Gold Haven Status Returning but Waiting on Fed

June 13, 2012 at 10:23


It has certainly become apparent that investor perception of likely U.S. Fed decisions on monetary policy has a strong immediate, and perhaps unjustified, impact on the gold price, although there are a number of day to day factors which are maintaining the underlying position, which seems to be mildly bullish at the moment. Certainly just the fact that Fed Chairman, Ben Bernanke, failed to promise further easing on last week’s statement to Congress, even though it didn’t suggest the reverse, was sufficient to knock the price back by around $50, before making a slow and measured recovery back to around the pre-Bernanke speech levels since.

According to U.S. precious metals specialist analyst, Jeff Nichols of American Precious Metals Advisors and Rosland Capital, in a note yesterday, with the U.S. Federal Reserve’s next policy-setting meeting set for June 19th/20th, the next week or so may be the last chance for investors to buy gold at under $1,600 an ounce. Indeed gold’s move yesterday afternoon to nearer $1620 from below $1600 may mean that they have already missed this particular boat, although overnight Asian and early European trade seems to have knocked the price back a little.

However, unless Bernanke and his colleagues at the Fed vote to pursue another round of quantitative easing (QE3) or other stimulative monetary actions at the forthcoming FOMC meeting the price could well fall back below $1600 again.. But, Nichols reckons, further easing is likely to be announced, if not at next week’s meeting, then soon after.

Nichols also suggests that an announcement of more monetary stimulus alone could send gold skyward by $50 to $100 in a flash, triggering the beginning of a sustained advance to $2,000 an ounce – or more by later this year or next.

Right now, he notes, “the Fed is looking at inadequate economic activity, a still-depressed housing market, unacceptable labour market conditions, and consumer-price inflation below the Fed’s target range. At the same time, it is worried that Europe’s intractable sovereign debt and banking crisis will damage the American economy and put U.S. banks and financial markets at risk (despite the recent €100 billion euro bailout of Spain’s banking system. And it fears U.S. fiscal policy will become even more restrictive as the automatic year-end tax increases and spending cuts take hold.”

In supporting his viewpoint that the Fed will indeed go for a renewed form of stimulative monetary policy – probably not called Quantitative Easing any more – but a rose by any other name… – he quotes Fed Vice Chair, Janet Yellen who said last week “A highly accommodative monetary policy will be needed for some time to help the economy mend.”. Whether this is the consensus view remains to be seen but indications are that it may well be – particularly given recent disappointing job creation figures.

As Nichols also points out the frequently disturbing sovereign and bank debt issues coming out of Europe have affected the gold price through making the dollar appear relatively healthy compared with the Euro, which has meant the dollar has appreciated and consequently commodities priced in dollars – and gold if you feel gold is not really a commodity but money – have seen lower prices in dollars as a result, but have maintained their value in other currencies. Indeed in some, like the Indian Rupee, gold has increased in price.

To some the Eurozone problems might have been expected to see a flight into gold as a safe haven, but for the moment they have tended to choose the dollar as their safe harbour and have ignored the problems of the U.S. economy which are being downplayed in this election year there.

Nichols views the latest bailout for Spanish banks as just a temporary short term fix which doesn’t address the underlying problems of deepening recession and horrendously high unemployment figures, particularly for the under 25s. It is truly difficult, if not impossible, for Spain, and the other Eurozone countries with very vulnerable economies, to grow their way out of recession while pursuing austerity measures effectively being forced on them by the one Eurozone state with a booming economy – Germany.

“But” notes Nichols, “something has changed for gold and precious metals investors: They are reacting differently to this news. Although the greenback is again reacting positively to the weakening and discredited Euro, gold and silver are managing to move higher, possibly signaling their return to “safe-haven” status”.

He goes on to suggest that with the U.S. economy in rougher waters again, with U.S. fiscal policy in disarray, and with U.S. monetary policy set to turn still-more reflationary, that gold’s safe-haven appeal will increasingly reassert itself and the metal’s price will soon react more positively to Europe’s travails.