Gold Futures have bounced up from the lows of around $1700 but it is too early to tell yet if the October correction is finally over. It’s a lack of follow-through on the downside for Gold Prices. The inability for Gold Prices to break cleanly below $1,700 might have been the result of physical buyers who were absent at higher prices & also the futures traders who booked gains around $1800 & are now returning to the market. Precious Metals & Commodity Markets have overreacted to the downside, when one considers the massive & multiple central-bank stimulus programs recently announced & some more in the near future pipeline. Most commodity prices & especially Gold, Silver & Base Metals are now at or near support levels and are ready to move up once they get a good momentum trigger. Cautious, range-bound trading may remain the trend for the gold and silver market for the entire week & there are now 5 trading days left until the US Presidential elections on November 6th after which some measure of the uncertainty will be lifted. The most important economic report this week will be the U.S. employment data for October, which comes out Nov. 2. It will also be the last jobs report before the US Presidential Election. Consumer spending and consumer confidence reports are also expected over the week.
US markets remain closed today, moving to protect workers as Hurricane Sandy barreled toward New York City with 70-mile-per-hour winds and the threat of an 11-foot sea surge. The shutdown, announced by the Securities and Exchange Commission, may extend through tomorrow also. Risks posed by the storm, expected to come ashore late today in southern New Jersey and potentially affect 60 million people, were deemed too great to require workers to travel. CME Group Inc. said it will halt stock-index futures and options at 9:15 am New York time. Gasoline rose as Hurricane Sandy threatened U.S. East coast refineries.
The positive U.S. GDP report announced last week has meant improved risk sentiment & the recent pullback in Gold Prices has attracted physical demand and investor buying. With this GDP report, it’s been 13 months that the economy has actually expanded. Gold market traders are again getting to be the most bullish in three weeks as investors’ bullion holdings rose to a record on Friday 26 – 2012. Investors boosted holdings in exchange-traded products to an all-time high of 2,585.1 metric tons, valued at $142.4 billion, data compiled by Bloomberg show. Hedge funds’ bets on a rally are near the biggest in more than a year, according to U.S. CFTC – Commodity Futures Trading Commission data. Central banks from Europe to China to the U.S. have pledged to do more to boost economies. The yen reached a four-month low versus the US Dollar this week on speculation the Bank of Japan (8301) will further expand stimulus and the Federal Reserve said it plans to continue buying bonds. A QE4 can be expected from the US Federal Reserve or an expansion to the QE3 when Operation Twist finishes in two months by December end. The BOJ, which holds a policy meeting Oct. 30, will consider raising its asset-purchase program by 10 trillion yen ($125 billion) to 90 trillion yen, the Nikkei newspaper reported. Inflation expectations measured by the break-even rate for five-year Treasury Inflation Protected Securities jumped 33% this year and reached a 16-month high in September. Gold ETP holdings gained 7.9% since the end of July and now account for almost a year of mine production.
Central banks have been expanding bullion reserves to diversify from currencies. Nations may add almost 500 tons this year, the London-based World Gold Council said in August. Brazil raised its Gold Bullion reserves last month for the first time since December 2008 and countries from South Korea to Russia increased holdings this year, International Monetary Fund data show. Brazil increased its Gold Reserves for the first time since December 2008 at a time when investors raised holdings in exchange-traded products to a record.Brazil’s Gold Holdings expanded 1.7 tons last month to 35.3 tons.Turkey’s Gold holdings increased 6.8 tons and Ukraine added 0.3 ton. If a central bank like Brazil decides to enter the Gold Markets, it will keep buying for a longer time horizon until an optimal share of Gold holdings to total asset is reached & a constant demand like these is highly Gold Price supportive.
