Morning Gold Fix: August 3
Commentary courtesy of www.fmxconnect.com
Gold opened Monday’s trading at
$1181.8 per 100 troy ounces. Throughout the day, it managed to rally
ten dollars and fall seven from its opening price, but closed out the
day nearly unchanged at 1183.4.
August gold was up 3.9 to $1188.0 per 100 troy ounces as of 8:49 AM
EST, this morning. The September U.S. dollar index was down .385 to
80.670. October platinum was down 4.3 to $1597.9 per 50 troy ounces.
Silver was up 4.1 cents to 18.460.
As Tiger Wood’s Dad would say: I am disappointed in you, Gold.
Gov’t is clearly preparing the field for QE 2, Stocks, Bonds and
Commodities all get the picture but Gold (don’t call it a commodity
please) is struggling. In a world where every asset has a 100%
correlation, where hedges add risk instead of mitigate it, Gold still
underperforms. It is annoying to say the least. The Fed sure is having
its way, and I am wondering if waiting for them to be wrong is as good
a trade as riding the fiat wave of bubbles they are recreating.
Bernanke announced yesterday, that they are going further out on the
curve to combat deflation.
Relevant quote (emphasis ours)
conventional interest rate policy is constrained by the fact that
nominal interest rates cannot fall below zero, the second arrow in the
Federal Reserve's quiver -- the provision of liquidity -- remains
effective," Bernanke said in a speech Monday in Texas. "The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand."
The Policy Answer Key
His 2002 Deflation paper telegraphed this approach. Here are the arrows in his anti-deflation quiver for use after ZIRP fails.
Fed to begin announcing explicit ceilings for yields on longer-maturity
Treasury debt (say, bonds maturing within the next two years). The Fed
could enforce these interest-rate ceilings by committing to make
unlimited purchases of securities up to two years from maturity at
prices consistent with the targeted yields.”
- “Of course,
if operating in relatively short-dated Treasury debt proved
insufficient, the Fed could also attempt to cap yields of Treasury
securities at still longer maturities, say three to six years”
lowering yields on longer-dated Treasury securities proved insufficient
to restart spending, however, the Fed might next consider attempting to
influence directly the yields on privately issued securities.”
another option would be for the Fed to use its existing authority to
operate in the markets for agency debt (for example, mortgage-backed
securities issued by Ginnie Mae, the Government National Mortgage
Here is the reason I believe this will all end badly:
generally only helps in the direction of the grass roots trend, and
stimulus is really just government intervention in free markets
Demand can be stoked by printing money, or by lowering prices. The Fed
wants to print money, what would be wrong with a clearance sale of
assets (deflation cleans out the fluff.)
- Be careful of
guys who say ALWAYS and NEVER: “The conclusion that deflation is
always reversible under a fiat money system follows from basic economic
reasoning.” Ben Bernanke
If by basic economic reasoning he means conventional wisdom, then sure. But we doubt it.