Gold remains defensive after recent gains above $1300 faltered as talk about a potentially hawkish replacement for Janet Yellen began to circulate. That story continues to play out this morning, buoying yields and the dollar and pressuring the yellow metal.
As I wrote in yesterday’s DMR, appointing a hawk like John Taylor to chair the Fed risks derailing any hope that President Trump’s reflation agenda gets off the ground. What Mr. Trump really needs is an unabashed dove like Janet Yellen, or as DoubleLine Capital’s Jeff Gundlach speculated last week, Neel Kashkari.
U.S. housing starts and permits plummeted in September, well below the expectations of analysts who were already expecting a hurricane related slow down. Later today we’ll see EIA crude stocks and the Beige Book. FedSpeak from Dudley and Kaplan is already trickling out of a moderated discussion on economic development.
Gold retreated into the recent range amid the latest bout of speculation as to who will succeed Janet Yellen as Fed chair. Bloomberg reported that Stanford economist John Taylor impressed President Trump in a recent interview for the position.
If Taylor gets the nod, there is concern that he would attempt to implement his Taylor rule. That prompted rates and the dollar to jump today, putting gold under pressure. Stocks retreated intraday, but not before the DJIA set a new record high above 23,000.
The Taylor rule presently indicates that rates are far too low. While Taylor has signaled flexibility as to some of the inputs into his formula, it still suggests the potential for an acceleration of the present tightening cycle. That would of course be contingent on Taylor getting buy-in from other members of the FOMC.
If used as it was originally proposed, the Taylor Rule would imply that the Fed rate — currently set at a range of 1 to 1.25 percent — needs to be at 3.75 percent in order to meet the central bank’s goals of maximum employment and 2 percent inflation. Even if Taylor shied from pushing rates to that level as Fed Chair, using the rule would still make him appear much more hawkish than his two predecessors. — Bloomberg
However, given that President Trump’s economic agenda is premised on tax cut, borrow and spend fiscal policies, it would seem that tighter monetary policy would pose real problems. With a national debt already in excess of $20 trillion and headed higher, every uptick in interest rates makes servicing of that debt increasingly difficult.
Higher rates — or a wider differential with our trading partners — would cause the dollar to rise. President Trump has made it very clear throughout his first year in office that he is not a fan of a strong dollar. “Lots of bad things happen with a strong dollar,” said the President. He has also said that he “likes a low interest rate policy.”
That all seems incongruous with appointing a hawkish Fed chair. So, consider me a skeptic that Taylor is the latest front-runner for the position.
I would also point out that the Taylor rule was devised in the early 1990s. So much has changed in the past 25-years, one might reasonably assume that models of that era no longer reflect the present realities of markets and human behaviors. The Phillips curve is another glaring example, which attempts to show that unemployment and inflation have a stable inverse relationship.
Jim Rickards has consistently preached that the Fed is getting policy wrong because they continue to rely on antiquated models.
In a recent speech, Fed governor Lael Brainard, an ally of Yellen, said the Phillips curve today is “flat.” That’s a polite way of saying there is no curve. — Jim Rickards
Enacting monetary policy based on assumptions that these models are merely lagging, that the current conditions are “transitory,” may in fact be a recipe for disaster. I maintain that the main motivation for gradual rate hikes at the Yellen Fed is to give them enough clearance above the zero-bound to allow cuts when the economy eventually falls into recession.
The price of Bitcoin is up 600% over the past 12 months, and 1,600% in the past 24 months. But the long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates – and there is no reason to expect virtual currency to avoid a similar fate.
“My best guess is that in the long run, the technology will thrive, but that the price of Bitcoin will collapse.” — Kenneth Rogoff
Gold prices fell to a one-week low on Tuesday on speculation that the eventual successor to U.S. Federal Reserve Chair Janet Yellen will favour higher interest rates.
“It’s partly (the possibility of a hawkish Fed chair) and that the Fed is going to and needs to hike rates this year that is contributing to a bullish dollar environment,” Martin Arnold, commodities analyst at ETF Securities, said.
U.S. President Donald Trump was favouring policy hawk John Taylor as the next head of the Fed, Bloomberg reported, pushing the dollar higher and lifting U.S. Treasury yields.
PG View: But easier monetary policy would better facilitate President Trump’s economic agenda. He’s already spoken out about the detrimental impact of a stronger dollar, so why would he install a hawkish Fed chair?
