Fed Policy, QE, and the Impact on Gold

Craig Hemke (00:00)
Hello again from Sprott Money, SprottMoney.com. We are now into the middle part of December, just a few weeks to go in the year 2025. We're not done yet. And it is time for your Ask the Expert segment for the month of December. I am your host, Craig Hemke. And joining me this month as said expert is EJ Antony. If you're not familiar with EJ, he's a great follow on Twitter.

I'll have him give his Twitter handle here in a second. Dr. Antoni has a PhD in economics and he is the chief economist at the Heritage Foundation in Washington, DC. So it'd be fun to pick his brain a little bit here. E.J., thank you for joining me.

E.J. Antoni, Ph.D. (00:44)
Hey, my pleasure, it's great to see you again.

Craig Hemke (00:46)
It's very fun. I'm really glad we've been able to get acquainted. And I can't wait to get some of your thoughts on what has happened this week and where we're going from here. ⁓ As we get started though, I mentioned we're recording this here on the 12th. Hey, 12 days, 13 days to Christmas. By the time you're watching this, it might be under 12. ⁓ Time to do some shopping. Of Sprott Money at SprottMoney.com has all kinds of great sound money gift ideas ⁓ and their holiday sale is currently taking place.

So go to SprottMoney.com, give the gift that keeps giving the whole year, Clark, and introduce your family and friends, your grandkids and kids to sound money and what that's all about by picking up a few gifts from SprottMoney.com. Of course, just call them at 888-861-0775. All right, E.J., like I said, you're the chief economist at the Heritage Foundation, well plugged in to what's going on in Washington, D.C. I mentioned you're a great follow on Twitter.

Maybe just a few words about your background and where people can find you.

E.J. Antoni, Ph.D. (01:50)
Well, the best place to find me is going to be there on Twitter or X, whatever we call it these days. The handle there is at real EJ and Tony in terms of stuff I'm involved with right now. A lot of monetary policy, which obviously has a huge impact on precious metals. And actually what we saw this week, getting back to your other question on what the Fed did. This was something that literally you and I talked about. I mean, not that long ago, right? We were looking at.

Craig Hemke (01:54)
Yeah, right.

E.J. Antoni, Ph.D. (02:20)
The financial plumbing and we said, you know, the Fed is going to have to stop QT soon. And they did. They stopped it on December 1st. And then we said they're going to have to restart QE in months, maybe even just weeks. And sure enough, today, the 12th was the first day of asset purchases. In other words, we're back to money printing. And it's not it has nothing to do with the labor market. Has nothing to do with inflation. This is all because of the monetary framework.

Craig Hemke (02:40)
How about that?

E.J. Antoni, Ph.D. (02:48)
that the Fed created in March of 2020. kind of, yeah, I guess you could say the chickens have come home to roost, right? The market has really boxed them in and Powell even admitted this, right? In the press conference, he talked about how the interest rates in some money markets were basically just getting too high. In other words, the Fed wasn't able to control those interest rates. And so the market just forced the Fed's hand.

Craig Hemke (02:54)
Yeah.

E.J. Antoni, Ph.D. (03:14)
And now the Fed is having to do all this ⁓ liquidity injection via the purchase of treasury bills. So it's something that we've been looking at for a very long time now. We knew the writing was on the wall over a year ago because of what was happening with reverse repurchase agreements and some other parts of the money markets. And we've just been watching it very, very closely ever since. And it happened pretty much right on schedule. So. We're going to continue to keep an eye on this and all of the upward pressure that it's going to put on things like precious metals.

Craig Hemke (03:49)
It was quite a, it wasn't like you said, it wasn't a surprise ⁓ to the folks like you. And like you said, the discussion we had at TF Metals Report a few weeks back ⁓ that this plumbing was getting a little tight. ⁓ I guess the surprise came for the market because we had this explosive move into precious metals ⁓ during the press conference and then into Thursday the 11th. We're giving some of that back here as we record this on Friday, but whatever, that's nothing new. ⁓

E.J. Antoni, Ph.D. (04:02)
Mm-hmm.

