The Federal Reserve Bank began its two-day meeting Tuesday and they will likely continue adding dollars into the financial system unabated. And, central banks are cutting their gold purchases, with Russia even selling some 12,000 ounces. Can anything at all save gold longs?
Just a little over a month ago, the Fed announced that wasn't tapering its $85 billion monthly bond-buying stimulus program known as "quantitative easing" ("QE"). This policy lowers interest rates because the bond-buying that raises bond prices also lowers bond yields.
And, the nearly $1 trillion added to the economy in the past year alone should have raised prices at some point. Since the start of the year, the S&P 500 is up 24% and oil is up 6%. But, commodity prices are generally down while the Consumer Price Index – the official inflation rate – is up just 1% since January. Gold, long considered a hedge against rising prices and economic uncertainty, is down nearly 20% since the beginning of the year.
In fact, while gold is basically flat since the Fed announced it wasn't going to taper, it was down 6% from the time of the "non-taper" announcement to the middle of October. What's more, the Fed decision not to taper came even before the budget battle in Congress led to a partial shutdown of federal government services. According to the Fed, the economy isn't strong enough yet to withdraw its stimulus efforts.
According to David Darst, Chief Investment Strategist at Morgan Stanley Smith Barney, inflation isn't a primary concern of either Fed Chairman Ben Bernanke or his nominated successor, Vice Chair Janet Yellen. Speaking on CNBC's Squawk Box Tuesday morning, Darst said:
"Our friend, Mr. Bernanke, his whole academic history and career has been built on deflation in the US and deflation in Japan. And, what you had there was a supply induced deflation morphing into a demand shortfall deflation. Supply-induced is where you have Asia, where you have technology, where you have globalization causing decline in prices. That's supply-induced. It's similar to the United States from 1871 to 1896 – twenty-five years. The prices declined in the United States by one and a half percent per year. That is a good kind of deflation. There's pernicious deflation, which is when you have demand shortfall. A couple goes into a department store, they say, 'Let's buy a refrigerator'. One spouse says, 'Let's wait'. They go back a year later, it's 10% cheaper and they say, 'Let's wait again'. That is the kind that Janet Yellen [and] Ben Bernanke are worried about."
Thus, while $85 billion per month is added to the financial system every month for the foreseeable future, Fed policy doesn't reflect a concern for inflation. In fact, Darst suggests that the Fed is worried about deflation instead.
So, does that mean nothing the Fed is doing will boost the price of gold any time soon?
Looking at gold's fundamentals is First Asset Investment Management portfolio manager John Stephenson. He believes gold hasn't taken a big hit yet because the Fed extended QE. However, he sees gold prices ultimately falling towards its marginal production cost of $950 per ounce by the end of next year. He also notes that the markets are giving a big indication of where it sees gold headed in the future as puts on gold contracts are trading at a premium – a generally bearish signal.
But all may not be lost for gold. On the yellow metal's charts is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. He sees gold hitting a critical point as it touches a key resistance level at its 150-day moving average which is also on gold's downtrend line. Break above that and that's technically bullish for gold, according to Ross.
Is the Fed's continuation of QE enough to save gold or is it inevitably headed down? Watch the video above to see more of Stephenson's fundamental analysis and Ross' charts on gold.
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