Gold and Silver trades again got hammered sharply lower in the early morning US market trading hours as has been the norm for quite sometime now. The Gold and Silver Market extended these loses & hit a fresh 8 month low in the afternoon following bearish FOMC minutes from a month old report, while bonds got sold instantly & the US Dollar soared above its 200 DMA. Gold and Silver were already down sharply as rumors swirled that a large commodity hedge fund had been forced to liquidate its holdings, which triggered a broad sell-off in industrial commodities led by crude oil. The FOMC minutes indicated that the Fed might have to slow or stop buying bonds before seeing the pickup in employment the program was designed to deliver. There are yet several reasons that the Fed will not stop the money printing process any time soon. Gold and Silver Price declines before the Fed actually starts tapering off or stopping the QE is as good as selling the fact & buying the rumor. This incessant slam down of Prices has sent the Gold and Silver Bulls reeling & now huddled up in a corner. The Gold and Silver market seems cowed down with complete Bearish sentiments. Is the US Fed, through its several means & ways, suppressing Gold and Silver Prices to display the strength of the US Dollar & that the massive QE programs dealt out over 4 years are not devaluing it? Is the Fed trying to maintain a show of strength in the Petrodollar to keep buyers of US Debt queuing up? The Big Banks also could be a part of the Big game plan to manipulate the Bullion market for as long as it can or needed. If these views are true, then there will be a double whammy effect to be dealt with later.
The truth is that weak trading volumes in the Gold and Silver Futures markets last week as most of Asia was on a holiday, gave the bears a chance to exploit the condition to the best of their ability & later this week, the momentum & the FOMC minutes did the rest of the damage. Negative US data was not even noticed. Housing starts fell sharply in January while wholesale costs rose last month for the first time in four months. The Gold and Silver price manipulators may be able to drive down futures prices for sometime but will not be able to control the physical market demand for Bullion. May be that is why many people have been shifting focus from the uncertain & manipulation-prone Futures Markets to physical buying. The trust in Gold and Silver has not at all diminished – in fact has been rising with a vengeance, as proven by the supply shortage in Silver coins seen recently. There has been a steady rise in Gold Demand from India, Russia, China & other emerging markets. Central Bank Gold Bullion buying has shot to a 50 year high in 2012. Stock Markets have been steadily rising & currently are above the pre-crisis levels, simply helped by large sums of money printed out of thin air, which indicate that piling up debt can return huge dividends of prosperity. The gap between Illusion & Reality is widening as what is seen, is getting further far away from the truth or what should ideally be. But sooner or later, there will be a time when only fundamentals would matter & nothing else would help.
The FOMC minutes & the impact on Gold and Silver:
The FOMC at its January meeting decided to continue buying $45 billion a month of Treasuries and $40 billion in mortgage debt without setting a limit on the duration or total size of the purchases. Policy makers also affirmed their pledge to keep the target interest rate near zero “at least as long” as unemployment remains above 6.5% and inflation is projected to be no more than 2.5%. The US Federal Reserve signaled it may consider slowing the pace of asset purchases as officials extended a debate over whether record Monetary Easing risks unleashing Inflation or fueling asset-price bubbles.
Why is the Fed worried of the prospective rise in Inflation now? The Fed has defended its QE initiatives repeatedly for 4 years insisting that Inflation will not be a point of concern at all. Obviously, as Inflation picks momentum, Gold and Silver would be top gainers, but the US Dollar would also be the top loser.
Several participants at the Jan 29-30 meeting of the FOMC “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the gathering released yesterday.
The prices of Crude Oil have been on the rise for quite some time now & with each Dollar rise in Oil prices means lower GDP. Gold and Silver should have been on the upside run but Bullion Prices have conveniently been suppressed by vested interests. Rise in Crude Oil Prices should ideally trigger monetary tightening by the Central Banks.
