Gold Prices Commentary for November 3, 2010


Bullion Bars

Special Edition: US Midterm Elections and the Fed Decision

As was largely expected (and already factored into asset valuations), the GOP took control of the US House of Representatives and gained Senate seats as well, in the wake of a midterm power shift not often seen in American politics. Yesterday, US voters voted in anger and out of rising frustration over (mainly) the state of the economy and several Democratic incumbents were replaced as a result. Big business cheered the outcome and will now be looking to Republican winners to block impending rules, taxation, and policies proposed by Mr. Obama’s administration.

One of these concerns was already reflected in CFTC Commissioner Michael Dunn’s take on the matter of funding for his agency as we go forward. Such funding is critical in order for the CFTC to carry out its proposed mandate of tightening regulation and enforcement of potential risk areas such as swaps and derivatives. Mr. Dodd expressed worry that the CFTC might not get the funding it needs for such tasks. With the political tilt that has emerged as of last night, the Commissioner’s worries may well be justified. His agency is in need of some 400 additional staff in order to do what it intends to do under Dodd-Frank.

For now, the focus in the markets has fallen on the banking and health insurance providers that stand to benefit from the power shift. JPMorgan, Goldman Sachs, and Bank of America were among the happiest with last night’s result. They had all spent heavy funds on lobbying against the Dodd-Frank law. Proposed rulemaking by the CFTC as regards derivatives as certain proprietary trading will now be at risk as well. On the health care side, firms such as Wellpoint and Boston Scientific cheered the GOP win as a possible facilitator of their escaping regulation and tax increases that were due to materialize over the next decade.

The Bush administration tax cuts, certain unemployment insurance benefits funding, and the national debt ceiling’s status will all be due for votes over the next half a year. Observers have tendered the possibility that with a GOP majority in Congress and a Democratic one in the Senate, the outcome as regards progress on the legislative and perhaps economic front as well, will resemble the typical traffic pattern on display at the Lincoln Tunnel on a bad Friday night: gridlock supreme.

Sources said that not only did the blowing up of the financial system unfold while Republicans stood by and watched, but that the so-called ‘fiscally responsible and disciplined’ party’s candidates took lots of money from the banking sector in this epic election; epic at least in terms of the $4 billion that has been spent on it. To be sure, not every dime spent paid off for certain candidates. For example, Ms. Fiorina and Ms. Whitman’s oodles of campaign-expenditure dollars did not pan out into golden nuggets of senatorial or gubernatorial victory at the polls in the Golden State.

The "real” test for this split American government, according to the same source, will come when the vote on whether or not to raise the US debt ceiling will face legislators — perhaps as early as the middle of next year. There is serious doubt about whether the GOP will be (by not voting to raise said ceiling) prepared to ‘throw America under the bus of default’ and thereby trigger a global recession of untold proportions.

As the news of the outcome of the US elections started to spread, so did worldwide apprehensions about what this all means to the global economic conditions. Overseas investors do not perceive the Republican victory in the House as implying that anything will be done to restore the US economic trends.

"Republican claims to fiscal probity are a little difficult to buy into,” said Simon Tilford, the chief economist at the Center for European Reform in London."What they’re advocating would probably increase the deficit rather than effect the dramatic reduction which they claim they want to bring about.”

With but a few hours to go prior to the announcement of the Fed’s new QE program, the markets learned that private-sector employment gained 43,000 positions in October. Coming on the heels of the recent ISM figures, the jobs data corroborates the theory that US economic growth remains in place, albeit at lower-than-desirable levels. The ADP report comes ahead of Friday’s non-farm payrolls number — which is slated to show a gain of perhaps as many as 70,000 jobs, even as unemployment might tick one-tenth higher, to 9.7%.

Such a set of relatively good economic numbers landing just before the Fed announcement made for a wild ride in the precious metals markets this morning. Gold, which had opened on the resilient side and made an attempt towards the $1,365 level virtually collapsed before the noon hour as bids sank across the board when players triggered sell-stops and positioned themselves for what might be contained in the Fed announcement.

Lows near $1,325 were hit in gold before the Fed decision, but the intra-day roller-coaster was really par for the course, given the gravitas of what had been and was going on, or about to unfold, in the background. Note that gold’s morning cave-in took place without any significant advance by the US dollar on the index (it remained virtually flat, and under the 77 level). Also note that crude oil did not suffer any such sell-off but advanced towards the $85 level instead. That was…then. Before the 14:15 New York hour, that is.

And now, for something completely…almost the same. The same as was expected, that is, plus $100 billion, for good measure (and not to totally disappoint the markets which were ready to throw many a tantrum). Just as political punditry foresaw the GOP-leaning swing coming on in the American political scene, the financial pundits who envisioned a basically deliberate and measured approach by the Fed ($600 billion on offer for now, but stretched out over time, until Q2 2011) turned out to be basically correct. On top of that, the statement language that the Fed used remained sufficiently ‘open-ended’ to allow for subsequent ‘wiggle-room’ — if required.

Yes, there could be more in the pipeline if the situation turns dire (read: deflation refuses to vanish from the scene) but, for now, the economy will have to make do with this particular accommodation from the Fed. Prof. Stiglitz (Columbia U) sees no beneficial effects from the QE package unless major ‘infrastructural’ (economic) issues are also addressed. Maximum employment and price stability were still the keywords in the Fed statement. On the dissenting side of the Fed’s decision was Mr. Hoenig — as has become ‘usual’ for his assessment. He sees no real benefits from the program, but does see added risks arising from it.

This was clearly not the "big QE2 transoceanic luxury cruise ship" that the plethora of large gold bettors had anticipated (and exhibited in the markets) over the past two or three months. It was also not the trigger for the demise (again) of the US dollar. What happens down the road remains a tad on the foggy side, but the immediate effect of the Fed news fell well short of the expected gold price fireworks. The lack of a mention of buying mortgage-backed securities, and the fact that the duration of the program is only eight months (as opposed to the original six months) likely rattled many an overly long (commodities) and short (the buck) speculator.

Whether or not the Fed gave ‘just enough’ not to tee off the market and its forceful demands because of the shift that began with last night’s elections, remains to be seen. There was a sense that going ‘over the top’ with a full trillion dollar program might have smacked of desperation and reveal that the Fed knows ‘something’ that the rest of us mere mortals ought not to. Thus, the number is 600 — billion. Take it, or leave it. Gold might do the latter. Perhaps. As of right this moment, it certainly is.

Until next time,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

Original article link: GOP Sails While QE2 Lists At Dock

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