In The Lead – QE = Questionable Easing?

Gold and silver opened marginally lower this morning while platinum and palladium continued to add to Thursday’s gains. Spot gold traded near $1,766 and spot silver near $34.50 as the New York session opened for the final day of the trading week.

Here is a quick reminder of how not to get carried away with Fed announcement-related gold price pattern days. There are good days and not-so-good days that follow FOMC statements, but when it is all said and done, the average gain (as reflected in GLD) has been 0.2% on such occasions. Platinum was bid at $1,691 (now only some $70 away from parity with gold) and palladium at $699 per ounce.

Yesterday the markets encountered forecasts of possible 26% and 37% gains to come in platinum and palladium over the next year given the current situation on the production side. One leader of a major protest by platinum miners has called for a national strike in the sector "to bring the mining companies to their knees," according to the Mail & Guardian. Rhodium advanced $50 to the $1,200 mark on the bid. Background markets showed crude oil rising to almost $100 per barrel on the back of the Fed announcement and growing tensions in the Middle East — North Africa region.

Also yesterday, just moments after the Fed announcement, firm forecasts of $2,300 gold in the very near future were also dusted off and trotted out into the blogosphere, in spades. While it is true that the odds of somewhat higher gold prices were augmented by the advent of the open-ended bond purchase Fed plan, the very long-term numbers and performance do not bear out the case for a "bullet-proof" capital preservation tool at hand.

As Societe Generale’s Dylan Grice notes,

"A 15th century gold bug who’d stored all his wealth in bullion, bequeathed it to his children and required them to do the same, would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90% over the next 500 years."

In the "shorter" term, the holder of 1980-vintage gold has not only earned nothing on his investment but requires $2,300 gold just to break even on the invested capital. On the other hand, the peace of mind and the potential shelter that gold may provide in the event of chaos, collapse or all-out war is not substitutable, no matter the number-crunching reality.

Copper climbed 2.5% this morning and other base metals were in the green column as well. The US dollar fell 0.34 on the trade-weighted index (trading at just under the 79 mark) while the euro rose to very near the $1.31 level in an extension of the rally that commenced after the German top court’s ruling on ESM. The euro appeared immune to swirling rumors that Spain was seeking a bailout — rumors denied by the ECB as well as the IMF.

Meanwhile, the Bank of Japan was rumored to be at the ready to sell yen and buy dollars in an effort to halt the rally in the Japanese currency that followed the Fed announcement. Hey, this is the "whatever it takes" era, right? Speaking of "whatever it takes" the Fed appears to have joined that club as well with yesterday’s move. Not yet ready to join this elite club is the PBOC, apparently. Media reports suggest that China is not about to launch major stimulus moves.

Reactions to the so-called QE3 (which we still see as more of a tugboat than a Nimitz-class fighter carrier) ranged from "awful" to "disappointing" to "logical." Ever the perky one, conservative columnist George F. Will summed up the Fed program by asserting that

"When the independent Fed buys bonds to affect short-term economic stimulus by manipulating long-term interest rates, this is less monetary policy than fiscal policy, which is the business of an accountable Congress. It also is a preposterous arrogation by the Fed of a role as the economy’s central planner, a role beyond the Fed’s — or anyone else’s — competence, and incompatible with its independence."

The content of the Bernanke press conference was quite a bit more meaningful than the relatively brief FOMC statement and it brought to light several of the Fed’s concerns and tactics while also raising a good number of questions that do not have satisfactory answers as yet. To begin with, Mr. Bernanke noted that the Fed’s most powerful ammunition is its credibility. Now, we know, such an assertion will be met with howls and other assorted noises; however, this is precisely the reason why the Fed shifted gears and embarked on a bond-buying program that will only cease when the results the Fed hopes for become manifest.

Vocal sources (see the Romney camp) accused the Fed of acting yesterday in order to save the Democratic incumbent as opposed to the American economy (or at least the jobs portion thereof). On the other hand, when it comes to the aforementioned jobs situation, the Fed did not come up with a particular number to target as regards general unemployment, and that vagueness is somewhat disconcerting. In addition, Mr. Bernanke could reasonably be asked: "Why this? Why now?" since he himself stated that he does not believe that QE3 can resolve the existing problems on its own and that the government must do its part to assist the US economy.

Among other things, Mr. Bernanke also said that the Fed is not trying to stoke the inflation rate by the implementation of its $40 billion per month mortgage-backed securities purchase program. He also said that the program will cease prior to the economy achieving what might be considered as "full" employment, and it will do so when "substantial" improvement is seen in the jobless numbers. The time horizon for coming close to such a desired target could well extend into 2015. Others, such as LPL Financial’s economic strategist John Canally, envision QE3 bond-buying to come to a halt whenever the US Congress shuts it down.

We close today with the head-scratcher of the week (or at least the irony prize winner of the day) coming from… the Fed. On the same day that the FOMC rolled out QE — whatever it is called — it also was announced by the Fed that it is upgrading its US economic outlook for 2013 and 2014. Huh? Yes, that’s right, according to Bloomberg News. Read on:

"Federal Open Market Committee participants upgraded their estimate for 2013 gross domestic product growth to 2.5 percent to 3 percent, compared with 2.2 percent to 2.8 percent in June. Estimates for 2014 are from 3 percent to 3.8 percent, versus 3 percent to 3.5 percent in the previous forecast, according to the central tendency forecasts, which exclude the three highest and three lowest of 19 projections."

Sounds like an open-and-shut case for embarking on an open-ended bond-buying program on the same day, n’est ce pas?

Have a nice weekend and to our Jewish audiences we wish all of you, a Happy and Healthy 5773!

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.

www.kitco.com and www.kitco.cn
Blog: http://www.kitco.com/ind/index.html#nadler