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BFI Capital
March 15, 2019

Central Bankers have Crossed the Rubicon

Crossing the Rubicon is a metaphor that means taking a specific step that commits one to an irrevocable course. Julius Caesar (100 BC - 44 BC) was a famous general of the Roman army who expanded Rome’s territory into France, Spain and Great Britain. When he was called back to Rome and explicitly told not to bring his army, he did not listen and crossed the river Rubicon that was the border between Rome and Northern Italy.

He brought his army, launched a civil war against the government and eventually became emperor for life (49BC). Unfortunately, he was later murdered by one of his closest former allies, Brutus. In fact, Caesar believed that Brutus was his illegitimate son from his lover in his youth – when Caesar was 15 years old.

Central bankers collectively crossed their Rubicon when they began to expand their balance sheets by printing money, with which they bought fixed-income securities and equities. They became the biggest manipulators in modern financial history, of which today’s investors may not be fully aware.

Most retail investors think that markets function like they do today, but in fact they are highly manipulated by those who can print money out of thin air. While the interventions in a situation of crisis like in 2009 (that was the result of previously misguided central bank policies) was justified to stabilize the system, they did not stop and did not let the system heal by itself as should have been the case in a free market and capitalist system.

That was because central bankers thought it would be too painful, and they also think they have an order to create (artificial) prosperity. The Fed, the ECB, the Bank of England, the Bank of Japan, the Swiss National Bank and the People’s Bank of China, to name only the most important ones, continued to print money for years and started the biggest financial market speculation ever seen in modern history.

This insane policy is wreaking havoc on our financial ecosystem, as there are big losers and big winners created by these policies. In that sense, it is considered unfair by the losers and they revolt today against the establishment stems. This revolt does not come from hell or heaven but results from unsound policies.

Of course, there is more to these problems. However, they are deep-rooted in the ill-guided monetary policies that Greenspan began, Bernanke pushed to excess, and the rest of the world followed. We must give Jay Powell credit for criticizing Bernanke as the only member of the FOMC from 2013 onwards, as the recently released minutes from those years show. When he took the chair, he was trying to reduce the balance sheet over time to what it has been before. However, his recent speech shows that this is most likely impossible – something many knew the moment they began this excessively expansive policy. The ECB has not even tried to reduce its balance sheet and is already talking about a potential next QE program. Thus, it is now getting very clear that central banking started a new era in 2009 – they crossed the Rubicon – from where there is no return.

Gold was discounting these events and peaked in 2011 after a terrific rise for 10 years. But gold has been correcting thereafter, because it overshot and later because the Fed stopped printing and even began reducing its balance sheet.

Gold spent the last six years forming a long-term saucer bottom, as can be seen in the chart below, with the low hit in late 2015. Once gold can break the upper $1300, the power of this bottom may propel it to much higher levels.

Gold with MACD - Weekly

Source: Thomson Reuters, Zulauf Investment Comment February 20, 2019

The first attempt to break through may most likely fail and it is conceivable that gold will consolidate below $1375 for several months before a successful break through will materialize. Gold will then begin to discount the new era of currency depreciation, continued financial market manipulation, and increasing political turmoil. We therefore recommend that investors hold a certain percentage of gold in their portfolios – not for trading, but as a long-term investment that protects against the silly policies from governments to central bankers. The rising uncertainty from politics, trade and economics is a great help to the yellow metal. Data shows that central banks around the world have been large buyers of gold. It is becoming obvious that the balance sheet expansion by central banks seen in recent years will eventually continue. Gold smells that the Fed’s attempt to reduce its balance sheets will be over soon. Thus, central banking is now confirming a new era of an ever-expanding balance sheet because the short-term economic costs to reduce it would be economic pain and declining equity markets. Today’s central bankers all operate according to “short-term gain, but long-term pain” instead of vice-versa.

And long-term, they will not have the power to clean up the mess they are initiating. This new era is positive for gold, as gold reflects the collective dumbness of today’s policy makers and how they steer our societies deeper into a mess. Central bankers crossed the Rubicon and so will gold, but in a positive way. Gold mining stocks are also attractive from a long-term perspective.

In the short run, gold will soon bump against the resistance of $1375 and a lengthy consolidation may then start. Use set-backs to accumulate for the long-term.

Felix Zulauf is a strategic advisor to BFI Capital Group. This article is published here, courtesy of Felix Zulauf. It is an excerpt from his most recent "Investment Comment".

He publishes research pieces approximately twice per month, to update investors on his macroeconomic views regarding equities, fixed income, the global markets, interest rates, currencies, commodities and various other topics. The service is geared to institutional investors and is not targeted for retail investors.

For more information, visit the Zulauf Consulting website, or request a complimentary trial of the service by contacting Blue Fox Advisors LLC at or by phone at 404-200-0777.

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