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Gold Turns Choppy As Yellen Confuses

by Peter A. Grant

August 25, AM
(from --

Gold is trading in a choppy manner as markets in general struggle to decipher Janet Yellen's message from Jackson Hole. The yellow metal dropped lower initially, rose to set new highs for the day and then slipped back to near unchanged on the day, resulting in an intraday range in excess of $20.

Gold reacted initially to Yellen's statement in the fifth paragraph of her speach, that she believes "the case for an increase in the federal funds rate has strengthened in recent months." The market seemed to disregard the very next qualifying sentance: "Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook."

So, we're getting closer to another rate hike, but we still need to see confirmation in the data. This is the same basic message the Fed has been delivering for the past 5-years.

When talking about policy during the financial crisis in 2008, Yellen notes that "a variety of policy benchmarks would, at least in hindsight, have called for pushing the federal funds rate well below zero during the economic downturn." The footnoted formula "would have prescribed lowering the federal funds rate to minus 9 percent at the depths of the recession."
8. R(t) = R* + p(t) + 0.5[p(t)-p*]-2.0[U(t)-U*], where R is the federal funds rate, R* is the longer-run normal value of the federal funds rate adjusted for inflation, p is the four-quarter moving average of core PCE inflation, p* is the FOMC's target for inflation (2 percent), U is the unemployment rate, and U* is the longer-run normal rate of unemployment. Based on the medians of FOMC participants' latest longer-run projections, R* is approximately 1 percent and U* is about 4.8 percent. Accordingly, with the unemployment rate climbing to 10 percent and core PCE inflation falling to 1 percent in 2009, this rule would have prescribed lowering the federal funds rate to minus 9 percent at the depths of the recession.

San Fransisco Fed President John Williams talked about R* in a research piece last week:
" realities pose significant challenges for the conduct of monetary policy. Foremost is the significant decline in the natural rate of interest, or r* (r-star), over the past quarter-century to historically low levels."

Williams went on to say that "a variety of economic factors have pushed natural interest rates very low and they appear poised to stay that way." With that in mind, the same formula cited in Yellen's speech would prescribe that the Fed funds rate be set at 0.54% today, just above the high end of the current 0.25-0.50% target range. I don't think the Fed is prepared to start micro-adjusting interest rates based on any formula, so the Fed funds rate is pretty much where it needs to be.

Nonetheless, Yellen really didn't say anything that might dispel the notion that the Fed is on the cusp of anther rate hike. But even another 25 bps hike is largely meaningless in the grand scheme of things. Keep in mind that economic growth remains anemic, inflation is below target, wages and productivity have stagnated and the national debt continues its march to $20 trillion.

Opinions expressed in commentary on the website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.


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