Them’s probably fightin’ word to the Fed’s Mr. Dudley, who, last week helped heat up the climate in the gold market with his “let’em have bonds” statements. Mr. Plosser sees little harm in experiencing ‘one or two months of deflation’ –an obvious jab at Mr. Bernanke’s deflation-obsessed language (and intended actions).
At any rate, Mr. B is likely to have his policy hands full – or fuller – next year. “The Three Hawks” (Plosser, Fisher, and Kocherlakota) – Fed non-voting members who will morph into voting ones come 2011 – are set to give him a run for the…money. In fact, it is now largely true that if the Fed wants to pull the QE trigger this quarter, and do it with only one (voting) dissent, well, it had better do so, and quick. As it was pointed out here last week, internal warfare at the Fed is heating up and could boil over around the time the tipping point in policy materializes. We’ve put a ‘sell-by’ date on that to June-September of 2011.
War of words or not, the very efficacy of the bond purchase program by the Fed is also very much in doubt. Not to mention one of the potential outcomes of same; higher (not a typo) interest rates. Yes, such a shopping spree by the U.S. central bank could actually push borrowing costs higher. Say what? Well, the markets are certainly acting (i.e. is pricing in, as seen in T-note yields and gold) as if the Fed has already bought somewhere between $300 and $700 billion of assets. That could mean there is very little room for additional gains when and/or if the Fed does open up its wallet. Any downturn due to disappointment over not having such candy made available to markets could be brutal.
Yet, there are some other ‘subtle’ indicators that some other behavioral patterns could be flashing to this market; however, the ‘ignorance is bliss’ syndrome present during practically every trading day in September (and certainly over that month’s final two weeks) remains manifest and still dominate among participants. For example, there is no apprehension about the fact that – in typical historical fashion – governments (read: central banks) are last to act on a trend.
There is more than one chart floating around (and easily findable) in the blogosphere that shows the near-perfect inverse correlation between gold prices and central bank buying/selling of the metal itself. While many see a new paradigm in the recent slow-down of gold disposals by the official sector, there are also those who point out that urgent calls to back up the gold-buying truck were being issued precisely when certain brilliant minds were dumping the stuff out of U.K. and Swiss vaults at prices under $300 between 1999 and 2002. Well, that paid off rather handsomely, no?
What exactly has changed? If in fact buying the metal is supposed to be a vote of total lack of confidence in ‘gubmint’ actions, then what exactly is it about those same central banks’ acquiescence (and implied bullishness) to buy and/or to hold on to gold at an all-time high that gives comfort and…confidence? Beware when you are told ‘this time it’s different.’ We’ve seen that movie, too.
Previews of coming attractions, on the other hand, shows a bunch of ‘action’ headed the markets’ way this week. Monday’s tallies will include pending home sales and August factory orders. Later in the week, several central bank interest rate decisions will be the main feature. Finally, as the week turns into the home stretch, the bellwether U.S. initial jobless claims and Friday’s unemployment report will fill the screen(s) for market spectators (and active players, mostly).
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America