Thumbnail Financial Sense Newshour Wrapup

On this week's Financial Sense Newshour podcast, the focus was on the economy. The hosts believe that the U.S. economy is in recovery mode, and will continue to be so unless the U.S. government does [in their words] "something stupid." By "stupid," they mean tax hikes.

There was no forecast on gold this week. The one most relevant to gold was a 2010 forecast on long-term U.S. Treasury interest rates: they're going up.


Should long rates go up, and short rates not go up, the yield curve will steepen even more. A steep yield curve is a kind of subsidy to the banks, which are still prone to mismatching maturities [borrowing short and lending long in order to capture the yield-curve differential]. Long rates might go higher as deflation fears keep melting, or if the bond vigilantes wake up and act on the huge deficits already in place. It's even possible that longs will incorporate a significant inflation premium.

To be honest, I don't know what the effect on gold will be. Common sense says that gold will go up, but we're not living in normal times right now.

If T-bond rates go up too much, there's a good chance that the Fed will shift back to quantitative easing. As long as Alt-A resets are hanging over the mortgage market, the entire system needs low mortgage rates. There are some reports that say the Alt-A and option-ARM resets will be far less damaging than feared, because the bulk of the vulnerable ones will have already become non-performing, but the monetary authorities seem unlikely to take that risk. Another quantitative-easing program will further balloon the Fed's balance sheet and probably balloon bank reserves.

Nevertheless, both have been bloated for more than a year now and the money supply hasn't exploded. The only measure with any froth is M1, and even its growth is cooling down.

Unless the U.S. dollar tumbles, I don't see how gold will ramp upwards as a result.


Of course, if both long and short rates go up, the latter because of Fed hikes, then the greenback will likely benefit. This scenario won't be good for gold.