In The Lead – QE: Quite Elusive


Precious Metals CommentaryOnce again, Fed Chairman Bernanke "disappointed" certain asset markets and their players with his visit to Capitol Hill yesterday.

His semi-annual report on the recovering patient that is the American economy revealed… more of the same: a slightly weaker — but not weak enough to stimulate economy, a relatively stubborn (above 8%) rate of joblessness, and a Fed that "stands ready to assist" but will not "give in" to the doves or to market tantrum-throwers at present.

Mr. Bernanke also reiterated the fact that neither he nor the members of the FOMC team are convinced of the efficacy of another round of full-blown QE asset purchases as regards the mandates of economic growth, reduction in unemployment, and maintenance of benign inflation conditions.

The Fed Chairman stressed once again that getting back to more normalized labor market conditions could be a slow process. Without stating it directly, Mr. Bernanke was hinting at the fact that central bank monetary stimulus isn’t per se effective at creating jobs in the economy. Strong job creation is currently the only metric on which Mr. Bernanke — according to his critics — has failed to "deliver."

Recently, Philly Fed President Plosser cautioned that folks who fell out of work during the Great Recession do not possess the skills necessary for qualifying for types of job openings that are being created. "Solutions to this problem are not amenable to monetary-policy fixes," he concluded. Of course, Mr. Bernanke’s critics might be overlooking the fact that, if Sweden’s recent experience is anything to go by, then, with the number of positions that have permanently been eliminated in the wake of the crisis, it might be futile to expect anything more than 7% unemployment to constitute the new "full employment" paradigm in America. No amount of Fed string-pushing would be able to alter that trend and final development.

For an example of really difficult labor market conditions, one needs look no further than China at this time. Premier Wen Jiabao warned yesterday that the country’s employment situation "will become more complex and severe" going forward. What "complex" or "severe" might imply is anyone’s guess right now. However, with the IMF still allowing for the possibility of a "hard landing" for the Chinese economy and with Premier Wen’s de facto admission that the government’s efforts to create jobs are falling short of targets, the tasks that lie ahead for him and his team are not enviable.

At any rate, back on Capitol Hill, while various Congressional figures sounded inquisitive for the TV cameras and some of them probed Mr. Bernanke fairly hard on his report, the tables were eventually turned on them. The Chairman warned that monetary policies are one thing (his), but that the US government’s fiscal policies are on what he called an "unsustainable" path and that Congress (i.e. his interrogators) better act lest it knowingly pushes the US economy off the "fiscal cliff" sometime in the coming year. No QE that the Fed could set in motion would avert that kind of a plunge.

Gold spent the hours prior to the Bernanke Congressional testimony on the defensive, touching lows near $1,570 but it then managed to narrow those losses and finish the trading day at $1,582 — lower by about $6 per ounce. Silver ended flat at $27.31 the ounce. Minor closing gains were noted in platinum (+$1) at $1,414 and in palladium (+$6) at $580 per ounce. Oil advanced 70 cents and the Dow climbed 78 points.

This morning, the midweek trading session in New York started with fresh declines across the precious metals’ price boards as the US dollar resumed its ascent on the trade-weighted index in the wake of an "uncooperative" Fed. Spot gold retreated to under yesterday’s lows at the $1,570 level once again, losing about $15 per ounce in the process, while silver fell nearly 50 cents to 20 cents under the $27 level.

Platinum lost $14 to ease to $1,400 round figure and palladium slipped $6 to $574 per ounce. No changes were noted in rhodium at $1,225 on the bid-side. The risk-off sentiment manifest in the pits in metals was also notable in crude oil, copper, and stock futures. The euro did not move much at all and was still stuck under the $1.225 level against the greenback. Rumors that Sicily may be on the verge of default kept the pressure up on the common currency and Italy’s downgrade to Baa2 by Moody’s last Friday did not help matters either.

Physical gold demand remains subdued in key markets and all eyes remain on India. That country’s bullion demand may contract by 30% this year according to the All India Gems & Jewellery Trade Federation. Already, Q2’s jewellery sales have dipped by 30 to 40 percent in the wake of record local prices for gold. At the same time, the poor start to the annual monsoons has prompted Citigroup analysts to project that

"rural gold jewelry purchases in India, a key element in the Indian jewelry market, are expected to suffer as reduced harvests negatively impact disposable incomes."

Meanwhile, the latest Reuters quarterly precious metals price poll reveals that gold experts the world over have dialed back on their price expectations for the yellow metal for the remainder of this year and for 2013. While the new average price figures are indeed lower than what had been anticipated earlier in the year they still remain higher than those recorded in 2011. The Reuters poll indicates that we might look forward to $1,667 gold in Q3 and $1,750 in Q4 but a replay of last year’s $1,927 high is not seen as being in the fortune-telling cards.

The Reuters poll yielded a relatively poor price forecast for "poor man’s gold" inasmuch as respondents projected a lower annual average price for the white metal and an upcoming median price of $31.67 per ounce. Even those who did allow for a better than up to now performance for gold cautioned that silver will continue to under-perform its yellow senior relative. Reuters reminds investors that

"the [white] metal is suffering from record-high mine supply, weak offtake from industrial users in the electronics industry, evaporating demand from the photography sector, and greater caution among speculative investors after two major price slumps last year."

