Markets await more money printing and key midterm elections
GDP meets expectations
Gold broke $1,350 today just before data showed the U.S. gross domestic product grew by 2 percent in the third quarter on high consumer spending, meeting economic forecasts. In a big meeting Tuesday – also Election Day – the Federal Reserve will discuss the prospect of further quantitative easing, or QE, which will have a major impact on the dollar, inflation expectations, and gold prices. “The Fed meeting next week has been dominating the markets,” said Standard Bank analyst Walter de Wet. “We think the gold market has priced in around a $500 billion QE exercise by the Fed,” he said. “If the Fed comes out with a higher figure, we think gold will move higher.”
The trillion-dollar question: How much money will the Fed print next?
All eyes are on the Fed and its next anticipated round of QE. Most experts agree that some form of QE will be launched at the conclusion of a two-day meeting of its policy-making committee next Wednesday. It’s now just a question of how many billions worth of assets it will purchase and how much the financial markets have already priced in that QE.
“Shock and awe”?: Goldman Sachs thinks the Fed ultimately might buy $2 trillion of assets – a figure close to its “shock and awe” purchase of $1.7 trillion in longer-term Treasury and mortgage-related bonds at the height of the financial crisis. “We expect an announcement of $500 billion or perhaps slightly more over a period of about six months,” said Goldman economist Jan Hatzius. “The key question, however, is not the size of the first step, but how far Fed officials will ultimately need to move to achieve their dual mandate of low inflation and maximum sustainable employment.” The Fed also might announce a monthly purchase rate of perhaps $100 billion that will remain in place until the outlook for jobs and inflation improve “significantly,” he wrote. Goldman thinks as much as $4 trillion of additional asset purchases might be needed to bring inflation and unemployment into line with the Fed’s targets.
Likewise, Bank of America–Merrill Lynch Global Research has forecast $1 trillion in QE, and a Reuters poll showed Wall Street analysts expect the Fed to buy between $80 billion to $100 billion in assets per month.
Or “a measured approach”?: However, on Tuesday, The Wall Street Journal downplayed expectations of a major round of QE: “The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. … Officials want to avoid the ‘shock and awe’ style used during the crisis in favor of an approach that allows them to adjust their policy, and possibly add to their purchases, over time as the recovery unfolds.”
Gold stands to gain: The launch of any significant QE should have an uplifting effect on gold prices. Gold could rise to $1,400 an ounce and the dollar could lose another 2 percent to 3 percent if the Fed buys $500 billion over the next six months, HSBC analysts said Monday. The Fed could eventually buy up to $2 trillion in bonds – way more than the government will issue this year, according to HSBC.
Unbottling the inflation genie
In leading the Fed into uncharted monetary territory, Chairman Ben Bernanke is risking unleashing 1970s-style inflation – against which gold is your best protection. “By reducing real interest rates and trying to break the psychology of ‘Why spend today when I can buy goods cheaper tomorrow,’ they are hoping to drive growth that would be more commensurate with a pickup in employment,” said Miller Tabak & Co. chief economic strategist Dan Greenhaus. “The risk is a late-1970s type of scenario where the inflation genie gets out of the bottle.”
Treasury sale anticipates inflation
Also agreeing is CNBC anchor Larry Kudlow, who commented this week on a major event in the world of U.S. Treasuries:
An extraordinary event for bond markets occurred [Monday] when the Treasury sold $10 billion of 5-year inflation-protected securities, or TIPS, at an auction with a yield of negative 0.55 percent. That’s right. Negative. Can’t remember when that’s happened before. In other words, investors were willing to pay the Treasury 105 cents in order to buy $1 of inflation protection. Now how does that square with the Fed’s new-found fear of deflation? Does the central bank ever listen to markets? Ever since Ben Bernanke announced his QE2 pump-priming monetary-stimulus idea late last August, inflation-sensitive markets have been going wild. The dollar is down. Gold is up. Commodities are up – big time. … You can’t print $1 trillion of new money without sinking the currency. The dollar is already overproduced. Just ask China and other Asian countries, or Brazil, each of which is fighting against the inflow of excess dollars. Again, judging by inflation-sensitive markets, rising prices are the fear, not falling prices.
Wall Street strategist Peter Boockvar writes about the CRB index rising to its highest level in two years, including booming cotton and copper. He also notes companies like Starbucks, McDonald’s, General Mills, Goodyear, and Kimberly-Clark, which have all reported higher cost inflation. And then comes this priceless sentence: ‘Ahead of next week’s FOMC meeting, where the Fed wants higher inflation, all will be okay as long as you don’t drive, eat, drink, wear cotton-based clothes, use copper wire for any type of construction, blow your nose, diaper a kid, or wipe your arse.’ Boockvar is right. The Fed is wrong. Investors will even take negative real yields to protect against inflation. What does that tell you?
