Archive for monetary policy
(Posted: June 18, 2013)
Gold continues to suffer under a cloud of bearish expectations.¬† Its price has been trending lower for some 20 months now - and, at recent lows, it is off some 30 percent from the September 2011 all-time high of $1924.
A growing number of investors, analysts, and journalists are already writing obituaries for the decade-long bull market and foresee only a grim future for the yellow metal.¬† These naysayers, most prominently economist Nouriel Roubini who gained some renown for predicting the financial-market debacle of 2008, point to a number factors to support their bearish predictions.
They say inflation will remain subdued, the U.S. dollar will continue to appreciate, interest rates will rise, Europe will pull through without sovereign defaults, and the central banks of some deeply indebted countries with substantial gold reserves (like Italy or Spain) may sell some of their official gold reserves.¬† Moreover, they say gold has been over-hyped and don’t see why investors would want to own an asset that earns no income.
It seems to me that the bears have a fairly provincial view and a limited understanding of gold’s increasingly bullish long-term fundamentals.¬† By “provincial” I mean they are ignoring more than half the world - the half that loves gold and will accumulate more.¬† They seem to think not much is important to the future of gold outside the United States and Europe.
Instead, the gold bears are ignoring much of what goes on beyond Wall Street and America’s shores.¬† What happened to China, India, the Middle East, Turkey and other gold-hungry countries?¬† Have these countries ceased to matter in the gold-price calculus?
Quite the opposite: In the next few years, if not longer, households, institutional investors, and central banks in these countries will continue to acquire huge quantities of gold - and most of these acquisitions are for the long term.
Buyers are not speculating for short-term gains but accumulating for long-term security.¬† In other words, much of this gold changing hands today won’t come back to the world market even at much higher prices levels.¬† This will contribute to a growing shortage of available physical gold - guaranteeing steep price increases for the yellow metal in years ahead.
Indeed, looking out beyond the next year or two, demand for gold in these gold-friendly countries will be enough to move the metal’s price higher even if economic and investment conditions in the United States and Europe remain inhospitable for gold.
What’s more, the gold bears are dismissing the certain consequences of unprecedented global monetary creation.¬† With the central banks of virtually every major economy inflating money supply with abandon, gold’s detractors are forgetting the iron-clad law of supply and demand . . . and the eventual certain devaluation of most, if not all, the world’s currencies - measured in terms of their purchasing power for actual goods and services.
The gold bears are also overly optimistic about U.S. economic prospects and the implications for U.S. monetary policy.¬† Those who adhere to a rosy economic scenario are expecting a shift in monetary policy later this year in which the Fed begins dialing back on the monthly dose of monetary stimulus.¬† This increasingly prevalent viewpoint has, in recent months, weighed heavily on the gold price and, indeed, the day-to-day variations in market expectations of future monetary policy explains much of the short-term gold-price variation so far this year.
In contrast, a faltering U.S. economy accompanied by persistently soft employment-market conditions and the declining pace of consumer-price inflation - could trigger a surprisingly robust recovery in the price of gold, - especially if monetary policy shifts into an even more accommodative mode.
The Fed is targeting a decline in the unemployment rate to 6.5 percent and a rise in the inflation rate to at least two percent.¬† As long as these targets remain illusive, the Fed is likely to continue its program of Treasury and mortgage debt purchases, known as quantitative easing, at $85 billion per month - and if the economy falters, as I think it might, financial markets may be surprised to see an even more stimulative monetary policy, surely a recipe for higher gold prices.
As noted above, financial markets have been increasingly anticipating an early reduction in the pace of quantitative easing, a “tapering” or scaling back in the pace of monthly bond purchases.¬† As a growing number of gold traders and investors begin to doubt the rosy economic scenario - possibly due to a spate of disappointing economic news - gold could rally enough to reverse the gold market’s recent downward price momentum and reestablish the long-term bullish uptrend.
Federal Reserve Chairman Bernanke has repeatedly warned us not to expect any reduction in monetary stimulus until the labor market shows meaningful signs of improvement - and this seems unlikely anytime soon.¬† Indeed, employment-market conditions are worse than the headline unemployment rate suggests - wages are stagnating, the workweek is shrinking, the number of part-timer workers seeking full-time employment is growing, and a rising number of discouraged workers are dropping out of the work force. This is a recipe calling for more stimulus, not less.