“Silver is in a chronic supply surplus and is already carrying heavy inventory. While we expect demand to grow faster than supply out to 2015, we do not think this will be sufficiently so to close the gap between the two,” RBS analyst Nikos Kavalis said. “As such, silver will continue to rely on investors to absorb (and keep holding on to) excess supply. For the long term, therefore, our price outlook remains bearish and we believe that once the tide turns lower for gold and the yellow metal starts trending downwards, so too will silver.”

Bank of America envisions silver rebounding somewhat in September, pending — of course — the handing out of another round of QE by the Fed. Yet, the US bank does figure that silver would still underperform gold even under such conditions.

As we go to ‘print’ it remains to yet be seen how much, if at all, Mr. Bernanke’s upcoming part two of his Capitol Hill testimony will vary from yesterday’s script, Market mavens have already repositioned their focus on the upcoming (at 2:00PM) Fed Beige Book report as the next item from which to try to extract positive Fedspectations or perhaps the opposite — depending on the contents. Some are even circling the August 1st date on the calendar, hoping that QE-day will finally dawn at the Fed and juice these apparently starved-for-that-monetary-drug junkie markets. With US elections impending, that might well be the last day for such treats to be handed out this year.

Earlier in the Tuesday session the gold market digested (and not too well at that) the news that US consumer prices finished the month of June flat. The "ravaging" mega-inflation whose effects we were supposed to be suffering from by now in the wake of the repeated rounds of QE, has evidently taken a detour into… Neverland. Hard money newsletters are devoting most of their energy to revisionism and to pushing back the "end of the financial world’s" scheduled appearance by several more years at this point.

Oh, and while we are on the topic, please don’t tell the writers of such scary financial e-mails that China, already the largest foreign US creditor just boosted its hoard of US government securities — by the most in six months. That’s right: boosted, not booted. China did not buy 2,000 tonnes of gold, it did not abandon the US dollar, it did not pay for Iranian oil with bullion bars, it did not unload its 1.1696 trillion dollars’ worth of US obligations, and it did not announce the end of your financial well-being. Shocking, eh?

As things are shaping up currently, even the advent of another QE might not have the "traction" that the previous rounds of Fed easing had on precious metals and commodity prices. Julian Jessop, Chief Economist at Capital Economics, reminds us that

"The prices of riskier assets have of course responded positively in the past to additional monetary stimulus, but we are skeptical that QE3 would be so well received given that "a third dose of the same medicine is bound to be less effective [for the economy]."

At the end of the day, any easing is a response to weak economic conditions, and as such, reflective of an environment wherein commodity demand is lackluster (or worse).

The IMF was referring to just such an environment yesterday, when it scaled back its estimates for global economic growth for the current year. The latest projection for such growth now stands at 3.5%; a notch below April’s forecast. The organization placed heavy emphasis on the resolution of the eurozone crisis and warned that it was of the "utmost priority" to fix the region’s problems. The "fiscal cliff" ahead in the US was also mentioned in the IMF report but the worst ‘hit’ projections-wise was reserved for the UK. The Emerald Isle is supposed to "grow" at a snail’s pace of about 0.2% this year, according to the Tuesday IMF estimates.

The IMF also expressed concerns about the economies of China and India, among others. Recent Chinese economic statistics have only served to aggravate the levels of anxiety being experienced by global investors. Many of them fear that the official numbers regarding the slowdown in that country are not quite accurate. Experts continue to point to core factors such as electrical power demand which stands starkly at odds with the state-issued GDP expansion rate.

And now, for something completely… the same: back to watching the US dollar. For those of you who do care about its gyrations and correlations to gold and to other metals and commodities, there is some exciting news to learn about. Our long-time reporter friend, Marketwatch’s Myra Saefong, writes that a new index to track the greenback has just been born. The tracking tool comes courtesy of The Wall Street Journal and the Dow Jones FX Trader. It is called The Wall Street Journal Dollar Index and it is found under the cleverly-named BUXX ticker symbol. The index showed a reading of 72.27 (up 0.29%) at last check. Its 52-week low was 64.96 while its 52-week high was 72.83 as of this writing. An excellent US housing-starts reports provided additional fuel for the dollar’s morning market "meal."

Myra writes that "the new index, which measures the dollar against a basket of other major currencies, including the euro, yen, Australian dollar, Swiss franc and Swedish krona, aims to improve on existing indices, such as the ICE dollar index, by basing its value on actual, up-to-date turnover by all participants in the foreign-exchange market, The Wall Street Journal reported Wednesday.

The new index captures more than two-thirds of daily global foreign-exchange trading volume, which is nearly $4 trillion a day, and it’s restricted to dollar currency pairs that account for at least 1% of global daily turnover and that the BIS breaks out as major currency pairs."

Until Friday, here’s to hoping you can make a few… buxx

Jon Nadler

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication. and

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