Uncertain Economic Optimism from the Fed

Friday, 20 June 2014
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Published in Gold Investing
Uncertain Economic Optimism from the Fed Time.
On Wednesday, the Federal Reserve announced it would keep its rates low for a while to allow the economy to recover. The thinking behind the announcement is that with lower rates in effect, businesses would be more inclined to invest, thus stimulating economic activity. The day after the announcement, gold bolted $41.40 to $1,340 an ounce, and silver $0.87 to $20.65 per ounce. Although precious metals are in a customary slow phase as the summer months take hold, investors clearly saw that maintaining a cash position would yield them little or no interest, so they jumped on the opportunity to pick up precious metals at low prices.

First-Strike

Prices for energy and grains followed suit, with crude oil, wholesale gasoline & home heating oil, wheat, and soybeans all exhibiting considerable increases.

We've gone from a Fed Chairman whose extended tenure gave him the wherewithal to candidly express “shock and disbelief” in congressional testimony (Alan Greenspan, October, 2008) to a shrewd and careful testifier (Ben Bernanke, July 17, 2013 semi-annual report: “As I have observed on several occasions, the phrase ‘at least as long as’ is a key component of the policy rate guidance.”), to the present Fed Wizard, Janet Yellen, who knows how to cover her bets (“there’s no mechanical formula for rate increases …”).

We've come to expect so little clear direction from the Fed, that markets now read what they want into the Fed Chair’s testimony.

Yellen’s message seems to be: “Here’s what the figures say. If we decide not to use the figures in our decisions, trust us.” Thanks, Ms. Yellen; now we understand… or we think we understand. Once Wall Street caught wind of her statement, the S&P 500 closed at a record high of 1,957, and the Dow climbed 100 points and the NASDAQ skyrocketed to its highest in 14 years.

From all indications, we’re in the midst of more than a win-win. We have a cluster win — everybody’s happy. Talk about brass ones: Tom Elliot, an international strategist from the deVere Group Consultancy,  assured us that since the US is no longer dependent on foreign oil, " investors no longer have to jump up and down with worry and fear every time an oil field in the Middle East changes hands."

A number of things intrigue us about the fallout from Yellen’s speech. We've come to expect so little clear direction from the Fed, that markets now read what they want into the Fed Chair’s testimony. Hello out there — has anyone noticed the dollar is falling? Also, there’s such precious little time between now and 2015, the promise to limit a raise in interest rates until then seems like no promise at all. It also intrigues us that precious metals investors now appear undeterred by Yellen’s declared slow-down in quantitative easing. The Fed has gone from $85 billion to $35 billion in bond buying. Yet gold and silver prices bounced back robustly.

Again, Yellen has covered her bets well. She announced that the Fed has now revised its outlook about economic growth, admitting we’re not out of the woods yet. She also alerted us that the Fed is allowing for a possible spurt in inflation, and hoping for an improved employment picture.

In the meantime, are you one of the investors who seriously underestimated the gold market? Sure, there’s a general economic jump in equity markets right now. But with so much uncertainty in the air about inflation and a rise in interest rates, doesn't it make sense to pick up some gold at its current price? Ultimately, isn't that what buying gold is all about — providing for uncertainty?

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.