by Tony Davis – Atlanta Gold & Coin Buyers ……….
As is the case with many individuals in the coin and bullion industries, we’re bullish on gold and silver and believe that the potential upside outweighs the downside risk. We’ve previously shared some of the reasons why we believe that 2014 will be a positive year for the gold market , and while our opinion hasn’t changed, we believe that it’s important to occasionally take a step back and make sure that we’re taking into account all factors that could have an impact on the price of the yellow metal. Furthermore, it’s important to consider factors that may cause the price of gold to fall short of expectations or stumble. In this post, we’ll share with our readers three factors that we believe could prevent gold from rebounding in 2014.
The term “taper” may have been the most frequently used word in the financial industry in 2013, as there was speculation throughout the year as to if the Federal Reserve was going to taper its bond buying program, when, and by how much. Ben Bernanke and the FOMC surprised the financial markets following their December meeting when they announced that they would be tapering their bond buying program by $10 billion a month. While $10 billion a month sounds substantial, it effectively reduces the Fed’s asset base expansion from $1 trillion to $900 billion a year, which is the scheme of things is a nominal amount. Money printing of $900 billion a year is still nearly unprecedented in the Fed’s history.
While the taper thus far has been nominal, some of the Federal Reserve presidents have expressed concern regarding the rate at which the Fed has been inflating, and the possibility that the expansion of the monetary base could translate into higher inflation rates. If we see fundamental improvement in the economy in the form of lower unemployment rates and higher GDP, the Fed may feel confident that the economy is on sound footing and may increase the rate at which they reduce their asset buying program. These efforts historically have not boded well for the gold and silver markets.
As alluded to above, the employment situation, or lack thereof, is one of the most important factors affecting the Fed’s monetary policies, and will likely continue to be until the unemployment rate drops to an acceptable level; at least as determined by the Federal Reserve. While we saw the unemployment rate in December drop from 7% to 6.7%, this was primarily as a result of individuals dropping out of the workforce, as only 74,000 new jobs were created in December. This figure surprised many financial experts, as the ADP numbers earlier in the week suggested that over 200,000 new jobs were created during the month, which was in line with economists’ forecasts. The disappointing jobs data caused the gold and silver markets to spike, as investors took this as a sign that the Federal Reserve will likely maintain their accommodative monetary policies.
While December’s jobs report was the weakest in approximately three years, we’ve been surprised before by data that fell short of expectations, only to see a reversal in subsequent months. At this time, it’s impossible to know if December is a sign of a poor jobs market in 2014 or if it was just an anomaly. If the latter, continued improvement in the jobs market could be detrimental to the gold and silver markets, as strong jobs reports typically causes the dollar to strength and gold and silver to decline.
What has possibly surprised most analysts (in and outside the hard money camp) is how little impact the Federal Reserve’s loose monetary policies have had on the rate of inflation. While December’s annual inflation rate ticked up a bit to 1.5%, we’re still well below the average rate of inflation that we’ve experienced since Nixon unilaterally took us off the gold standard in 1971. So how is it that the Federal Reserve has inflated at a rate that can best be defined as “hyperinflationary,” yet the inflation rate remains below 2%? This is simply because banks have opted to park their excess reserves at the Federal Reserve for a .25% annual return as opposed to risking their loss of capital by loaning out their excess reserves. Many individuals believe that it’s only a matter of time before we begin to see high inflation rates. In fact, John Williams from Shadowstats.com believes that the real inflation rate is closer to 10%. However, the question should be asked – what if we don’t see future inflation rates that reflect the meteoric rise in the Fed’s monetary base? Furthermore, what if the Fed not only tapers later in the year, but actually reverses trend and begins to reduce the size of its monetary base? The longer inflation rates remain below the historical average, the more likely gold and silver prices will remain in check.
In summary, while we believe that 2014 will be a positive year for gold and silver, it’s important to consider the factors that could prevent the gold market from experiencing a rebound in 2014. While the Federal Reserve has only begun to reduce their bond buying program, it’s possible that they could increase the pace if they believe that economic fundamentals are improving, such as an increase in GDP and an improved jobs market. While December’s jobs report was the worst in three years, it’s important to consider that it could just be an anomaly, in an otherwise improving jobs situation. Last but not least, the high inflation rates that we’ve been expecting in response to the Fed’s inflationary efforts may not come to fruition if lending remains weak and the Fed reverses course with respect to its monetary policies.
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Visit his website at www.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at [email protected] or at 404-236-9744.