Lear Capital: Taper Caper Drives Gold and Silver Prices Higher

2010_01_05_17_53_260001It’s on again!  The latest taper talk would suggest the Fed is about ready to taper back the purchase of Mortgage Backed Securities and Treasuries.  A common belief is that the Fed cannot do so without disrupting a so-called recovery.  The argument, available today, however, is that the economy is in recovery and now the Fed is ready to act on its long-hinted intention to wean the economy off its current stimulus program.

I say “available today” because jobs data just came in stronger than expected, suggesting the economy has turned the corner and can grow on its own with less help from the Fed.  My take on the jobs data is this…DAH!  What do you expect during the season of seasonal hiring?  UPS, for example, began hiring some 55,000 seasonal workers back in October.  Last year Fed Ex hired 20,000 seasonal workers and this year they expect to increase that amount.

Retailers are also going for broke in a massive hiring spree.  According to the Wall Street Journal, Amazon will hire 70,000 seasonal workers.  In other reports WalMart is said to have hired 55,000 and Target Stores are weighing in with 70,000 new hires for the holidays.

According to a recent Forbes article, of 2100 retailers surveyed, 39% said they would be hiring seasonal help.  That’s up from 36% last year.  Some of those mentioned were Kohls, JCPenney and Toys R Us.  The Gap listed 10,000 positions to fill and Best Buy listed 6300 more.  Virtually hundreds more retailers are following suit in hiring hundreds of thousands of seasonal workers.

If we do a little math, we see well over 200,000 seasonal hires by just a few large employers mentioned herein.  This may spell temporary relief to some of our 11.3 million unemployed, but it is hardly a permanent fix to our current jobs dilemma.   With unemployment reportedly dropping from 7.3% to just 7%, we could attribute .13% of that decline to just the temporary hiring, by these few employers named.

And so opens the window of opportunity for the Fed to stop crying wolf and finally do some tapering.  In so doing, consumer confidence could get a small boost at the tail-end of a holiday buying season, boosting holiday sales in kind.  While I do not believe the printing of money can ever stop without triggering a default on debt, I do think the Fed is losing credibility with this on-again off-again taper talk.  They have to do something.

That said, I agree a taper announcement could be in the cards for next week’s Fed meeting.  If I was to speculate on how it might be accomplished, without taking the foot off the economy gas pedal, I could see a “switch” coming.  The Fed currently buys $40 billion per month of Mortgage Backed Securities and $45 billion of Treasuries per month.  A switch could look something like this.  Reduce MBS buying by $10 billion per month and increase Treasury buying by $5 billion.  The net effect would be a taper of $5 billion.

To what end?  Jacking up the purchase of Treasuries could serve to keep our country’s cost of borrowing at extremely low levels.  Since the “shutdown” ended in mid-October, our debt has risen by $300 billion.  That’s a pace of $1.8 trillion per year which would put our national debt near $19 trillion by the end of fiscal 2014.  In the event the latest budget deal actually passes, it will bring an end to the sequester and increase short term debt.  That means more short term borrowing by government and rising deficits.  The Fed may have to jack up Treasury purchases just to fund the increased debt while keeping interest rates relatively low.

This all bodes well for gold and silver.  It is inflationary and as debt rises, it brings our debt situation closer to a crash point.  That’s when the “revenue in” is not even enough to cover even the interest payment on our debt.  This could explain gold and silver’s short term spike in prices but, as always, at any given time, there are a hundred reasons for gold and silver prices to rise from these prices which are lower than the all-in cost of production for most mines.

Make no mistake!  Debt is on the rise and likely much faster than anyone has forecast.  As David Stockman said this morning in a Television interview, this latest attempt to arrive at a bi-partisan budget deal is just another kick of the can down the road.  Gerald Celente, one of the most respected market trend forecasters, says by 2Q 2014 we will see a crash in the markets that “will make 2008 look like a picnic.”  If that happens, which investment would you like to be holding?

That’s my opinion for the day and maybe not yours but if you agree with it, I would be honored to have you follow me @DaveTheGoldDr.





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