What about inflation and the dollar?¬† Investors and observers of the gold scene have been misled by the very low reported rate of consumer price inflation and by the apparent strength of the U.S. dollar in world currency markets.¬† I don’t know anyone who really believes that inflation is near zero.¬† It may be low, but not that low . . . and, eventually, all that new money the Fed is creating month after month will come home to roost.
Gold prices have been restrained by the “appearance” of a strong U.S. dollar. ¬†But, in reality, the currencies of all of the old industrial-world countries are devaluing together as each country attempts to increase international competitiveness and boost exports.¬† These currencies - including the euro, the pound, the Swiss franc, the yen, the Australian dollar and others - are all losing value in terms of their true purchasing power - only the dollar’s decline may be a bit slower than most others.¬† This “beggar-thy-neighbor” competition is reminiscent of the Great Depression . . . and must surely be supportive of gold.
Stay tuned to this space - and my more frequent twitter posts @NicholsOnGold - for on-going gold-market analysis and commentary.
(Posted: June 4, 2013)
For now, gold remains captive to the flow of U.S. and global economic indicators and prospects . . . especially those that may influence Federal Reserve monetary policy.
With the U.S. economy far from a satisfactory and self-sustaining recovery, the news is likely to become increasingly positive for gold — with diminishing expectations of imminent “tapering” (that is scaling back the Fed’s monthly bond-buying program) eventually replaced with talk of additional monetary stimulus of one sort or another.
Home in the Range
At the moment, however, gold appears range-bound between $1370 and $1420 — bouncing around within this range on the release of every relevant economic indicator and every comment on prospective monetary policy from one or another Federal Reserve official.
Paradoxically, a significant break out of this trading range — either up or down — is likely to boost buying interest. On the upside, if the price moves much above $1420, the momentum and other program traders will begin migrating back to the bullish camp. On the downside, if prices move much beneath $1370 (and even more so near $1320 (if we ever see gold prices back to this bargain price level), physical demand from all corners of the globe will underpin the market and lead to a swift increase in buying.
Paper vs Physical
It is important to distinguish between the paper markets, which are reactive to the daily news flow and where most of the short-term speculative trading is occurring . . . and the physical market, which has been — and will continue to be — a giant sponge soaking up every ounce of gold available at prevailing prices and premiums.
Much of the “paper trading” is among a small number of dealers and institutional speculators — not only in the transparent futures markets, but also (and sometimes more so!) in the largely opaque and unregulated inter-dealer over-the-counter markets, also known as the “dark pools” of liquidity where high-volume trading goes on virtually unnoticed. For more, see my May 15th post “Dark Pools, Program Trading, and the Decline of Gold.”
And, I would include in this group of short-term paper traders the hedge funds that for several months now have been lightening their gold holdings (mostly in the form of gold ETFs) in order to participate in, and benefit from, the upward march in world equity markets.
I expect when markets turn — that is when Wall Street turns down and gold prices begin convincingly moving higher — we will see a reversal with some of these funds rushing back to gold, contributing to a surprising recovery in the metal’s price.
Gold is Forever
Importantly — and in contrast to the paper markets where trading is very short-term oriented — the physical markets have an increasingly long-term orientation. The Chinese (both on the Mainland and across Greater China) are accumulating gold, not to resell for a quick profit as prices recover, but with the intention of holding forever as an inheritance to be passed on to future generations.
Many retail buyers of bullion coins and small bars in Western markets are also long-term holders with little intention of taking profits anytime soon. ¬†These buyers are motivated more by fear than by greed — Fear of financial market breakdown, fear of monetary debasement and future inflation, fear of an uncertain economy, fear of government intervention in personal affairs, and so on.
Indian demand is less certain and typically more price sensitive — with sellers, often led by housewives selling a bangle or two, emerging on rupee-denominated gold-price rallies. The country’s central bank, the Reserve Bank of India, and the Finance Ministry raised import duties earlier this year and have taken other regulatory actions to discourage gold imports, which after oil are the country’s second biggest commodity import and a major contributor to India’s gaping current account deficit. These efforts are increasing the domestic price premium over the world price, assuring a rise in illegal imports, and ending the sale of old scrap gold to world markets. In any event, Indian gold buyers will gradually adjust to the higher domestic price and demand will return to past levels dependent on local economic conditions, especially in the farming sector, which is traditionally an important buyer of gold.
