What looked like it would be a quiet day changed shortly after the options market close. Sitting inside a late-August like 7 dollar range throughout the day, we awaited Fed minutes release at 2pm. To my surprise, the minutes showed that Fed governors emphasized the potential for use of monetary stimulus in the coming months. Gold rallied on the release, and is now trading comfortably around 1650, where, it hung out for months before dipping into the 1530-1630 range that we broke out of on Monday.This seems to me to mark a material shift, and while I am not sure why it is taking place, it is important that we take note.
_______________________________________________________________________________
Fed Minutes
The thesis I have put forth for many months on this site has been that the likelihood of monetary stimulus from the fed is actually quite low. This thesis proved to be correct despite the big Goldman Sachs call that we would be getting QE in July. The basis for assuming no QE is and has been rather simple.
The first reason is that there is a great deal of debate as to whether or not QE is actually stimulative for the economy. If the evidence does not clearly support it, what would catalyze the fed to move in that way?
The second reason for the no- QE thesis was centered around the idea that the Fed is aware of its dwindled stash of monetary bullets, and thus, would only act to use what little it has left if the economic situation worsened significantly. We can debate the data all we want, but things have not materially worsened, and we have watched the stock market quietly creep to multi-year highs. Why then, with markets holding their own, would the Fed ever choose to act?
I should be clear that to this point, the Fed still has not acted or engaged in any new stimulus; but the last meeting's minutes clearly indicate a signaled increase in the likelihood of such stimulus. In the hour or so that I've had to think about it, the only possible explanation I could come up with for this change in sentiment is that the Fed governors realized that the stock market is coming into some real resistance at these levels, and that they want to keep the uptrend going. Bernanke has often said he views stock market performance as important to the recovery; but whether or not the Fed would go as far as to try to create a catalyst for a technical breakout I do not know (it seems like a bit of a stretch). I should point out that the minutes are from a meeting that took place weeks back, so some of the sentiments of Fed members may have been more accommodative with the stock market at lower levels.
_____________________________________________________________________________
The Middle East
A few weeks back, I mentioned both my discontent and disbelief at the lack of media coverage being dedicated to the tensions in the Middle East. As the Syrian debacle heated up and Saudi troops were being mobilized, all I could hear on the TV set was hackneyed chatter about the next big thing coming out of Apple. What perplexed me about the lack of coverage was the fact that the events of the Arab spring in the previous year were so closely covered, and such important drivers of the market at the time. I felt, and continue to feel that were this coverage to pick up, gold prices would be a beneficiary. Now, we are finally starting to see that media coverage pick up.
CNBC had a number of segments today centered around the topic of the Middle East, in particular whether or not Israel will choose to strike against Iran. Having recently been to Israel, I have a new found appreciation for the unthinkable complexity of the issues behind Middle East tensions. Middle Easterners do not think about nationhood the way Westerners do. Colonialism led to the drawing of borders that had little to no regard for the cultural boundaries amid the geography. As such, it is increasingly hard for someone who is not from the Middle East to recognize the impact of cultural affiliations on a more tribal, or, put less eloquently, "non-nation sub cultural" level. Therefore, I will not try. But I want to highlight a few comments made by some of the guests with respect to the potential for Israel to strike Iran.
The first commentator I heard pointed out that there is rampant inflation and economic woe throughout Iran. He suggested that the likelihood of Israel attacking Iran imminently is very low, because starting a war would simply play into the hands of the Iranian government by giving them a way to unite their people. By his logic, not striking would allow for the continued build of frustration among Iran's populace (due to the economic situation, which can in part be linked back to the government's foreign policy which has led to sanctions) and thus a weakening of support for its government.
Later in the day, a different guest stated that he thought an attack from Israel was highly probable. He reasoned that top Israeli officials believe that were they to engage in war, they would want to do so before the November elections. The logic, as I took it, was that Obama would have no choice politically but to stand behind Israel with the election forthcoming.
Whatever the outcome, there is no surer truth than the fact that there are no quick and easy solutions in the Middle East. The issues and tensions have been quite serious for some time now. The game-changer is that we are starting to see the media hone in on it. If media coverage continues, which I think it will, such tension should be supportive for gold prices.
____________________________________________________________________________
In conclusion, it is becoming harder and harder to see gold moving significantly to the downside. We have broken out above the 1530-1630 range I always mention, and because we were stuck in that range for so long, the breakout becomes all the more meaningful. I would not get ultra-bullish on gold here in the immediate short term, simply for the simple fact that we spent so much time hovering around this 1650 price earlier this year. That consolidation that we saw will make it technically harder to soar higher.... it will probably have to do a little bit of work. That being said, the aforementioned Middle East situation should keep a bid in gold. In my last post I mentioned the importance of the upcoming German ruling on the constitutionality of the Euro bailout funds. In passing Merkel has been supportive of Draghi of late, which is likely part of why market handicappers seem to be betting that the fund's legality will be upheld (Yes, there theoretically should be no connection between an executive's thoughts and a ruling by a court.... but we all know how it really works). Gold continues to trade (lately even more) in step with the Euro. So any more news that is pro-Euro existence, should be supportive for gold prices. Perhaps, as with the stock market, gold will take a little breather, but given both the technical picture and the headwinds surrounding it, gold looks poised to continue moving higher.
No comments:
Post a Comment