Interesting news from the Fed yesterday. If you didn’t catch it, it was the Bernanke and friends’ promise to do something.
” The Committee will closely monitor incoming information on economic and financial developments and will (my emphasis) provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability”
In the June release, they just used the term “is prepared.” Now we all know that they got together and said “let’s change up the words.”
As for gold’s reaction, I’m not really sure. I guess it was waiting for Draghi to do something and we also have the monthly jobs report that always makes gold very volatile. So we’ll see. Gold miners, however, are showing signs of strength.
Stick with the winners for the quarters to come: Agnico Eagle Mines (AEM), Pretium (PVG), Randgold (GOLD), New Gold (NGD).
remember, email us with any questions.
I think the Fed’s move to extend the twist until the end of the year was probably the worst thing that could have happened for gold bulls and today’s gold price is confirming it. Even though they left in the part where “the committee is prepared to take further action as appropriate to promote a stronger economic recovery…,” I doubt the Fed will make any moves any time soon.
When Operation Twist was first announced September last year, gold crashed and for the next two quarters, gold bulls were hoping for bad jobs numbers in anticipation of QE3. But one of my smart colleagues told me, the Fed won’t do anything for a while. They have to allow monetary policy to take place. Otherwise they’d lose a lot of credibility.
It made sense but I was still skeptical at the time. Nonetheless, gold bulls would go through the two most disastrous quarters of everyone’s career (Obviously not all due to US monetary policy). In regards to QE3, I’m worried Bernanke will try to hold off as long as possible, and in doing so, all risky assets are likely to take a beating. Including gold. Including oil (which by the way is already at $80). Including stocks. I hope I’m wrong.
Socgen is out with a research note this evening with trading ideas if Bernanke announces a new QE program at tomorrow’s FOMC meeting. The banks number one idea is long gold. (That also happens to be the number one macro trading idea of TheInvestingOracle site and has been since 2008).
Socgen sees Gold closing the gap with the monetary base (see chart below) increases since 2007. If that happens, it sees the price of gold at $1900/oz. Lastly, if gold catches up to the monetary base from the 1920’s we are looking at…drum roll please….. $8500/oz.
Today started the Federal Open Market Committee’s (FOMC) two day meeting on monetary policy. The meeting will conclude tomorrow afternoon with a decision on interest rates (unchanged), which will be followed by a statement of text (look for changes) and after that, the great Chairman himself, Ben Bernanke will give a press conference.
If you have followed my work from my time at Minyanville Media where I wrote the Active Investor, you know that for six months I have been predicting some sort of Quantative Easing to happen this summer.
It looks like that prediction will be correct as it seems some sort of QE will happen this summer.
Goldman Sachs believes that tomorrow the fed will announce some sort of new QE program. The investment bank, sees the possibility of the Fed buying MBS or just extended the Operation Twist.
The thesis is based on a June 6th speech on criteria needed for more QE by Vice Chairwoman Janet Yellen:
“[i]f the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective…”
It looks like all three criterions are close to being met, though not quite there yet. If Bernanke wants to stay ahead of the curve, it would make sense to announce some sort of intent to perform QE, at the next meeting (August I presume) if conditions continue to deteriorate.
If that’s the case, what will the new easing program be? .
What I think will happen is the fed may announce a perpetual easing program. By that, I mean the fed will announce it will purchase treasuries, MBS, etc. at a clip of $50 bln to $75 bln per month. This is known, as a “flow” of purchases and it will allow the fed to react flexibly to quickly changing economic events. It also does away with the idea of QE 3-4-5, etc. As Apple CEO Tim Cook said, iPad 20 doesn’t sound that great. I would almost think of QE, like the fed’s ability to move short-term interest rates, as just another tool in the box.
Trading wise, if that happens, I would buy gold and lots of it. That said, I always like to see what the stock market is doing heading into the Fed and currently it has rallied for four straight days. This tells me that Mr. Market is expecting some sort of QE announcement tomorrow.
While the stock market is saying QE, the fixed income market is pricing in a operation twist expansion/extension. If this is the Fed’s plan, I expect a large sell off in the stock market.