Astronomers have entered a new era, combining observations of gravitational waves and light for the first time. They have recorded a cataclysmic collision between two neutron stars in a distant galaxy, which not only set the universe aquiver but also propelled newly created atoms of gold, uranium and other heavy metals into space.
“We now know that the violent collision of neutron stars is a gold factory.” — Professor Sheila Rowan of Glasgow University
Gold retreated into the range after failing to sustain recent probes above $1300, as the dollar firmed. However, political and geopolitical risks are still seen as supportive underpinnings to this market.
U.S. trade prices came in hotter than expected for September, with a 0.7% gain for imports and a 0.8% rise in export prices. Higher energy prices associated with the hurricanes contributed to the rise in import prices. While these gains may prove temporary, these data bolster the position of the policy hawks on the FOMC calling for a December rate hike.
Look for the probability of a rate hike to go back above 90%, which is pushing the dollar higher. However, with expectations already all-but a sure thing, there’s not much more room for improvement and gold has been holding up pretty well. There’s also still plenty of time before that December meeting.
U.S. industrial production rose 0.3% in September, in line with expectations, versus an upward revised -0.7% in August (was -0.9%). Cap use edged up to 76.0%, from a negative revised 75.8% in August (was 76.1%).
Later this morning we’ll see the NAHB housig market index for October, Treasury budget for September and August TIC data. We’ll also hear FedSpeak from Philly Fed’s Harker.
Gold is consolidating above the $1300 level, buoyed by persistent political and geopolitcal concerns. However, equally persistent strength in shares is driving risk appetite, which is limiting the upside for the yellow metal.
The near-term uptrend in the dollar that began early in September seems to have lost momentum ahead of resistance marked by the mid-August highs at 94.14. The dollar index rolled over early this month, but additional downside follow-through is needed to return confidence to longer-term downtrend.
If that happens, it would likely push gold through the next important tier of resistance at 1308.80/1313.62. That would return considerable credence to the uptrend that has dominated this year.
North Korea has renewed its threat to launch missiles toward Guam in response to the latest joint U.S./South Korea military exercises. As the saber rattling and drilling continues, the risk remains that one side or the other will misinterpret some action, leading to a shooting-war.
Spain continues to press Catalonia for clarification of exactly what happened last week. If they did indeed declare independence — or if they fail to clarify one way or another by Thursday — Spain may exert direct rule over the currently autonomous region. What kind of force might be used to accomplish that remains to be seen.
U.S. data remains uneven, but the market still seems inclined to ignore continuing signs of weak inflation. That’s because the Fed continues to indicate that they remain optimistic that inflation will eventually pick-up and therefore another rate hike is warranted this year.
Rate hike probability for December remains near 90%, although some FOMC members expressed last week a desire to remain on hold until there are actual signs of higher inflation, rather than mere Phillips curve driven expectations.
If the inflation data were sufficient to warrant a pause in the tightening cycle in September, nothing — beyond the hurricane related jump in energy prices — has really changed in the past month. The situation could certainly change ahead of that last FOMC meeting, but at this point the certainty of the market doesn’t make sense.
Gary Cohn, the top economic advisor to the White House, said Monday that tax reform has to get done this year.
“The opportunity is now,” he said in a question and answer session at the annual meeting of the American Bankers Association.
…The House and the Senate haven’t been in session at the same time recently, something that frustrates efforts, Cohn said at the ABA meeting. “Unfortunately we keep losing days” when lawmakers could meet to work on the plan, he said.
PG View: It seems to me, a great deal of optimism was ascribed to a 9-page outline proffered by the administration. Now the question becomes, can Congress actually come up with a plan that will make it to the President’s desk before year-end?
It was a faint signal, but it told of one of the most violent acts in the universe, and it would soon reveal secrets of the cosmos, including how gold was created.
Astronomers around the world reacted to the signal quickly, focusing telescopes located on every continent and even in orbit to a distant spot in the sky.
…Measurements of the light and other energy emanating from the crash have helped scientists explain how planet-killing gamma ray bursts are born, how fast the universe is expanding, and where heavy elements like platinum and gold come from.
…Perhaps one day the material will clump together into planets the way ours was formed, Reitze said — maybe ones with rich veins of precious metals.
PG View: The origins of gold is a pretty amazing story . . .