Craig Hemke (04:18)
E.J., the question, I don't want to make it just a question of semantics, but I see this argument out there about, it's not QE, it is QE. It is a liquidity injection. No, it's not. They're monetizing the debt. No, they're not. Where do you fall in all this?

E.J. Antoni, Ph.D. (04:35)
Well, at the end of the day, what I really care about are the effects. Forget the nomenclature. This is part of the problem with using all these euphemisms, right? It's that they can mean whatever they want to whoever wants it. So let's put the euphemisms aside for a second and let's look at the actual mechanics of what the Fed is doing because that will inform us as to what the effects of those actions will be. The Fed basically has a magical checking account as you and I have discussed, right? When the Fed

Craig Hemke (04:44)
Yeah.

E.J. Antoni, Ph.D. (05:04)
It gives the asset holder cash and the asset holder gives the asset to the Fed. The former asset holder now has that cash from the Fed and the Fed has that revenue generating asset. In this case, it's treasury bills. Now, where did the Fed get the money that it paid that asset holder? The Fed created it in the action of purchasing that asset. So,

Craig Hemke (05:27)
Hmm.

E.J. Antoni, Ph.D. (05:33)
When I say the Fed is a magical checking account, that's not just me trying to be pejorative or comical here. The account has a perpetual zero balance. There is nothing in it. So when the Fed writes a check, the money is created. It used to be that they would literally have to print the money. Today, they just enter ones and zeros into a computer to grow a spreadsheet, grow a balance sheet entry.

by purchasing these securities, the Fed is by definition creating money. Likewise, what the Fed was doing until December 1st was the Fed was ⁓ selling off securities. It was a net seller at least, right? So that meant that the Fed would say to you, look, I'm gonna give you this treasury bill, note, bond or.

maybe even agency debt like a mortgage backed security, whatever the case may be, I'm going to give you this revenue generating asset, you're going to give me cash. So now you are the asset holder and now I at the Fed have the cash, except as soon as the Fed received that cash, what happened to the cash? It disappeared. It was extinguished because again, this account at the Fed must have a perpetual zero balance. And so by selling assets, the Fed was extinguishing money.

Craig Hemke (06:56)
Mm-hmm.

E.J. Antoni, Ph.D. (06:57)
By

buying assets, the Fed is by definition creating money. Okay, so call it QE, call it not QE, call it money printing, call it asset management purchases, use whatever euphemism they want or you want, whatever the case may be. At the end of the day, it is creating money, full stop. All right, so what are the effects of that? It's pretty simple. Econ 101, you are increasing the supply of money.

relative to the supply of fixed goods like gold or silver, let's say, or I don't care if it's platinum. In fact, it could even be another object. It could be a car. It could be the number of cars, right? It could be the amount of services in the economy, whatever the case may be. When we say fixed, we just mean fixed at the moment, all right? Because obviously you can go out and you can mine more gold. It's happening all the time. The supply of gold is increasing.

Craig Hemke (07:50)
Mm-hmm.

E.J. Antoni, Ph.D. (07:53)
Obviously the demand of gold is increasing faster, hence the increase in price. But whatever the case may be, you are increasing the quantity of money relative to the quantity of products and services that that money can buy. That means that you have increased the relative price of those products and services, but you have decreased the relative price of that money. So what happens when you decrease the price of money? This is kind of confusing for a lot of folks actually.

because we think about money as the way we price things. So how does money have a price? It's just like what, ⁓ well, let me put it this way. One of the functions of money is that it's a yardstick. Okay, it tells you how much of something you need to get something else. In other words, how many dollars do I need to buy an ounce of gold? Well, if you shrink a yardstick, you will need more yardsticks to cover the same distance.

Craig Hemke (08:50)
Hmm?

