Gold falls as Fed hints at exit strategy

May 18, 2011 07:00 PM

Financial markets learned with certainty yesterday that the Fed can no longer be regarded as wrestling with the idea of whether to exit from stimulus, but, rather, as to when and not as much as to how to do so. In parsing the FOMC’s minutes which were recorded during its April 26-27 gathering, Fed watchers ascertained that the US central bank’s policy making members are basically nearing an agreement on the steps they will take to drain the bathtub of liquidity in which many a speculator has been enjoying a very fun-laden bubble bath for some time now.

While financial markets learned that ticker tapes are moved by scribbles found in the Fed’s meeting minutes, the world at large this week learned that the rich/famous/powerful can reliably be counted upon to eventually reveal (not by choice, mind you) that they are driven by the heady pheromones of sex/money/drugs and that sooner or later they exhibit such tendencies with a regularity that puts Swiss watches to shame. Messrs. DSK and Arnold only add to the growing list of hitherto iconic figures that are now becoming material for late night talk shows.

In the wake of the release of the Fed’s meeting minutes it was reported by Reuters that “U.S. interest rates futures fell as the Federal Reserve's record of its April meeting raised some concerns that it might tighten monetary policy sooner than previously thought.” The unwinding of the $2.6 trillion large securities portfolio and the timing thereof have been the subjects of intense debates both within and without the Fed and they have intensified as we approach the termination date of QE2 in six weeks’ time. Some Fed members are not totally sold on the soundness of the US’ economic recovery while others do not buy the idea that current inflationary manifestations are of a lasting nature.

In any case, market betting is now focusing on whether Fed action on rates comes in 2011 or perhaps a few weeks into 2012. Talk of QE 2-point-anything has died down to but a trickle, and even that is now only visible in the ever-hopeful hard money newsletter niche. What kind of “black swan” it might take to bring about such a fresh accommodation on the part of the Fed remains a mystery shrouded within an enigma.

Overall, it appears that most FOMC meeting participants did agree that shrinking the presently swollen Fed balance sheet prior to actually hiking interest rates might be the sequence that is more desirable. Mr. Bernanke did however specify during his April press conference that followed the Fed meeting that, if inflation turns more than pesky and shows signs of hanging around, well, then “there’s no substitute for action.” No need to guess the type of “action” he was referring to…

Page 1 of 3
About the Author

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.