Gold and Bitcoin: The Ultimate Winners of the Feds End Game?

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The Federal Reserve has executed an aggressive plan over the past year, raising rates in a concerted effort to stifle runaway inflation. With ten consecutive increases starting in the spring of 2022, this is the steepest series of rate hikes America has seen since the 1980s.

As 2021’s near-zero interest rates fade from view in the rearview mirror, questions arise about when the current tightening cycle might end. Gold bugs and bitcoin aficionados are waking up, spurred on by whispers of a potential policy shift amid wobbly markets.

On the Blockworks On the Margin podcast, host Mike Ippolito interviews Luke Gromen, Founder and Chairman of Forest for the Trees, about the Federal Reserve’s endgame and how a possible leadership change could affect sustainable assets; both metallic and digital in nature.

Gromen likes gold and bitcoin in the current scenario, suggesting both win in the end.

People say the feds are going to raise rates a lot and that’s bad for gold.

That was historically the case, Gromen acknowledges, but things are different now. There has not been a time in the past hundred years when if the Fed raised rates too much, it would bankrupt the United States government.

Nothing is more bullish for gold and bitcoin, he says, than the moment markets say, Oh my God, they can’t raise rates anymore.

Of course, US governments will not theoretically go bankrupt, he says. The Fed will print the difference.

Tax revenue falls short of government spending, Gromen observes. Health and human services, social security, treasury spending if you add up those three categories, they were more than first half tax revenue.

The point at which the government cannot pay the true interest costs is already there, Gromen says. We were there in 2020. We were there in 2021.

Were there again.

Which is normally great for gold and bitcoin, Gromen says, but there’s a catch. If the Fed doesn’t print the money, given the dollar’s role as a reserve currency, US governments will crowd out global dollar markets, which we are seeing.

Gold and bitcoin win either way

As the dollar rises against other currencies, there could be some pressure on bitcoin and gold in the near term, according to Gromen. But at some point, the rising tariffs and restrictive printing policy become too much of a threat to stability.

Markets could panic at the prospect of a default if the Federal Reserve continues to suspend printing, he says, which isn’t bad for gold or bitcoin. Alternatively, the Fed could be forced to fund the spread with printed money.

In the end, they win anyway.

That said, Gromen admits he’s taking a barbell approach to the current situation. I am overweight gold, overweight bitcoin, overweight gold miners, as well as some energy games and some industrial equity games.

But I’m also overweight US dollar cash and short-term Treasuries and we have been all year.

Fly the plane into the ground to fight inflation

Gromen suspects Federal Reserve Chairman Jerome Powell doesn’t understand the second and third derivatives of what he’s doing because he appears to have pledged to fly the plane into the ground to fight inflation. .

There haven’t been many instances where I’ve seen American policy makers understand the second and third derivatives of what they’ve been doing for a long time, overall.

I have to be flexible in terms of managing my own cash and in terms of keeping my firepower dry, admits Gromen. This is the best way to hedge the volatility that will ensue if the Fed continues not to print.

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