E.J. Antoni, Ph.D. (08:51)
If all of a sudden a yardstick goes from 36 to 30 inches, you will need many more of them to cover, you know, at whatever distance it is, a city block, a mile, length of a football field, you name it. You just need more because you've shortened them. That's what you're seeing with the dollar. As the dollar is worth less, its length as a measuring tool goes down. So now you just need more of them to cover the same distance. In other words, you need more dollars to buy

the same ounces of gold or the same number of cars to buy the same number of services. Let's say you have somebody preparing your tax return for you. They're providing you that service. You're gonna need to pay them more dollars now, not because the service got better, but because the dollar got worth less. And again, it goes all back to this very fundamental basic understanding of one quantity relative to the other, and therefore there is a relative price between the two.

Craig Hemke (09:24)
Yep.

E.J. Antoni, Ph.D. (09:49)
And changing those relative quantities is going to change that relative price. That's what we're seeing today. Now, on top of that, you also have an additional element when it comes to gold, especially, and to a lesser extent, silver, but it's still true. It's what we call a monetary premium. And because we see gold and silver as essentially having a special monetary value, not only because they

They were literally money in the past, but there's also the possibility that they might become money again in the future. This is the same speculative aspect that gives Bitcoin literally all of its value, or at least nearly all of its value. This monetary premium, this means that currency debasement or the relative decline in the value of currency is actually going to give gold, silver, anything with a monetary premium in additional increase in its price.

E.J. Antoni, Ph.D. (10:47)
And sure enough, that's what we have seen the last several years. I will never forget in, oh gosh, I think it was September of 22, Wall Street Journal had a headline that said gold loses its status as safe haven. And I think it was like 17 or 1800 bucks an ounce. And thank goodness I made the call to get into gold when it was, I think just over 1800. Maybe it was like the very beginning of 2023, January of 2023.

Craig Hemke (11:01)
Right, right, right.

E.J. Antoni, Ph.D. (11:14)
And obviously it's done incredibly well since then because the writing was on the wall of what was going to happen to currencies relative to other prices, especially anything with a monetary premium. And that is is very likely set to continue.

Craig Hemke (11:17)
It has. Mm-hmm. Well, and you make that excellent point. I mean, it's about supply and demand of the dollar in any, got the old supply and demand curves, right? And you increase the supply. Well, actually maybe subsequently decreasing demand. That's another part of the equation we'll have to talk about sometime. You lessen the value. And it's not that gold's gone up in price and now is expensive. It just took $1,100 to buy an ounce of gold 10 years ago. It took 2,200 five years ago and now it takes 4,400. The gold's the same.

E.J. Antoni, Ph.D. (11:58)
Mm-hmm. Right.

Craig Hemke (12:00)
It's the amount of dollars it takes. ⁓ E.J., go ahead. Please.

E.J. Antoni, Ph.D. (12:03)
And you bring up a really good point, if I may, just real quick on

the demand side of this. The United States made a huge, huge policy mistake that has really ⁓ weakened the dollar since then. And it was when the government, the US government made the decision to seize any Russian assets that were dollar denominated. So to be clear, these were not American assets. These were assets owned by the Russian central bank and by the Russian people.

Craig Hemke (12:24)
100%.

E.J. Antoni, Ph.D. (12:31)
And the United States decided in a completely unprecedented move to confiscate them. And this is something that didn't even happen during the Cold War with the Soviets. The consequence of this was leaders around the globe, not universally, but there were plenty of them who said, you know what, we don't think the dollar is is a safe asset anymore. And that accelerated an existing trend of dumping the dollar in exchange for things like gold as central bank reserves.

Craig Hemke (12:40)
Right, right.

