Lear Capital: The “No-Taper” Caper Makes Gold Twitch

2010_01_05_17_53_260001As Chairman Bernanke sang his Swan Song, the crescendo heard through multiple stanzas was that the Fed would maintain a highly accommodative policy.  The longer we listened the more we heard the actions taken today to reduce Treasury Bond and Mortgage Backed Security purchases, each by $5 billion a month, were in fact the result of a switch in policy emphasis.  The Chairman traded bond purchases for forward guidance promising an extended period of very low interest rates.  The markets understood this and as the case has been in every other announcement of a stimulus program, the markets rallied.

Throughout his speech, Bernanke cited improved economic conditions, including a decline in unemployment.  He even went as far as to say, that by the end of the year, unemployment would drop by an additional 1.3 million workers and bring the data closer to the targeted 6.5% unemployment rate.  He glazed over some of the finer points of unemployment data by attributing the growing number of discouraged and under-employed workers to demographics.  Tell that to the 1.3 million who are about to drop off the unemployment rolls.

The bottom line is this.  Just because 1.3 million people will lose unemployment benefits by the end of the year, does not mean unemployment will drop.  The data may indicate a drop but the joblessness still exists.  And, just because you are a discouraged worker does not mean you are employed.  You are still unemployed.

Facts aside, the Chairman made his move based on the expectation the economy will continue to grow.  Hence the perfect exit scenario for the Chairman responsible for more money printing than any other throughout history.  The economy is improving, money printing has worked and if conditions change… Well… that’s for someone else to deal with.

As the Chairman made his exit on these high notes, the markets are left to decipher the message delivered.  On one hand, the net effect of the trade, forward interest rate guidance in exchange for modest tapering of bond purchases, was zero and the current level of stimulus has been maintained.  On the other hand, the economy is expected to continue improving, therefore justifying a taper.

Meanwhile, back at the House, our politicians are making a deal to raise the debt ceiling.  The sequester will be lifted, and in a bi-partisan show, debt and the deficit will explode higher.  To any extent the Fed can be viewed as cutting back on stimulus, our politicians are planning to pick up where the Chairman is leaving off by spending more.  Either way, someone has to print more money.  I suspect this is the reality markets will wake up to as the subject of rising debt and rising interest rates takes center stage in January.

Even as I write, one commentator on the financial channel expressed some skepticism about the recent stock rally saying trade volume behind this rally is low and that’s not what you want to see in a 300 point move.  Hmmm!  Maybe the light is beginning to shine through.

While the stock cheerleaders celebrate their rally, the gold bashers are out in force.  To listen to the talking heads, Gold is finished.  It would be hard for anyone to watch the financial channel and be convinced of anything else but to buy into the markets and sell your gold.  After watching and reporting on the gold market now for nearly 30 years, something just doesn’t seem right.  Generally, gold is as much in love with stimulus as the markets.  The more stimulus the higher the threat of inflation.

So, I did some due diligence to see if I could find some semblance of reason for the finger of gold traders to twitch and hit the sell button after Bernanke’s “No-Taper Caper.”  I found this as reported by Ed Steer.  It is a commentary by John Embry of Sprott Asset Management on yesterday’s gold move.  Here John Says:

The gold price traded in a very tight range in Far East and Europe trading—and the price activity only started getting interesting in the lead-up to the 2 p.m. EST FOMC report.  The high of the day came shortly before that time—and the price gyrations upon the release of the news didn’t go far in either direction.  By 3:25 p.m. the gold price was back to where it started at the close of trading on Tuesday.

Then out of the blue a seller appeared in the thinly-traded New York electronic market, and in less than half an hour had peeled over $16 off the price.  After that, the gold price traded sideways into the close.

This gives us a clue.  While the markets traded higher on light volume, which is not conducive to a sustained rally, the gold price tumble was set off by one trade.  The days ahead will be interesting to say the least.  Pardon me, but I get just a little curious that all this exuberance is being put forth just as holiday retailers desperately need to close the year on as high a note as the Chairman.  In the case of today’s markets and gold and silver, I don’t think reality is perception.

As always this is just my opinion and some may agree while others think I am full of bullion.  If you do agree it would be my honor to have you follow me @DaveTheGoldDr.  Merry Christmas everyone.  Enjoy your gift of low gold and silver prices while they last.

One thought on “Lear Capital: The “No-Taper” Caper Makes Gold Twitch

  1. Please verify this statement: A couple weeks ago, the national Labor board stated that, we now have the same amount of people working full time, as we did 35 years ago. If that’s true, and we also have 50 to 100 million more people in this country. What are the real unemployment numbers. I’d really like to know!

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