RBA Adds $110 Billion in Three Months. Where Is It Going?

Wednesday, 8 July 2020
Melbourne, Australia
By Greg Canavan

Remember when lockdowns were all about preventing a strain on the hospital system?

Well, with 41 Victorians in hospital and seven in intensive care, Victoria goes back into stage 3 lockdown as of tonight.

I know lockdown enthusiasts will accuse me of not understanding the power of exponential numbers. Fair enough, maths was never my strong suit.

But I would respond by accusing them of not understanding how an economy works. It’s not a system you can turn on and off. It’s a system of human action and interaction.

That’s why Ludwig von Mises called his magnum opus on economics, Human Action.

Shutting an economy down means threatening the livelihood of millions of people.

I get that we need to get the spread under control. But harsh lockdowns are not the way to go about it.

What does the market think about the second largest state in Australia shutting up shop (literally) for another six weeks?

Not a great deal.

After rallying strongly early yesterday, it finished the day flat. And at midday today, the ASX 200 is only down slightly.

It’s not that the market doesn’t care. It’s just that it’s been flooded with that much liquidity the ‘care’ doesn’t show up that much.

You’ve heard a lot in recent months about how much the Fed and other central banks have expanded their balance sheets to cushion the impact of the virus.

What about the Reserve Bank of Australia (RBA)?

On 19 February, the RBA’s balance sheet was just under $170 billion. By 1 July it hit $281 billion.

That’s a 65% expansion in just over three months. In dollar terms, that’s an extra $110 billion in cash flowing through the financial system.

And it is essentially new cash in the system. The RBA’s balance sheet (on the liability side) saw an increase of $50 billion in its exchange settlement account, and $60 billion in deposits.

On the asset side it grew its ‘Australian dollar investments’ by roughly the same amount.

This is just a reflection of the RBA going into the market and buying state and federal government debt, and creating new cash to do so.

Where does that cash go?

Well, contrary to popular opinion, it doesn’t just sit idly on the sidelines. It moves through the financial system.

And right now, it’s facilitating a lot of buying and selling of equities.

That’s not to say it can prop the market up indefinitely. Another wave of fear will see that liquidity easily absorbed.

But for now, it’s doing its job.

One sector that has benefitted from the flood of new dollars is gold stocks. Rightly so too, given the effect of all those new dollars on the value of the currency.

As a result, Shae Russell’s Hard Money Trader service has profited handsomely from the many opportunities in the gold sector.

She just recommended her subscribers take profits on a West Australian gold explorer. The stock price had doubled since the initial recommendation back in February. From Shae’s update yesterday:

We’ve got some more movement with Black Cat Syndicate Ltd [ASX:BC8]. The share price has enjoyed an incredible rally in the last couple of weeks, largely due to good news and a lot of punters hoping to join the rally.

BC8 unearthed some impressive drill results last week. A couple of core samples showed gold mineralisation extending anywhere from two–five metres long. And one core sample reported three core samples with double-digit gold grades, around 84–99 metres deep.

The other samples were a mix of single-digit gold grades (the smallest being 3.3 grams of gold per tonne). And the depths ranged from 84–265 metres.

Shae is loving the boom conditions in the gold sector. But she isn’t getting carried away with things. Risk management, quite rightly, sits at the heart of her service. As she writes:

It’s prudent to reduce your risk where possible. Cashing out half your trade is a great way to do that.

Taking half profit on triple-digit gains is a powerful way for you to keep exposure to highly-speculative stocks as well as enjoying the rest of the runs.

Plus, that now frees up some capital to invest in your next parcel of shares…

Shae’s next recommendation will be hitting the inboxes of Hard Money Trader subscribers tomorrow. If you want to get in on the action, find out more here.

Gold stocks might be popular, but they’re about the only sector on the ASX that is in a strong upward trend right now. Most of the other sectors are enjoying a rally from the big crash in March. But they remain in overall downtrends.

It may be a cliché, but it’s true: In the stock market, ‘the trend is your friend’.

Right now, it’s very friendly for gold stocks…

Cheers,
Greg