E.J. Antoni, Ph.D. (13:00)
And that continues to this day, especially in very large economies like China, ⁓ where their asset purchases in terms of gold, the gold reserves they're bringing into the country are basically continue to set records or near record highs. And all of that represents a shift in demand as you articulated away from dollars and towards gold. So you have simultaneously increase in the quantity demanded and a decrease in the ⁓

excuse me, a decrease in the quantity demanded, an increase in the quantity supplied, both of which are going to put downward pressure on price. And that's what we've seen.

Craig Hemke (13:39)
Yep, and upward pressure on price of things. Like you said, the fixed measuring sticks ⁓ like gold or silver. ⁓ E.J., ⁓ regarding the Fed, one last question there. ⁓ Powell's a lame duck at this point. ⁓ He even specifically stated this new, whatever we want to call it, $40 billion a month of ⁓ temporary open market operations. We'll see how temporary it is. It's going to only run through April.

which is how long his term is going to run. Where do you think Fed policy heads in 2026? Will the next Fed head just kind of be a yes man for the Trump administration and cut rates and work with Besant, you know, to manage the rest of the curve? Where do think this goes?

E.J. Antoni, Ph.D. (14:28)
But it depends on who it is, right? There is certainly that chance that you get a more of a kind of yes man there. There's also a chance that you get a really talented technocrat and someone who understands the mechanics of the Fed and how we can actually kind of put the toothpaste back in the tube, so to speak, and reverse the monetary framework that they built in 2020.

that has required them now to reengage with quantitative easing or again, whatever euphemism you wanna use, but it is requiring them to create money again to keep the financial plumbing flowing and to prevent really a financial crisis from brewing. ⁓ What has happened the last couple of months was basically ⁓ a way for the Fed to prevent the repo crisis that happened in September of 2019, which required them to...

ultimately conduct a $500 billion bailout of leveraged hedge funds. Think of that half a trillion dollars, but that's what they had to do. We forget that happened because it was right before COVID and everything. And once COVID hit, it was a buying spree at the Fed for every asset they could get their hands on. So it didn't matter. ⁓ It's going to be difficult to unwind that, right? What the Fed's response has tended to be ever since the 1980s has been every time there's a crisis,

Craig Hemke (15:30)
Right, right before COVID.

E.J. Antoni, Ph.D. (15:50)
they instead of letting things play out, try to slap a bandaid on it and they set up the next bubble. This is what they did with long-term capital management, right? That was really the first case of too big to fail, where not that the government said this is too big to fail, but that that happened in conjunction with the Fed saying, we're gonna step in and be the ones to lead the bailout here. Then obviously the dot-com crisis, the dot-com bubble, the housing bubble. ⁓

Craig Hemke (15:59)
Yep, 98.

E.J. Antoni, Ph.D. (16:19)
You were you were seeing I mean, it's difficult to identify exactly what the bubble is. You really had about half a dozen different things that were starting to pop at the end of 2019. But it could have been a very healthy, ⁓ very healthy way to just get the mal investment out of the economy. But instead, you had covid hit and the Fed put rates down to zero and bought everything. And now you genuinely do have an everything bubble. So, you know, again, it depends on I think who the next person is.

Craig Hemke (16:39)
Yeah. ⁓

E.J. Antoni, Ph.D. (16:48)
in terms of are we going to get actual monetary reform, which would be terrific, and we could actually get towards something resembling stable prices or whether you're going to get more of the same.

Craig Hemke (16:59)
Yeah, Trump says we might, he might, he knows who it is. least he said that a couple of weeks ago. Who knows if he's changed his mind. ⁓ But he's also said he might let that name out before Christmas or before the end of the year. So we'll all know soon enough when we can begin to project where they might be headed. I don't know, to some extent, I feel like this rallying gold is kind of front running. What's going to be a really funny, interesting year next year. All right, E.J., my final question I want to ask you about. ⁓

after the government shut down, put all that data behind, you know, so far behind the calendar, they just punted on a lot of the October data. ⁓ We are scheduled at least to get the November jobs report ⁓ next Tuesday, the 16th at 830 Eastern. That'll be the first, let's call it live report that we've had now in months. ⁓ Powell even mentioned in his press conference that, you know,

