typically sells at a premium to other items in the pre-1933 gold coin genre.

We are offering a limited number of Helvetias in a high state of preservation at prices comparable to what you would pay today for small denomination contemporary bullion coins – an attractive price incentive. We invite you to learn more about this opportunity HERE.

At the moment, we have about 200 coins left of the 500 originally offered. As always the items are offered on a first-come, first-served basis. Our last three special offers sold out in matter of a couple of days, and we do not expect this tranche of gold coins to last long.


Quote of the Day
“Banks in the United States have the potential to increase liquidity suddenly and significantly – from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. . . What potentially matters about high excess reserves is that they provide a means by which decisions made by banksnot those made by the monetary authority, the Federal Reserve System – could increase inflation-inducing liquidity dramatically and quickly.” – Christopher Phelan, economist, Minneapolis Federal Reserve

Chart of the Day

Chart note: As outlined above, the Federal Reserve encouraged commercial banks to keep excess reserves on deposit at the central bank for a number of years by paying a rate higher than the federal funds rate. As of yesterday, those two rates are now at a par at 1.95%. Chairman Jerome Powell announced that the Federal Reserve will hold back the rate on excess reserves by five basis points – raising it by 0.2% – and push up the Fed funds rate by 0.25%. Though not a monumental juggling of the numbers, it is the message that the Fed is trying to send to the markets that is important. The two lines in the chart above have now converged.

By Michael J. Kosares
Michael J. Kosares , founder and president
USAGOLD - Centennial Precious Metals, Denver

Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business.  He is also the editor of Review & Outlook, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion.  If you would like to register for an e-mail alert when the next issue is published, please visit this link

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Michael J. Kosares Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules