So Ben Bernanke, on his way out, still manages to find a way to please the punters. The man is a genius…an evil genius. While easing back ever so gradually on his failed quantitative easing experiment, he still managed to surprise the market with a commitment to keep interest rates low until the next time Haley’s Comet comes around.
Well, not quite, but you get the gist.
Bernanke’s Fed, soon to be Janet Yellen’s Fed, will now ‘only’ purchase US$35 billion of mortgage backed securities per month and US$40 billion in Treasury securities. That’s a $10 billion per month ‘taper’, with a promise of more to come.
Yet the market rallied. It appears as though the punters weren’t quite expecting such dovish comments on interest rates. But c’mon…this is Ben Bernanke!
Still, if it is true that QE only benefitted financial markets and not the real economy, then this taper, with the prospect of more to come, should be bearish for the markets. If stocks are going to move higher from here, they will have to do so on improving ‘fundamentals’.
And while it’s true the US economy is improving, you’d have to think the S&P500’s 150% plus rally from the 2009 lows has already factored most of that improvement in.
Either that or the stock market just goes on another nonsensical bullish surge…
And what about gold? It rallied along with stocks following the Fed’s announcement, rising about 10 bucks to US$1,240. Then it had second thoughts and plunged lower. As the Asian markets open for trade, it’s around US$1,215/oz.
Does this mean gold is signalling the deflationary force of the taper? Or does it simply mean the market and economy will take the taper in its stride, giving less reason for punters to own gold? Or is it all just noise?
So many questions, so few answers. Making sense of the market in the short term is always a difficult task. The bulls and the bears will have different interpretations, but no one really knows what is going on. Sometimes the market works in your favour, sometimes it doesn’t.
In the case of gold, here’s what we think. Or what we think we think. How’s that for definitiveness?
Anyway, we think gold is in a big — as in very big — secular bull market. In US dollar terms, it’s increased every year for 12 years. Gold even finished calendar year 2012 with a gain.
But it’s had a big fall in 2013. Nearly everyone thinks it’s the end of the bull market. The economy is improving. The Feds have engineered a recovery. Buy stocks, sell gold!
That has certainly been a winning trade in 2013. And it could be a winning trade for a little while longer as momentum builds.
But in our view, gold is just enduring a cyclical bear market within a much larger secular bull market. The duration of the cyclical bear is a sign of the size and duration of the secular bull.
For example, the correction from gold’s peak in September 2011 has now spanned 27 months. The price fall from the peak is so far around 40%. That’s longer than the correction that occurred during the 1970s bull market, but not as severe in terms of price. The 1970s cyclical bear lasted from December 1974 (the peak at around US$200/oz) to August 1976 (at around US$105/oz).
So the current performance of gold is not unusual. In the scheme of things, 27 months is not that long. After rising for 12 years, gold might need one or two years to set the stage for the next major move higher.
And that move will most likely come at the point of maximum bearishness. At a guess, that will come when gold breaks below its June low of US$1,190. From there, gold will likely plunge lower as everyone throws in the towel.
After that round of selling subsides, you’re likely to see a short covering rally that no one believes will last. And then gold will creep higher and higher while everyone dismisses it. Before you know it gold will have rallied 20-30% from its lows…and everyone will be waiting for the next move lower.
That’s one scenario, anyway. It’s the ‘gold is in a secular bull market’ scenario. We’ll find out if it’s right soon enough…or maybe it will be another year…
One reason we think such a scenario is plausible (apart from the fact the US dollar based monetary system being on its last legs) is that investors in the West have no patience anymore. These days, everyone is a trader…a speculator. If an asset class goes down, it’s time to get out.
Momentum takes on a life of its own…the longs get out and the shorts pile in. This is what pushes prices to extremes.
Meanwhile, for every seller, there’s a buyer. The largest gold ETF in the world, GLD, has gone from holding around 1,300 tonnes of gold at the start of the year to 812 tonnes now. That’s a loss of nearly 500 tonnes.
Where has it gone? ‘East’ is the most likely answer. While the West gets out of a once ‘hot’ investment, the East continues to accumulate as it has always done…through the cycles, storing their surplus savings in gold and less so in the debt-based paper of a declining hegemon.
But the declining hegemon is looking good right now. It’s tapering! Things must be improving. If you think this is the beginning of the end of extraordinary monetary stimulus, 2014 is likely to throw a few surprises your way.
The cynic in us says this is just Bernanke taking care of his legacy. He knows QE has been a huge failure. The US economy has improved despite, not because, of QE. But he’s taking credit for it anyway, using the improvement as cover to ‘honourably’ retreat from a failed strategy.
If the Fed retreats too quickly, they’ll cause a stock market rout, which will provide the cover for Yellen to come in with her own version of innovative monetary policy.
So it’s a bit of ‘QE is dead, long live QE’.
Once you start down an inflationary path, it’s very difficult, if not impossible to stop. The global economy is firmly entrenched in an inflationary policy bias. 2014 will likely prove that you can’t simply reverse it.
We’re too far down the rabbit hole…the only thing that will stop central bankers will be the destruction of their credibility. And where do you think gold will be trading then?
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