Gold following Fed rumors of easing

In the Lead: “Inflation-Sanitized For Your Protection”

All of the above, when taken into consideration, brings us back to a discussion on the so-called Taylor Rule. The market analysis team over at Standard Bank (SA) — while still bullish on gold’s prospects for a fresh high above $1,900 (circa Q3) and while still anticipating gold to test $1,650 in coming sessions — has offered the opinion (borne out by the rule’s construct) that “for the first time since Feb ‘09, [it] now signals that the Fund funds rate may be too low."

The SB team further relays that “The Taylor Rule provides an indication of where the Fed funds rate should be, given US unemployment and inflation. Until December last year, the Taylor Rule signalled that the Fed funds rate should actually have been negative. However, given that nominal interest rates can’t be negative, the Fed embarked on QE. However, according to the Taylor Rule, the incentive for further QE has disappeared — for now.” The Fed meets next week and market observers do not anticipate anything more than a “stay the course” type of statement to come in the aftermath of the gathering.

Further easing is also further from the ECB’s mind than it has been in some time. In fact, recently installed ECB President Mario Draghi has already concluded that his institution has done as much as was willing to do in order to combat the regional debt debacle and that the time to  pave the road towards exiting from its pro-liquidity stance may be upon us, and soon. Mr. Draghi is, as is the Bernanke-led Fed, cognizant of the risk entailed in getting away from accommodation too late.

Bloomberg News reported that “declaring that the environment “has improved enormously ”and there are “many signs of returning confidence in the euro,” Mr. Draghi turned the spotlight instead on “upside risks ”to inflation, which is now forecast to remain above the ECB’s 2% limit this year. That suggests policy makers don’t plan to cut rates further or add to their 1 trillion euros ($1.32 trillion) of long-term loans to banks, economists said.”

Well, while the Fed stands pat and/or mulls and inflation-cleansed OT2, and the ECB tilts towards an eventual tightening, the situation for China’s PBOC appears to shift into a different and perhaps opposite direction. Blame the country’s economy, which, as shown in the latest metrics, has slowed more than expected and might do more of the same in coming months. One of the corroborating statistics for the above-mentioned disconcerting trend (for commodity buffs especially) is the latest reading on Chinese inflation.

The rate of growth in Chinese consumer prices came in at only 3.2% last month; that was a twenty-month low. That would also be the slowest gain in inflation rates since June of 2010. It was but last July that the rate of inflation in that country was a (too) hot-to-trot 6.5%. While the Chinese economy is not exactly collapsing, the slowdown has reached a pace that is sufficient for some to conclude that some type of easing might be on offer by the country’s central bank, and perhaps soon. Today we will get data on Chinese consumer spending and factory output, as well as fixed investment (expected to be below historical averages).

While on the subject of China, it appears that certain “wishful thinking” being expressed in certain publications about what Chinese gold investors are or are not doing, amount to little more than non-fact-based speculation, or worse (agenda-padding). For example, the shopworn and debatable theory that Chinese (and Indian) investors have not been selling positions into the recent slide in gold prices has been drummed up heavily out there, right along with ill-informed allegations of sinister conspiracy, with the clear intent of bolstering the fast-crumbling morale among Western (mainly US) investors.

Developer of the quite-well-performing ZYX Change Method, Nigam Arora, begs to…differ. He does so by having pulled the hard data from the Shanghai Gold Exchange’s volume and price tables for the period from 2/28 to 3/06. As they say, a picture (in this case a table) is worth a thousand words (or, in this case, a million or two gold kilos). No speculating, just the facts, Ma’am. There’s the “Bernanke Effect” in play, a world away, with the same “emotions” on display as we saw in New York just hours prior to this.

Have a pleasant weekend, everyone!

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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