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Fed Continues Easy Monetary Policy

Release Date: 
Friday, September 20, 2013

Gold and Silver Prices:

Gold and silver prices saw significant gains earlier this week following the Federal Reserve’s surprise decision to continue its $85 billion bond buying program due to a weak job market and fears of a crippling debt ceiling fight in October, but prices eventually consolidated during Friday trading.  “Gold prices surged, chalking up their biggest one-day gain on both a price and percentage basis since March 19, 2009. Something about central-bank printing weakening the dollar and forcing inflation seemed to convince some folks to buy gold. Can’t imagine why.” (“Morning MoneyBeat Asia: Risk Trade Runs to Gold,” WSJ, 9/19/13.)

Gold ended the week down $2.30, closing at $1,326.60. Silver prices were down $0.47, at $21.90.

Federal Reserve Continues Quantitative Easing On Economic Fears

The Federal Reserve caught many market watchers off guard when it failed to taper its $85 billion per month bond buying program following the Federal Open Market Committee meeting this week. The FOMC’s statement noted, "[t]he tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market…The [Fed] decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

During a press conference following the FOMC meeting, Mr. Bernanke identified several factors which led to the decision to delay any reduction in the Fed’s bond buying program including the weak job market and the risk of a government shutdown. “A government shutdown or even failure to raise the debt limit will have very severe consequences for the economy,” the Fed Chair told reporters. (“Fed Will Not Reduce Stimulus, Waiting for “More Evidence” of Recovery,” Time, 9/18/13.)

Forbes columnist Agustino Fontevecchia offered this analysis of the Fed’s decision to continue quantitative easing.  “In his post-FOMC press conference, Fed Chairman Ben Bernanke made it clear that he had lost control of the market, causing a tightening of financial conditions that directly hit the highly supported housing market through higher mortgage rates...The Chairman appears to have boxed himself in, as the market roars higher on any indication of monetary stimulus, and could tank if the training wheels come off. Beyond tightening financial conditions, Bernanke is scared the economy won’t have the strength to live through another intense political battle between Obama and the Republican caucus.  He remembers that nefarious effects of the 2011 debt ceiling debate, which led to the first downgrade of the US’ triple-A credit rating and a prolonged market rout that hampered growth.”  (“Bernanke Is Terrified Of Higher Mortgage Rates And The Debt Ceiling Debate,” Forbes, 9/18/13)

The Telegraph’s Ambrose Evans-Pritchard wrote that any attempt to taper quantitative easing could be disastrous for the world economies. “The American economy has shed 347,000 jobs over the past two months, roughly comparable with the rate of loss seen during the Great Recession. It is remarkable that the US Federal Reserve should even have been thinking of phasing out life-support in such circumstances…It would be a grave error for the Fed to taper bond purchases at all at this juncture, given the risks for Brazil, India, Turkey, South Africa, Indonesia, Ukraine and others already facing a turn in the credit cycle, and given the danger of another eurozone debt spasm, as happened at the end of QE1 and the end of QE2.  The Bernanke Fed has twice misjudged the global effects of premature tightening already, each time precipitating a credit and stock market crash within weeks, and each time forcing the Fed to capitulate. Third time lucky?” (“Fed recoils from 1937 tightening error as jobs evaporate,” The Telegraph, 9/18/13.)

Fed Policy Signals Resumption of Gold Bull Market

The chief market analyst at the Lindsey Group, an economic advisory group specializing in global macroeconomic trends, told CNBC the Fed’s policies signal the end of the gold bear market. "The two-year bear market for gold is over, and the uptrend is going to resume…Gold is your defense against your policies of the Fed, and in my eyes, the Fed lost a lot of credibility today…Just when you thought the Fed was very dovish, they pull an even more dovish act, and many in the markets were blindsided," said the analyst, Peter Boockvar.

Mr. Boockvar went on to explain that gold's significant rise following the Fed announcement “was predicated on the idea that the Fed is going to repeat the mistakes of the mid-2000s, and way-overstay its welcome with QE." Mr. Boockvar “owns gold, because he thinks that thesis will end up playing out.” (“Why Bernanke may have ended gold's bear market,” CNBC, 9/18/13.)

Ron Paul: Gold is “Insurance” Against Government Policies

Former U.S. congressman Ron Paul, in an interview with CNBC, offered his reasons for investing in gold. “Paul said gold, which he acknowledged is a part of his personal portfolio, should be a long-term investment and an insurance policy against government actions. ‘We do know that governments will continue to spend, the deficit problem hasn't been solved…The employment statistics are not quite as rosy as some people believe…We're in big trouble...There is a lot of inflation, a lot of unemployment. To say that gold went down in the last year, that doesn't tell you a whole lot. You've got to look more long term and you have to look at the basics…‘I think most people who study free market economics know that this is very, very fragile. The dollar is fragile. I think people should be more cautious than overly confident.’” (“U.S. Government can’t control its spending addiction:  Ron Paul,” CNBC, 9/18/13.)

Limited Gold Supply Bullish For Gold

Yahoo Small Business contributor, Michael Lombardi, explained that supply constraints should lead to higher gold prices. “It has been very well documented in these pages how the demand from India and China for gold bullion is increasing. We have also seen central banks buying the precious metal to protect their reserves. But when I look at other side of the equation, the supply side, the case for higher gold bullion prices becomes even stronger...When gold producers invest less in exploring for new projects, the overarching effect is less future production, which leads to less supply. We’ve heard from senior gold producers about cutting costs; just imagine how severe the pain is for gold producers who have significantly higher costs!  If the prices of gold bullion remain suppressed, we could potentially see many gold producers shut down mines that produce the precious metal above the spot price, the end result of which will be an even smaller supply of gold bullion.” (The Other Reason Why Gold Bullion Prices Could Skyrocket,” Yahoo, 9/17/13.)

CBO Warns Federal Budget is Unsustainable

“The nonpartisan Congressional Budget Office (CBO) issued a report on Tuesday warning that the federal budget is on an unsustainable course. [The CBO] warned that under current law, growing future deficits will push the debt to 100% of GDP 25 years from now. And under another scenario that envisions changes being made to some laws—including removing the so-called automatic budget cuts known as the sequester—the debt would be even higher, at nearly 190%, by 2038.”

CBO director Douglas Elmendorf stated, “The federal budget is on a course that cannot be sustained indefinitely…Because federal debt is already unusually high relative to GDP, further increases in debt could be especially harmful.”  (“U.S. on ‘unsustainable’ budget course,” MarketWatch, 9/17/13.)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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