I mean, I've always called it the BLSBS and he kind of alluded to that. He was like, yeah, we know they're going to have to revise, you know, half a million jobs every six months out of the report. So we're going to look at it if it just takes 60,000 right off the top of the headline number. It's like, okay, well, what is that number then? What maybe most folks don't realize is ⁓ for a while there, your name was bandied about as a replacement to head the Bureau of Labor Statistics. ⁓

E.J. Antoni, Ph.D. (18:15)
Hahaha

Craig Hemke (18:25)
And then, but you're not going to, you're going to remain at the Heritage Foundation. What, if you could just kind of summarize what's wrong with how that report is tabulated in the first place. And then maybe some of the changes that, you know, had you gotten a chance, you would make.

E.J. Antoni, Ph.D. (18:45)
Sure, there's a couple of real big problems. One of which is just that response rates for a lot of BLS surveys have plummeted over the years. It got especially bad, you know, after COVID. ⁓ These surveys are just way too burdensome, especially on small business, which is the most underrepresented portion of the business community in these surveys. And it's because...

You know, look, if you're a large corporation and you got your HR and accounting departments and everything in house, it's very easy for you to turn around the data into the kind of format that the BLS wants. And if you're a small firm, you don't have that kind of flexibility in those kinds of resources. It's just too difficult. There's no reward structure. And it's all just a burden. And again, when costs are as high as they are today, you don't have the margin for that kind of stuff. So they're just not responding.

Craig Hemke (19:25)
Right?

E.J. Antoni, Ph.D. (19:35)
And we're having to wait until mandatory quarterly UI data is filed with the Labor Department before those figures can get incorporated into the data that the BLS uses. And then we actually get accurate numbers. And for those of us who actually follow those quarterly reports, that's how I and many other people were able to know ahead of time that we were gonna get a massive downward revision back in September, I guess it was, of 911.

thousand jobs in annual revision. In other words, we had almost a million jobs over the course of 12 months that were never there that we were told were being created. But look at again, it's not just me, plenty of other people look at this data. In fact, the Federal Reserve Bank of Philadelphia, one of the 12 regional Fed banks, even produces an early benchmark where they essentially take all this data that is publicly available to me and plenty of other folks, and they try to create

Craig Hemke (20:11)
Right. Imaginary.

E.J. Antoni, Ph.D. (20:33)
their own estimates. And that's one of the tools that that I use as well. And so even within the Federal Reserve system, again, they knew you were going to have this huge downward revision. And the kicker is that even though the problem has been blatantly obvious, it's been evident that it was there for several years now. BLS still hasn't fixed it. And and so this is why Powell can can say at a press conference, look, we're just going to axe several thousand jobs off the top every single month.

because we know it's not true. We know the jobs aren't there. We know the numbers are garbage. And so we're gonna act on the best information that we have, which is knowing that BLS is grossly overestimating ⁓ some of these labor market conditions right now, underestimating others, but whatever the case may be. you know, this whole, and it's not just the survey response rates, the birth death model, which doesn't have to do with birth and deaths of people, but births and deaths of.

Craig Hemke (21:30)
Right.

E.J. Antoni, Ph.D. (21:31)
of businesses as

Craig Hemke (21:32)
Businesses.

E.J. Antoni, Ph.D. (21:32)
you know, ⁓ that has been grossly overestimating the number of firms in the economy and the number of people employed at each firm. And so that's another way in which it's not just a matter of how the BLS collects the data, it's a matter of how they process the data that just needs to be completely revised. mean, yeah, just from start to finish, from the way they collect to the way they process to the way they disseminate the data.

You really need to just revamp the agency from soup to nuts.

Craig Hemke (22:05)
Do you look at that number on Tuesday and just do like what Powell said and just say if they print 40,000 just assume it's actually negative 20? Is that just kind of the thing we do now?

