The Fed did it! They actually did it! The Fed began the long road back from the abyss of quantitative easing, and the stock market broke then roared! This raises the question why it balked at tapering in the first place. The Fed is trying to regain its credibility that it had lost as it boldly went where no Fed had gone before by making a major policy change ahead of the Christmas holiday. The stock market (CME:ESH14) broke hard at first but rallied soon after, and even more after Ben Bernanke’s final news conference! He made a promise that almost no matter what, the Fed Fund rates would stay near zero in 2014 come hell or high water. Of course it is a promise that Ben won’t have any power to keep as he will be put out to pasture.
Yet while the stock market rallies and gold (COMEX:GCG14) breaks down, is it possible that the market is a little too happy? The drop in gold plays into one of Ben Bernanke’s major concerns — the lack of inflation. The Fed seems confident that inflation will eventually appear, but so far the Fed has missed its inflation targets and predictions. Bernanke said, “There is still this question about inflation, which is more than a bit of a concern.” The Fed “is determined to avoid inflation that is too low, as well as inflation that is too high.” Well right now Ben, it is too low, and if you are trying to create inflation it seems the taper is backfiring. Gold prices dipped below $1,200, and it would seem that gold is not seeing the road to raising rates as inflationary, in fact quite the opposite.
Is gold signaling that there are problems in the Fed’s rosy scenario? Is the drop in gold warning that the roaring stock-market is going into bubble territory? Or does the drop in gold signal that the market believes that the Fed is going to lose the war on inflation? Maybe instead of buying bonds, the Fed should buy gold if they want to boost inflation expectations.
In the Fed’s defense, one reason inflation is not taking off is the U.S. energy boom. In yesterday’s EIA report we failed to meet expectations in every major category. Distillate supplies fell 2.11 million barrels, gasoline supplies rose 1.34 million barrels, crude oil supplies fell 2.94 million barrels! Today we could see the biggest natural gas draw in history!