247Bull.com Editor: The Fed continues to add fuel to the monetary fire, however money velocity continues to fall, meaning that inflation remains elusive and deflation continues to be a real threat. If, sooner or later, inflation expectations turn around, we could see a prolonged period of sustained inflation. And even if the Fed does scale back the rate at which it is buying bonds and mortgages sometime this year (likely in September), they will still be carrying out QE well into 2014. And if the economy or markets take a turn for the worse as a result, they new Fed Chairman (likely Janet Yellen), is certain to increase stimulus measures once more. All of which means that gold investors must play a waiting game.
Gold prices hovered just below $1380 an ounce Wednesday morning in London, with silver trading around $21.80, after the metals failed to break through $1380 and $22 respectively.
European stock markets ticked higher by lunchtime – with the exception of Germany’s DAX – regaining some of yesterday’s losses, which were followed by sell offs in the US and Asia.
Commodities ticked higher this morning while US Treasury bond prices fell ahead of an auction of 10-year debt later today.
“The gold price is unable to recover despite a weaker US Dollar and falling equity markets,” says this morning commodities note from Commerzbank.
“The dominant subject on the gold market continues to be the possibility of a premature withdrawal of bond purchases by the US Federal Reserve…in our view, the figures available so far do not constitute any reason to scale back QE3 in the near future.”
“There’s a tug of war between investors putting money into gold and taking it out,” adds Bernard Sin, head of currency and metal trading at Swiss refiner MKS, who also cited concerns among investors “worried about is if there’s no more quantitative easing”.
“With the Chinese out [on holiday] until Thursday,” adds a note from ANZ, “the [gold] market is lacking a key stabilizing factor.”
Since falling sharply in April, gold has swung either side of $1400 an ounce, with the gold price falling as low as $1337 and as high as $1478. Silver has also oscillated, while stock markets have retreated after hitting multi-year, or in some cases record, highs last month, with Japan’s Nikkei especially hard hit.
“We think the recent volatility can be mostly traced to [Fed] Chairman Bernanke’s rather unconvincing testimony in front of Congress a few weeks ago when he failed to clarify exactly when the Federal Reserve’s bond buying program will be pared back,” says a note from INTL FCStone metals analyst Ed Meir.
“Markets have been on edge ever since, with the global bond market in particular getting hammered.”
An auction of 10-year US Treasury bonds later today is set to see benchmark yields above the inflation rate for the first time in 18 months, the Financial Times reports.
The market yield on 10-year Treasuries has risen from 1.6% at the start of last month to nearly 2.3% yesterday. Treasury Inflation Protected Securities (Tips), the price of which is linked to inflation, have also seen yields rise sharply in recent weeks. Bond yields move inversely to bond prices, with rising yields indicating investor selling.
“We have known for some time that Tips were overvalued, and the reversal has happened very quickly,” James Evans, senior vice president at Brown Brothers Harriman, tells the FT.
“Rightly or wrongly, the bond market has pulled forward the end of QE and rate hikes coming as early as 2014. It does seem premature.”
“The bond market seems to be missing the point that the Fed’s policy of tapering [i.e. slowing the pace of QE asset purchases] depends on the tone of economic data,” adds Barclays interest rate strategist Michael Pond.
“The market has moved from pricing in less bond buying [by the Fed] to a full-on tightening cycle and we believe that is a different story than what the Fed is trying to communicate.”
“Recent weeks suggest that transparency [from the Fed] doesn’t mean clarity,” says Jim O’Neill, former chairman at Goldman Sachs Asset Management, in a column for Bloomberg View.
“The Fed can talk about ‘tapering’ QE all it likes; it can’t change the basic laws of economics and valuation. A rise in the benchmark yield to 4% would represent normality even if inflation expectations stayed well controlled.”
“While it might be easier to detail the ‘deserved’ casualties of the last month, or more, finding the undeserved casualties might not be quite so obvious,” says this morning’s note from the currencies team at Standard Bank.
“In our view these are assets where the selling has been more a function of position unwinding than any significant change in the fundamentals that underlie the market.”
India’s government does not see the need for any further measures to restrict gold imports, according to the country’s economic affairs secretary Arvind Mayaram.
Ben Traynor | BullionVault