The Daily Market Report: Gold Firm, Despite Intraday Rebound in Dollar
24-Mar (USAGOLD) — Gold remains well bid, having set another 2-week high at 1195.03 in overseas trading. Perhaps most impressive has been the resilience of gold in the face of a strong intraday rebound in the dollar.
Gold is only about couple dollars off the high for the day, even after the dollar index jumped 100 points. The EUR-USD rate swung by more than 130 points, and yet gold is hanging around near the highs. A rise back above $1200 may find some buy stops, giving further impetus to the recent gains.
Perhaps it was the ever-so-slightly hotter than expected inflation print for Feb, at +0.2%. That moved the annualized pace of inflation from a deflationary reading to unchanged. Maybe with the ECB now riding the liquidity bandwagon, the central banks will finally get the inflation that they so desperately want. The trend in prices thus far, certainly does not suggest any such shift has occurred, but time will tell.
Right now, the yellow metal is being buoyed by revived expectations that the Fed will be patient in raising rates, even after they removed the word from last week’s policy statement. All of the declines that followed the better than expected February employment report have been retraced. The optimism associated with the jobs data, has been replaced by new found pessimism springing from just about every data-point since.
One of the burning questions in my mind has centered on if all the extra-ordinary measures that the Fed has employed in recent years would eventually foster robust economic growth and inflation before the next recession struck. That certainly didn’t work for the BoJ and Japan, who has been at this far longer than the Fed and ECB.
Since the Great Depression, the U.S. has suffered thirteen recessions. The periods of economic growth between recessions have been as long as 120-months, and as short as 12-months. The average is just over 59-months.
The time elapsed since the Great Recession “officially” ended in June 2009 presently stands about at 69-months, well beyond the average. In other words, this “recovery” is already getting pretty long in the tooth, and most of the data that have come out recently provide cause for considerable concern.
St. Louis Fed President James Bullard warned today that the first rate hike might trigger a “violent” reaction in markets. Such a move may also hasten the next recession, which is already overdue.
The last thing the Fed wants to do is raise rates and then have to quickly reverse course and cut them again. Chicago Fed President Charles Evans implied this would be far worse than just leaving rates at the zero-bound for a longer period. “[T]he credibility that supported the alternative tools’ prior efficacy could be substantially diminished by an unduly hasty exit from the zero lower bound,” said Evans.
The Fed, and many of the other central banks of the world, are stuck between a rock and a hard-place. The BoJ seems to have reconciled that they’re just going to print yen like mad and buy assets until the needle moves. It hasn’t for more than 20-years, so the measures get bigger and bigger. It may be just a matter of time before the Fed and ECB come to the same conclusion.
Throwing up their hands at this point and saying ZIRP and QE don’t work may not be an option at this point. An acknowledgement that trillions have been wasted in the herculean effort to generate modest growth and inflation would destroy the credibility of the central banks. If the veneer — that the central banks have everything under control — falls away, the “violent” reaction that Mr. Bullard worries about may prove to be the biggest understatement of all time.