Gold held above the psychological $1,300 mark on Monday, supported by ongoing tensions over Iran and North Korea and recent weak U.S. economic data.
Palladium made another break above $1,000 an ounce to the highest levels since 2001 on the back of strong Chinese auto sales.
…”Last Friday we had rather disappointing CPI number, which further enforced the view that there’s no need for the Fed to be very aggressive in terms of rate hikes,” said analyst Carsten Menke at Julius Baer in Zurich.
…”Now it seems that gold has some legs above $1,300 level, which attracts some technical buying. The bulls have the upper hand, at least for the moment. I wouldn’t expect a sharp down move over the next couple of weeks.”
Gold remain well bid above $1300, having ended last week on an upswing. The next technical hurdle is defined by resistance at 1308.80/1313.62. A breach of this level would return confidence to the dominant uptrend.
The dollar index is modestly higher, but momentum on recent uptricks has been lackluster. Fed funds futures suggest the probability of a December rate hike remains near 90%. These factors are limiting the upside.
North Korea has renewed its threat to fire missiles toward Guam as U.S. and South Korean forces begin new naval drills. Spain is still waiting for clarification from Catalonia as to whether they declared independence or not last week. If they did, or they do not respond by Thursday, Spain has threatened to impose direct rule.
The U.S. calendar is light today. NY Empire State index surged to an 8-year high of 30.2 in October, well above expectations of 20.0, versus 24.4 in September. September Treasury budget is out this afternoon
Gold typically trades inversely to the dollar, or whichever currency it is being measured against. USAGOLD founder and president Mike Kosares wrote in this month’s newsletter that many might be surprised to find that gold is up against every major currency this year.
Euro –– + 1.1%
Japanese yen –– + 8.0%
Chinese yuan –– + 6.5%
Swiss franc –– + 6.1%
British pound –– + 3.4%
Australian dollar –– + 2.1%
Canadian dollar –– + 3.2%
U.S. dollar –– + 11.5%
(As of 9/27/2017.)
The dollar has been in a strong downtrend since 1971 when Nixon ended the gold backing. This was a disastrous decision for the world’s financial system and for the US economy. It has led to a total collapse of the dollar and a financial system based on debt only. — Egon von Greyerz
I would suggest the downtrend in the dollar goes back much further, to the late-1800 and the end of the Spanish American War. However, most analysts benchmark 1913 and the advent of the Fed. The BLS’s own CPI Inflation Calculator shows that a 1913 dollar presently has 4¢ of purchasing power. In other words, the value of that 1913 dollar has devalued by 96% since the Fed came into being.
The price of gold in 1913 was fixed at $20.67. In the intervening years — and even taking into consideration the corrective consolidative phase since the 2011 peak — the price of gold has risen a whopping 6,189%.
Can the dollar’s value really erode further? Absolutely. Over time, that 4¢ in purchasing power will become 2¢, will become a penny and then we’ll be talking fractions of cents. It is the inevitable reality of a fiat currency in a net-debtor nation.
And what of that debt? Last month, Congress suspended the debt ceiling yet again, allowing our national debt to surge beyond $20 trillion.
When the debt ceiling is reinstated on December 08, you should have no doubt as to what will happen. Oh sure, there may be at least a little debate next time, but the debt ceiling will be raised or suspended once again. There is absolutely no reason to consider any other conclusion. Since the very first debt ceiling was implemented in 1917, there’s never been a level that hasn’t ultimately been exceeded. In it’s entire 100-year history, the debt ceiling has never been lowered.
If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion. — John Mauldin of Mauldin Economics
I think the national debt could easily double in the next decade, so I’d have to take the “over” as well. The only way out government will be able to service such a massive debt load will be to weaken the dollar, as it has since President Nixon closed the gold window in 1971, ending convertibility of the dollar to gold.
“I directed [Treasury] Secretary Connolly to suspend temporarily, the convertibility of the dollar into gold or other reserve assets, accept in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.” — President Richard M. Nixon, August 15, 1971
Nearly 50-years later, I think we can all agree there was nothing “temporary” about it. Nixon also called concerns about devaluation a “bugaboo,” claiming that “the effects of this action will be to stabilize the dollar.” In reality, nothing could have been further from the truth. The dollar tumbled in value against other currencies and against gold.
At the time of Nixon’s speech, gold was trading around $43 per ounce. By January of 1980, it had reached a high of $850, nearly a 20-fold increase.