Policy makers in December started debating when to halt bond buying that has pushed the Fed’s assets to more than $3 trillion, prompting warnings by some officials that the program will complicate an eventual withdrawal of stimulus. The minutes show “tapering is a likely outcome at some point in the future,” said Hanson, a former Fed economist. “If you taper the purchases, it allows you to calibrate how the market reacts to your actions without having to go cold turkey.”
The minutes released yesterday didn’t indicate a discussion about when to end quantitative easing. Most analysts still believe the core voting members of the Federal Open Market Committee, led by Bernanke, firmly back the asset purchase policy. So the Fed will be continue adding $85 billion of liquidity each month for at least the rest of 2013 which may help stock markets in elevating prices of paper investments even higher, right till markets again get unstable to a point of total collapse. There is always a rising potential for a violent correction when asset prices are powered higher though the underlying facts & fundamentals are deteriorating at an even faster pace. As for Gold and Silver, they are bound to rise anyways, in fact exponentially in every currency that devaluates fast. Historical analysis of the technical “Death Cross” formation in Gold Charts shows that Gold Prices actually rebound substantially after sharp dips in the weeks following the formation.
Should the Fed focus on Financial & Economic Stability or Inflation Risks?
A number of officials said that their evaluation of costs and benefits of the policy “might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor-market outlook had occurred. The minutes said “many participants” expressed concern about “potential costs and risks arising from further asset purchases.” Several discussed “possible complications” that additional purchases could have as the Fed begins to exit the policy, a few mentioned inflation risks, and some mentioned risks to financial stability. The minutes said that the committee would conduct a review of quantitative easing at the March 19-20 meeting. Fed officials are also considering new ways to present economic projections in their public communications. Many participants expressed interest in using their quarterly projections to convey information about future asset purchases and the Fed’s balance sheet. The Fed chairman and his principal allies remain concerned about the economic outlook.
The minutes clearly show a Fed whose thinking on the conduct of monetary policy is constantly changing and a committee that is far less unified than at any other time in the past few years. The Fed’s 3 rounds of Quantitative Easing have played an essential role in the record-breaking Gold Price rally in recent years due to the inflation-hedge appeal of Gold which attracted investors. Currency debasement as a result of rampant cash printing by central banks has been the main driver of higher Gold Prices. But the sentiment started to shift from late last year when illusions of US Economy recovery started emerging, raising doubts on the necessity of large-scale Quantitative Easing and cooling sentiment in Gold and Silver. Unemployment is yet very high in the US & Eurozone still has significant economic challenges as well which seem to increase despite Government claims that things are improving – Just Illusions created by vested interests. Stock markets & Prices of raw commodities – both have been on the rise with the rising liquidity in markets. With each addition of monetary infusion done every month & each passing day, the Fed will find it more difficult to turn the QE tap off. The markets have become addicted to easy money & it has more or less become a lifeline by now, which if tapered will make the economy anemic & if cut off, will kill the economy.
So what should the Fed do now – Simple, Kill the Dollar! Multiple objectives will be achieved with one action.
BUT what about Gold and Silver – Oh, They will be close to the sky by then – for the holders of US Dollar.
Automatic Spending cuts – Sequester just a week away: Unemployment to Rise
On Tuesday, President Obama said the Republicans would be at fault if the $1.2 trillion spending cuts take effect and cost the jobs of emergency personnel. Republicans fought back by seeking to portray Obama as the mastermind of the spending reductions, known as the sequester, thereby making him responsible for any damage they cause to the military and the economy. The sequester is the result of a summer 2011 deal between Obama and Congress that was designed to be so distasteful that it would compel lawmakers to agree on a broader framework to tame federal borrowing. That hasn’t happened. And with no recent communication between the White House and congressional Republicans, much of Washington seems resigned to the cuts taking effect March 1. Macroeconomic Advisers, an independent economic group, said Tuesday that sequestration would cost 700,000 jobs and push the unemployment rate a quarter of a percentage point higher than it otherwise would have been.
Unemployment rise thus added will thereby keep QE firmly in place. Gold and Silver will again get supported on their way up.