Friday, February 22, 2013

Are Central Bankers Poker Bluffing the Gold Markets?

Dr. Ed Yardeni at his blog writes
Other than profit-taking, what might be the fundamental reasons behind gold’s weakness? Perhaps the most important reason for the weakness in gold is that after three years of “living dangerously”--with lots of panics about apocalyptic endgame scenarios--the global economic and financial outlook is improving. That means that central banks may start to ease off on easing.

Earlier he wrote of the important role played by the FED in influencing stock market prices, (chart from Dr. Yardeni)
The Fed has contributed greatly to the bull market with its NZIRP and QE ultra-easy monetary policies, as evidenced by the close correlation of the S&P 500 and the securities holdings of the Fed. Bond yields fell to historic lows as the Fed purchased more fixed-income securities, increasing the attractiveness of stocks.
If gold prices indeed has been anticipating a forthcoming squeeze in the monetary environment due to an alleged "improving" fundamentals, which has bolstered the stock market, then we can easily deduce that tightening policies may similarly lead to falling stock markets.

This means that gold prices could be a leading indicator of the stock markets.


One can easily correlate the substantial contraction of the ECB’s balance sheet (left window), with the recent collapse in gold prices (right window).

The ECB’s balance, which has shrank to its lowest level since March of last year, began its accelerated descent since October almost simultaneously with peak gold prices.

Also, China’s government has announced pulling back on her easing policies through “a net 910 billion yuan ($145.89 billion) drain from the interbank market this week” (Reuters) which has coincided with a slump in her stock markets.

Of course, today’s booming US stock markets, as well as property markets, has prompted for the increasing hawkish statements from FED officials.

As Bloomberg’s Caroline Baum rightly points out,
Market participants forget that the Fed is neither omniscient nor a very good forecaster. What it is is the sole proprietor of the printing press. If the hint of cutting back on its hours of operation is enough to frighten the stock market, then the Fed really has to be concerned by what it hath wrought. 
This only means the Fed has been caught in a box. Once the stock markets gets freaked out by the prospect of a money squeeze, two question arises: 

-Will the central bankers stand firm and let the market clear (bubble bust)?  
-Or will they come rushing back to reflate the markets?

At the end of the day, my bet is that all these hawkish talks will pave way for future easing, thus a resurgent gold.

Euro Pacific Peter Schiff, in the following video, expounds on this matter:

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