Commentary for Wednesday, March 19, 2014 (www.golddealer.com) – Gold closed down $17.60 at $1341.40 reacting to the Federal Reserve’s plan to reduce its bond purchases. The plan (sometimes called tapering) is designed to reduce the amount of liquidity created by the government to improve business and employment during the recession.
Gold was somewhat weaker in the overnight Hong Kong and London markets in anticipation of Yellen’s comments today. The domestic and after-close trading further reacted to the downside when traders finally realized that another $10 billion in tapering was coming through the front door.
For some reason the gold traders are fixated on this loose money program and frankly it has been a stone around gold’s neck since the economy has begun to improve. The theory being that less quantitative easing would lower the inflation threat and therefore work against higher prices for gold.
The theory is sound enough but the numbers have never made sense to me in a practical way. It seems as though everyone forgets how long this loose money policy has been in place and even with continued tapering how long it will take to end the program. Finally even when the original $85 billion a month in bond buying is finished the Federal Reserve basically promised that interest rates would remain low so the grinding away at your buying power continues.
Today is FOMC (Federal Open Market Committee) day or Fed for short reduced bond purchases by another $10 billion. This was the third such cut by the Fed and Chairperson Yellen had her first news conference with no surprises and if the taper continues as planned the original program will be kaput by September of this year. Of course this assumes the US economy continues to improve and employment also moves lower.
The current loose money policy has expanded our balance sheet (increased its debt) to more than $4 trillion dollars. At the beginning of the financial crisis (2008) it was less than $1 trillion dollars so the numbers are huge. Four trillion dollars looks like this – $4,000,000,000,000 – and continued interest rates at virtually zero will only compound the issue. Even if you are a fan of government intervention in the business cycle that is a lot of fiat money.
Silver closed down $0.03 at $20.80 and physical activity remains subdued.
Platinum closed down $9.00 at $1452.00 and palladium closed down $3 at $768.00.
One of my favorite commentators on the metal is Peter Hug (Kitco). Always sound with no-nonsense – consider his latest thoughts. Fed Day – I have a morning tendency that first requires a cup of coffee in the morning, then I check the markets and then I plug in CNN and CNBC for a quick overnight refresher. Not once in the first hour was the Ukraine mentioned. Last week, the story drove gold to within $8 of $1,400 and overnight the significant level of $1,355 was taken out on the downside. This may be a healthy pause in a continued, well-defined bullish technical picture, but, the focus will be on the Fed today and I suspect there will be no “new” news on the tapering policy with forward rate guidance as the focus of traders. “If” this market requires easy money to continue higher, that fact is, in my opinion, assured. The current tapering should continue, buying at a reduction of $10 billion a month and the stimulus will continue throughout the balance of this year, but at that point, rates are still at “zero” from the Fed. Sounds accommodative to me. The risk to metals in this scenario is the competition to gain yield. It is one of an improving U.S. economy or not that will funnel assets away or into gold, again assuming no serious geopolitical events. Gold will need to retake the $1,355 level to reaffirm the upside. The $1,337 level should provide the next level of downside support.
It’s clear gold is struggling and continued tapering will weigh on any upward price movement. To fight this type of momentum is a mistake so sit back and have a glass of wine. Support will reappear when the physical market gets interested and for now gold is on sale.
A wild card supporting gold might be more problems in the Ukraine but I think this unlikely. Putin is not a genius but has played the international community well. In the end however there will not be any large escalation because no leading country has a dog in this fight. Sanctions (without bite) will be the rule regardless of any proposed coalition the President might have in mind. This fiasco and healthcare reform will weigh heavily on Democrats in the upcoming elections.
The walk in cash trade today was boring and so were the phones. This type of action is typical of a descending market which has moved from “plenty of buzz and momentum” to “no buzz and wondering what will happen”. It’s enough to make you drink.
The GoldDealer.com Activity Scale is a “2” for Wednesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 3) (last Thursday – 3) (last Friday – 3) (Monday- 4) (Tuesday – 4). The scale (1 through 10) is a reliable way to understand our volume numbers.
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