Inflation evident in soaring commodity prices
Research analyst Jake Weber of Casey Research highlights the discrepancy between skyrocketing commodity prices versus the U.S. government’s official, anemic inflation statistics in his article “Chart of the Week: Inflation in the Real World”:
The Real Cost of Living
As is often the case, there is a big difference between what the government statistics are reporting and what’s going on in the real world. According to the most recent inflation reading published by the Bureau of Labor Statistics (BLS), consumer prices grew at an annual rate of just 1.1 percent in August. The government has an incentive to distort CPI numbers, for reasons such as keeping the cost-of-living adjustment for Social Security payments low.
While there’s no question that you may be able to get a good deal on a new car or a flat-screen TV today, how often are you really buying these things? When you look at the real costs of everyday life, prices have risen sharply over the last year. For simplicity’s sake, consider the cash market prices on some basic commodities. On average, our basic food costs have increased by an incredible 48 percent over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23 percent on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39 percent higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36 percent since last October.
You probably aren’t buying new linens or shopping for copper piping at the hardware store every day, but I included these items to show the inflationary pressures on some other basic materials that will likely affect consumer prices down the road. The jump in gold and silver prices illustrates that it’s not just supply and demand issues driving the precious metals higher – the decline in purchasing power of the dollar is also showing up in the price of physical goods. It is because stashing wheat and cotton in the garage is an impractical way to protect purchasing power that investors are increasingly looking to protect themselves with the monetary metals – a trend that is now very much in motion.
China blasts the dollar
Money printing by the United States is “out of control,” China’s commerce minister said Tuesday. “Because the United States’ issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation,” Chen Deming said. “The uncertainties of this are causing firms big problems.” Chinese officials have criticized U.S. monetary policy as being too loose before, but rarely in such explicit language. At the G20 meeting in South Korea that ended Saturday, Chinese Finance Minister Xie Xuren said issuers of major reserve currencies – code for the United States – must follow responsible economic policies. Along with posing an inflationary risk, a weak dollar also places appreciation pressure on China’s yuan since its value is so closely tied to the U.S. currency.
China eyes more gold
China should boost the amount of gold held in state reserves to a level equal with the U.S. holdings, a newspaper run by China’s Ministry of Commerce said Wednesday, citing local researcher Meng Qingfa. U.S. reserves stand at 8,133 tons versus China’s 1,054 tons. “Doubtlessly, if the yuan is set to become an international currency like the dollar or the euro, China has to get a huge gold reserve to support it, and a reserve of 1,054 tons is far from being enough,” Meng said. He added that China could build up a gold reserve as large as the U.S. stash by using only 10 percent of its $2.65 trillion stockpile of foreign-exchange reserves. Meng’s view does not represent China’s official stance, but the domestic appeals for China’s foreign-exchange reserve regulator to buy bullion has been intensifying in recent years. According to UBS analyst Edel Tully: “This … supports the general market consensus that China will add to its gold reserves. While the implications of potential QE and its size have monopolized market attention, the China report reminds us that the current mood amongst central banks, particularly in Asia, is to increase exposures to gold.”
Beware mass insider stock selling
Is now the time to buy gold for safety’s sake? This worrisome report from CNBC suggests yes:
“The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, editor of the Crosscurrents newsletter, has ever seen since he began tracking the data. … ‘Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally.’ … Newman isn’t alone in warning about insider selling. The latest report from Vickers Weekly Insider, a publication that makes investments based upon these transactions, shows that total insider sell transactions relative to purchases on the New York Stock Exchange are running at a ratio of more than four to one over the last eight weeks. … Newman … sees the insider selling as just the latest reason, along with the mortgage foreclosure mess and fully invested mutual fund managers with no fresh powder to put to work, to be cautious on the market. ‘At the risk of sounding like a broken record, we expect a significant correction,’ said the newsletter editor.”
Gold vs. silver is a win-win
Gold vs. silver: Which is the better investment? To find out, CNBC put two precious-metals experts in a boxing ring, in the form of Goldmoney chief James Turk and Charlie Morris of HSBC Global Asset Management. In this Oct. 26 interview, Morris argues that gold will outperform silver. “We’re in a massive bull market for all precious metals,” but silver is more volatile, he says. In the long term, gold will triumph because gold is “a more precious precious metal, so I think over the long term you’re going to get a better return at a lower volatility.” Turk argues that silver will outperform gold – though he endorses both metals because both avoid counter-party risk: “I’m a long-term accumulator. I see buying gold or silver as a form of savings – you’re saving sound money and you’ve done very, very well this decade, and I think that’s going to continue regardless whether you buy gold or silver. … My recommendation is generally to have two-thirds of your bullion portfolio in physical gold and one-third in physical silver, and if silver does outperform, it will become increasingly part of your portfolio.”