Negative interest rates part 2: A game of Dominoes called “Yield Curve Control”
History was made back in 2013 when twelve builders spent eight days setting up 277,275 domino pieces in a record-breaking display that took only ten minutes to topple. Only 272,297 fell but it was more than enough to set a record.
Once the question of negative interest rates was brought up to Federal Reserve Chairman Jerome Powell last Wednesday, he reiterated that “such a policy wasn’t on the table”, but it appears that the Fed could reverse its course if the economy further declines. What we have seen over the past couple months are those final 4,978 dominoes beginning to fall and there is little anyone can do to stop it. Now I am only looking forward, not in the rearview mirror as to what could have been done. Personally, I think the first domino fell on August 15, 1971 when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value and abandoned the gold standard. All other suggestions will need to be discussed over a cigar and scotch once the social distancing restrictions are lifted.
As the crisis deepens and growth forecasts begin to see further setbacks, the Fed will take one last action after we dip into negative rates. They will take from the Bank of Japan's playbook and adopt “yield curve control”. Simply put, the Fed will buy as many bonds as necessary to hold yields at specific levels across the curve. At this point we will continue to see the balance sheet expand at a rapid rate causing another surge in the price of gold as indicated in the charts below.
From a trading perspective we have been using multiple strategies to try and take advantage of the expected long-term price appreciation in the precious metals markets. If you are unfamiliar with strategies involving futures or options, we at Blue Line Futures are here to help. GET TRADE ALERTS!
Here are a few key “stand outs” and should be on everyone's tactical trading screens.
The chart above shows the rapid rate of expansion of the total assets of the Federal Reserve and what I believe is just the tip of the iceberg. This upward sloping line on the far right will ultimately develop into what we see below, which is the Bank of Japan's total assets.
The key area you will want to look at is January 2016, this is when they had first adopted negative interest rates. Several months later in September 2016, the BOJ realized that they had to adopt “Yield Curve Control” and anyone can see what happened to the balance sheet next with a massive extension higher. This leaves us with our last chart of Gold in Japanese Yen terms below.
The price of gold in yen terms still to this day continues to surge and make record highs. This is because once you adopt new “temporary” or “experimental” policy measures into the financial system they end up eventually becoming “permanent” or your “go to play” in the handbook.
Remember there are many factors that could affect the direction of the metals markets so be sure to stay up to date on the developments by registering for a Free two-week trial of the Blue Line Futures Morning Express Research Reports by clicking on the link here: The Blue Line Express Two-Week Free Trial Sign up
Good luck and good trading, Phillip Streible Chief Market Strategist 312-858-7303 Phil@Bluelinefutures.com Follow us on Twitter:@BlueLineFutures Follow us on Facebook: Blue Line Futures Facebook page Subscribe to our YouTube channel: Blue Line Futures YouTube channel
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