With the uncertainty over the outcome, the US Presidential election has many investors on the sidelines . Gold will be supported by and likely see gains into year end due to the coming uncertainty surrounding the US “fiscal cliff.” For more details read: “Fiscal Cliff gets into Focus…” Tax increases and spending cuts are expected which would sink the US economy into a deep recession or a Depression. If US Congress cannot agree on a deal by the end of the year it could have deleterious effects on the dollar and on capital markets. Stormy volatility may be seen soon after the election when the reality of the appalling US fiscal and monetary situation is realized. China could become more aggressive in stimulating its economy with the new government in place at the end of the first quarter. Given the extremely bullish fundamentals for Inflation triggered due to ultra loose monetary policies, negative fiscal outlooks, negative real interest rates and global currency debasement, we expect this November and year end to be very positive for Gold and particularly the still highly undervalued Silver. The rational & prudent investors should ideally use the current dips in Gold and Silver Prices to enter fresh buy positions as both may soon rise with extreme volatility, especially Silver. Investment demand should support silver, as it benefits from higher Gold Prices, and may benefit the most from loose monetary policy and a rebound in risk appetite. The rally in Silver will extend higher even after the Gold rally weakens. A Rally in Base Metals & Silver is what seems the most likely outcome of the ultra lose monetary policy adopted by several central banks. With Gold already not far below its lifetime peak, the best alternate avenues are Silver & then the Base Metals complex with Copper riding the sector. Price out-performance more likely to come from those supply-constrained metals such as Copper & Lead. Accommodative monetary policy should provide support but the upside is limited by subdued demand in a sub-par economy. Weaker consumer demand will later hurt the industrial use of silver, while high prices then will reduce its demand as a jewelry material. Silver & Gold would then see sharp declines, though there is a long time to go for that to occur.
David Einhorn presents one of the most coherent explanations why QE, contrary to the Chairman’s “best intentions” does nothing to stimulate the economy at the consumer level, and why it effectively serves as a hindrance to future growth: “Sometimes you have to look at what is the base assumption. Because sometimes you have a group think around the base assumption and everybody agrees to the same thing and acts reflexively and doesn’t really challenge what is going on. I think we have reached that point with the monetary policy. The assumption is that if you want the economy to improve, if you want more jobs, if you want more consumption, what we need is ever-easing monetary policy. It gets to a point where it’s not a question of diminishing returns but it actually turns out to be a drag. I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive group think of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures. “Lower rates drive up the cost of commodities: oil and food. And money that is spent on oil is sent out of the country to the Mideast and it doesn’t help, and takes out income from people’s pockets that could otherwise be spent on other goods. The second is that not being able to earn a safe return on savings, is causing people to hoard savings rather than consume. In other words if I know I am going to earn 3% in the bank I can spend that income and I can have visibility towards that, but if I know I’m going to earn zero in the bank, in order to figure out how much I need to save for retirement I need to save a much bigger number. Which means I can’t spend much now, I need to save more now, to build up those savings for retirement. If I am already retired and I am on fixed income, my income has now really gone down and I have to hoard money so I can spread it out thinner over a longer part of my life. So by denying individuals savings or interest on income on their savings, it is causing hoarding which is driving down consumption which is hurting the economy.
It seems as if nothing will stop the money printing and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens. Specifically, he says, “Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.” Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’. He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget. Chairman Bernanke concedes that this policy hurts savers, then offers some verbal sleight-of-hand worthy of a three-card monte hustle: He says the savers are helped by low rates because low rates support higher asset values and promote a healthy and growing economy. He then goes on to say that because savers benefit from a healthy and growing economy, we must therefore have an accommodative policy.
This in turn begs the question: Does an accommodative policy promote a healthy economy? Chairman Bernanke argues that higher asset values create a wealth effect, which he again describes, “if people feel that their financial situation is better because their 401(k) looks better or for whatever reason, their house is worth more, they are more willing to go out and spend.” We have just spent 15 years learning that a policy of creating asset bubbles is a bad idea, so it is hard to imagine why the Fed wants to create another one. But perhaps the more basic question is: How fruitful is the wealth effect? Is the additional spending that these volatile paper profits are intended to induce overwhelmed by the lost consumption of the many savers who are deprived of steady, recurring interest income? We have asked several well-known economists who publicly support the Fed’s policy and found that they don’t have good answers. If Chairman Bernanke is setting distant and hard-to-achieve benchmarks for when he would reverse course, it is possibly because he understands that it may never come to that. Sooner or later, we will enter another recession. It could come from normal cyclicality, or it could come from an exogenous shock. Either way, when it comes, it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot. What tools will the Fed and the Congress have at that point? If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then? We don’t know, but a large allocation to Gold still seems like a very good idea.
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