At 50 times, the leverage in its balance sheet is enormous (meaning $1 of capital supports $50 in asset value). But as the Fed is not a commercial bank, such leverage is probably not an issue.
With the balance sheet so stretched, one would think the Fed would be squeezing as much as they can from their assets. Not so. The Fed and Treasury continue to value their 261.5 million ounces of gold holdings at $42.2222 an ounce, providing the Fed with a balance sheet value of just $11 billion.
At today’s price of around $730, the Fed’s assets would rise by $180 billion, or roughly the amount Fed credit expanded last week. But a glance at the Treasury’s US International Reserve Position’ tells us why a gold revaluation will not occur anytime soon. According to the Treasury, their description of gold is as follows:
Gold (including gold deposits and, if appropriate, gold swapped).
Interestingly, the additional explanation that the country’s gold stock includes swapped gold only began appearing from 14 May, 2007 onwards. It would appear that the US Treasury and Fed do not hold anywhere near the amount of gold they claim to, with the mysterious difference representing a short position in the gold market.
We continue to monitor the bond market for clues as to investor appetite for US Treasury’s. As shown in the chart below, the US ten-year bond yield hit a low in mid-September. In other words, bond prices looked like they peaked in September and even in the panic of October could not make new highs.
The government bond market bubble, based on unquestioned faith in US government credit, is perhaps in the initial stages of deflating. The big question is where does the money leaving the bond market flow to? We’re likely to find out in the next few months, but our guess is that the gold and silver markets will provide accommodating homes.
Looking at the chart below, we see gold continuing to correct the nine year advance from the 1999 lows to the all-time high of $1032.70 reached earlier this year. Although holding above the 24 October low of $682.41, rebound attempts have been capped by resistance in the region of $775 to $780.
In the near-term, we anticipate further consolidation below $780. While this barrier continues to cap prices, we cannot rule out a deeper correction to levels below $682.41.
Despite the near-term correction in gold, the longer-term outlook for the precious metal remains positive. In our opinion, a clear break above $780 will improve near-term momentum although a further break above the $850 region is required to signal a restoration of the longer-term upward trend.
While the bond market looks to be getting restless, the inflation/deflation camp remains evenly split. The asset market deflation we have witnessed over the past 12 months is flowing through to the real economy, so shorter term, deflationary forces have the upper hand.
