While the Fed’s taper talk has been tapered and then un-tapered, the market may now be tapering the Fed rather than vice versa. Let’s assess Act 2 of the taper talk and the implications for the markets, including the dollar and gold.
In the short to medium term, the U.S. dollar and currencies are heavily influenced by the actions of the Fed. As the Fed may be reading tealeaves as much as anyone else, we may be facing particularly high policy uncertainty that, in turn, reflects on elevated volatility in the bond and currency markets. The good news is that this may yield opportunities for the prudent investor.
The price of wholesale gold fell back to $1320 per ounce Wednesday lunchtime in London as new data showed the US economy expanding faster-than-expected. Second quarter GDP rose 1.7% in real terms from a year earlier, the Bureau of Economic Analysis said.
Wholesale gold rallied from a drop to $1310 per ounce Thursday lunchtime in London, gaining as world stock markets also cut earlier losses. Trading back above $1322 – a two-year low when hit by April’s gold crash – spot bullion also rallied 1.0% for Euro and Sterling investors.
Both silver and gold slipped in London on Friday morning, edging down to $1271 per ounce and $19.80 respectively. European equities pushed higher while the US Dollar rallied and major government bond prices rose.
The dollar price of gold dropped $20 per ounce lunchtime Friday in London, briefly dropping through $1220 per ounce after the release of June’s US non-farm payrolls data. Non-farm payrolls growth came in at 195,000 against consensus forecasts of 165,000.
The price of gold rose in Asia and jumped at the start of London trade Tuesday, hitting $1267 per ounce to recover 40% of last month’s crash before easing back. Prices for silver bullion also rose, but lagged gold’s rate of gain, before slipping back below last week’s finish at $19.69 per ounce.
For a number of weeks the Fed has been talking about “tapering” its asset purchases, and from the recent spike in US government bond yields and the decline in US equities it seems as though investors them at their word. This does however raise an interesting question: If the Fed really is going to begin taking away the punchbowl why is the dollar tanking?
The “cleanest” dirty shirt, the U.S. dollar, is down versus the euro so far this year; and was down last year. If this is a strong dollar environment, are investors prepared for a weak one? With plenty of dirty laundry in the world, we ponder how investors might be able to profit from actively managing currency risk.
The Fed’s “tapering,” the dollar’s up, bonds are down. Is this time to bet on the greenback, or to diversify out of the dollar? We believe the dollar may not only have gotten ahead of itself, it also rallied for the wrong reasons. We look at the risks and opportunities presented.
Wholesale prices for gold and silver rallied from a fresh plunge in early London dealing on Monday, rising to stand unchanged and 2.3% lower respectively from the end of last week’s trade by lunchtime.
Neil Irwin over at the Washington Post recently set about reminding the unwashed masses that, only the dollar is money, in his piece “Bitcoin is ludicrous, but it tells us something important about the nature of money.” He starts us out with his “givens”.