Don’t underestimate the bullish influence of official-sector demand on the future price of gold. Indeed, purchases by a number of central banks, especially the People’s Bank of China and the Bank of Russia (which are by far the two biggest buyers month after month, year after year) are unlikely to be sold within our lifetimes. These official purchases are intended not only as a vehicle for reserve diversification and reducing reliance on the dollar, the euro, and other old-world currencies — but are part of these two countries’ strategic goal of raising their respective currencies’ international reserve status and gradually reshaping global monetary affairs.
The bottom line is that when gold turns higher there will be insufficient liquidity and a shortage of available supplies — except at much higher prices . . . and many will be surprised by the magnitude and swiftness of gold’s next big leg up.
(Posted: May 22, 2013 from Twitter)
Gold prices moved higher this morning in anticipation of Fed Chairman Bernanke’s testimony today before the Joint Economic Committee.
Recent speeches by other Fed officials in the past few days suggest the Fed will leave the door open to stepped-up quantitative easing should the economy falters or if inflation remains below target.
Any talk of more QE from Bernanke this morning could give gold enough juice to re-test overhead resistance around $1400 . . . and possibly move higher.
See my recent posts on NicholsOnGold.com for more on Fed policy and the economy.
(Posted: May 21, 2013 from Twitter)
This week’s gold-price action reflects a market once again range bound, searching for direction in an uncertain economic environment. ¬†For sure, the risks of further gold-price retreat remain high. ¬†Much depends on the market’s sense of prospective Federal Reserve policies.
This Wednesday the financial markets will be listening carefully to the latest Fed speak on monetary policy and the economy for clues.
First off, the FMOC will be releasing the minutes of its April policy-setting meeting — always an interesting document to Fed watchers who, like the Greek oracles, look for meaning in even the slightest change in wording from the previous FOMC meeting minutes.
In addition, financial markets will be listening carefully to Fed Chairman Bernanke’s Wednesday testimony before the Joint Economic Committee.
If that wasn’t enough, financial markets are re-reading yesterday’s somewhat ambiguous speech by Charles Evans, president of the Chicago Fed and a voting member of the FOMC this year . . . and today’s speeches from James Bullard, president of the St. Louis Fed, also a voting member this year, and William Dudley, president of the New York Fed and a permanent voter.
Financial markets — including gold — will be parsing every word for clues about prospective monetary policy, especially with regard to its accommodative bond-buying program.
Any hint of “tapering,” that is cutting back on its $85 billion monthly bond-buying program, could ¬† send the dollar higher and gold prices lower. ¬†But, most likely, taken in total, all this Fed speak is likely to leave markets still uncertain and confused about the Fed’s intentions.
What will matter more in the weeks ahead is the flow of economic news. ¬†If the economy seems to be gathering strength, markets will assume an early reduction in monetary accommodation — and, other things being equal, this could make it more difficult for gold to renew its long-term uptrend.
My sense, however, is that the economic news will not be encouraging. ¬†After all, the economy still faces continuing drag from January’s rise in payroll taxes as well as increases in state and local taxes and user fees and from the on-going sequestration-required cuts in Federal spending and resulting worker layoffs and unpaid furloughs.
Importantly, Europe’s deepening recessions and slower growth in China, India, Brazil, Mexico and other emerging economies that are important markets for U.S. exports is taking its toll.
Uncertainty about U.S. fiscal policies, the continuing divide between the White House and Capitol Hill, the approaching U.S. Federal debt ceiling and talk of a downgrade in Treasury debt by the rating agencies later this year is making it difficult for businesses to make long-term investment decisions and for consumers to take on more debt, necessary to sustain household spending.
Optimists point to Wall Street’s strength and the rise in home prices as evidence of an improving economy are looking through rose-colored glasses,
In my book, these asset markets are rising, not because the economy is regaining its health and vigor . . . ¬†because the vast quantity of liquidity created each month by the Fed’s bond-buying program has no where else to go — and the computer models that govern much of the action on U.S. and world equity markets are trend followers, seeking the implied yield that comes from going wherever the momentum indicators take them.
Signs the economy is losing ground — and is increasingly at risk of slipping into recession — could be the catalyst to an upside gold-price breakout.