E.J. Antoni, Ph.D. (22:14)
Well, I think we have to unfortunately really dig in deep and do a lot of work. You you have to say, all right, how many jobs is the birth death model actually adding? You have to look at the business formation statistics and try to guess from there, you which way the number of firms are going. And again, some of this data isn't even available on a monthly basis. It's available on a quarterly basis. And some of the BLS data sets, this is one of the real ironies.

Craig Hemke (22:27)
Yeah.

E.J. Antoni, Ph.D. (22:40)
some of the BLS data sets you can actually use to disprove the numbers you see in other data sets. ⁓ Because again, BLS will put out ⁓ other reports like business employment dynamics. So we can look at number of firms and number of jobs there. And again, it's just, it's a lot of legwork, but you can kind of double check the numbers if you will, and get a better sense of which way, where the economy actually is right now, and then which way it's headed.

Craig Hemke (23:09)
Should make for an interesting week next week. ⁓ That's for sure.

E.J. Antoni, Ph.D. (23:11)
You're not kidding

between jobs and CPI getting released.

Craig Hemke (23:15)
Right.

Didn't BLS put out the CPI too? Isn't that under their purview?

E.J. Antoni, Ph.D. (23:19)
Yes, exactly. a lot of, yeah,

a lot of people don't understand the same agency that is messing up the jobs numbers so terribly, frankly, ⁓ has been has been not doing a very good job with the inflation numbers either. We've we've had months where they were missing so much data. And it's not because the government was shut down. This all predates the shutdown. They were missing so much data that they literally were just imputing, which basically means making an educated guess.

Craig Hemke (23:45)
goal seeking.

E.J. Antoni, Ph.D. (23:45)
In other

words, we don't have info on this cell in the spreadsheet or this one or that one. And so we're just going to impute it all. And in some instances, they were guessing again, it's little more than educated guess. They were imputing more cells in the spreadsheet than they had to do during COVID when the economy was shut down and surveyors had a very difficult time finding prices. mean, it's absolutely just it's despicable. The disservice that is being done to the taxpayer here who's

Craig Hemke (23:51)
He

E.J. Antoni, Ph.D. (24:15)
Again, pain for all of these people.

Craig Hemke (24:17)
And the algos, the high frequency trading algos, the markets, just read the headline. You know, and that's 90 % of the volume some days. And it's just, goodness gracious. EJ, ⁓ it's always fascinating to visit with you. And ⁓ I'm sure everybody watching has enjoyed this. Again, ⁓ real EJ and Tony, right? That's your Twitter handle or X handle.

E.J. Antoni, Ph.D. (24:40)
You got it, A-N-T-O-N-I.

Craig Hemke (24:43)
encourage everybody to ⁓ give E.J. a follow because he puts out great stuff almost every day. E.J., thank you so much. It's been really a ⁓ great visit and just great information, and I'm sure everybody has really enjoyed hearing it.

E.J. Antoni, Ph.D. (24:56)
Hey, it's my pleasure. Thank you for having me.

Craig Hemke (24:59)
Well, hopefully we can do it again in 2026, but we're not done with 2025 yet. And so on your way out, everybody watching, if you haven't already subscribed to whichever channel you're watching this on, you might want to do so because my old friend from the great white North, ⁓ Santa himself, everyone's favorite retiree is scheduled to visit with me next week. think everybody knows I'm talking about Eric Sprott, who's had a pretty good year, I would imagine, ⁓ with his net worth.

So we'll see if Santa wants to ⁓ see what he has to say. We're going to record that next Thursday. So hit the subscribe button so that as soon as Sprott Money posts it, you'll be able to watch and listen to the ⁓ wisdom of our old friend, Eric. Again, EJ, thank you for your time. Thank you everybody for watching. Visit Sprott Money and pick up some holiday gifts and keep an eye on this channel for some more information before we can begin to wrap up 2026.