The dollar index has fallen about 9% YTD in 2017. The recent 3% corrective bounce seems to have lost momentum, suggesting the dominant downtrend is re-exerting itself. A weaker dollar into year-end bodes well for higher gold prices over the same period. This may be the last opportunity to buy gold at these levels.
Gold futures pushed above the key $1,300 level Friday after the latest reading on U.S. inflation came in cooler than expected, raising uncertainty about the pace of U.S. interest-rate hikes over coming months.
Closely followed investor Dennis Gartman told the CNBC Futures Now program on Thursday that “one currency that will probably do best of all is gold. Gold has been rallying in dollar terms. It has been a bull market since December. And it is still a bull market.”
Gartman noted that on average gold has been outperforming the S&P 500 this year.
A spike in energy prices in the aftermath of Hurricane Harvey boosted the U.S. cost of living by the most since January, while inflation excluding food and fuel was below estimates, a Labor Department report showed Friday.
While economists expected an overall pickup in price gains in the aftermath of Hurricanes Harvey — energy costs rose by the most since June 2009 — the details suggest any broader acceleration in U.S. inflation may need more time to gain traction.
PG View: Should take at least a little wind out of December rate hike expectation sails.
Gold jumped back above $1300 after a tame core CPI print for September, shows that the Fed continues to face an inflation problem. Headline inflation rose 0.5%, the biggest m/m jump since January, but it was still below expectations of +0.6% and attributed to hurricane distortion.
Like PPI yesterday, higher energy prices in the wake of the recent hurricanes pushed the broader measures of inflation higher. However, these gains are unlikely to be sticky.
This morning’s gains put the yellow metal decisively back above the entire 20-, 50-, 100- and 200-day moving average complex, returning considerable credence to the underlying uptrend. Next resistance is at 1308.80, the halfway back point of the decline off the September peak at 1357.50.
…as attracted to gold as Indians are, they weren’t the world’s biggest investors in the yellow metal last year, and neither were the Chinese. According to a new report from the World Gold Council (WGC), that title shifted hands to Germany in 2016, with investors there ploughing as much as $8 billion into gold coins, bars and exchange-traded commodities (ETCs). This set a new annual record for the European country.
…Germany’s rise to become the world leader in gold investing is a compelling story that’s quietly been developing for the past 10 years.
…a 2016 survey found that 42 percent of Germans trust gold more than they do traditional money.
This is where Germans and Indians agree. The latter group’s faith in the banking system has similarly been eroded over the years by regime changes and corruption, and gold has been seen as real money.
Gold remains fairly well bid, despite today’s firmer inflation data. The yellow metal is trading just below $1300, underpinned by geopolitical risks and perhaps slightly more dovish than expected minutes from the September FOMC meeting.
Below target inflation remains a considerable concern for the Fed based on the FOMC minutes that came out yesterday. However, that has seemingly done little to temper December rate hike expectations, which continue to hover near 90%.
Warmer producer inflation in September is being attributed at least in part to hurricane distortions. Focus now shifts to tomorrow’s CPI data, which is also expected to rise. The market and the Fed will need to ascertain if inflation is really picking up, or if these upticks are merely aberrations.
St. Louis Fed dove James Bullard says the central bank needs to defend the inflation target, or risk losing credibility. Continuing to raise rates when inflation is below 2% sends a signal that “the inflation target is not that important,” he warned.
“If you are going to have an inflation target you should defend it. If you say you are going to hit the inflation target then you should try to hit it and maintain credibility.” St. Louis Fed President James Bullard
In saying that it is a “denial of reality” to think inflation and rates would soon return to the norms of the ’90’s and 2000’s, Bullard is also acknowledging that something may have fundamentally changed. In the extreme, that may mean we will follow the path already blazed by Japan and that we are in for a perpetual state of easy monetary policy and moribund growth.
If that is to be the reality, one might wonder how stocks could possibly sustain current valuations. It would also favor the long-term downtrend in the dollar, which would be supportive for gold.
…Gold’s recent advances have come along with the heightening crisis over North Korea’s nuclear program in which the country’s unstable leader Kim Jong Un and our own fragile President Trump have ratcheted up the rhetoric to the point where accident and miscalculation could lead to catastrophe.
…With that cataclysmic risk even remotely on the horizon, buying insurance by putting 5% of your money in gold is the least you can do.