Not much follow-through from Wednesday’s Fed euphoria in the US stock market yesterday. Investors are drifting away, preparing for the holidays. Dow up only 11 points.
But, whoa! What’s this?
Gold took a pounding yesterday. It fell $41, to close below $1,200 an ounce.
Remember when gold began its correction from over $1,900 an ounce? We guessed the correction could wipe out half the gains, which would put the bottom at about $1,150 an ounce.
Gold came close to that level once… and bounced. It looked as though the correction was over. Now we’re getting close again. If gold doesn’t bounce this time, we could be in for a more vicious price collapse. (More on this from Chris below…)
Why? Is it because the Fed is now in tightening mode? Is the Great Experiment over? Was it a success?
Or have gold investors misjudged things?
Our guess: No, no, no and no.
As we’ve been telling members of our family wealth advisory, Bonner & Partners Family Office, the Great Experiment is NOT over. The Fed is NOT tightening. The economy has NOT revived. And gold investors have understood correctly that the Fed’s policies WON’T cause growth… or inflation.
Instead, they will lead to stagnation, which could last for many years. Just look at Japan.
When that reality sets in, so will a more determined… and direct… form of monetary stimulus.
Gold’s day will come; but it may not come tomorrow.
An End of Easy Money?
“Fed’s taper decision signals end of era for easy money,” declares the Financial Times.
The Financial Times always seems to get the story wrong, at least on the editorial pages. The newspaper’s chief economics commentator, Martin Wolf, is a giant in this field.
And lest readers are still able to think clearly after reading Wolf, he brought Larry Summers onto the editorial page to obscure any residual clarity.
But rarely is the news portion of the paper as mixed up as the editorial pages. Yesterday was an exception. Bernanke’s decision to trim $10 billion from the Fed’s monthly asset buying hardly qualifies as the “end of era for easy money.”
The Fed is still ballooning its balance sheet by $900 billion a year. Bernanke also made it clear that the Fed would push forward with a federal funds rate – the rate at which banks lend to each other overnight, and therefore the “base” interest rate for the entire economy – at the zero bound until the official rate of unemployment moved “well past the time that the unemployment rate declines below 6.5%.”
How long will that be?
For all the talk about “transparency,” we have no better idea now than we did before Bernanke opened his mouth. As always, the Fed can do what it wants… when it wants. And it can do so for reasons of its own.
When the merde hit the fan in 2008, then Treasury secretary Timothy Geithner was on the phone almost around the clock with Goldman Sachs head Lloyd Blankfein.
Was it really any surprise that the feds rushed to the scene of the accident with painkillers? Is it really any mystery now that the financial industry is hooked on them?
Nah… Here at the Diary we like to keep things simple. We can’t understand anything too complex. The gist of the story is as follows:
The role of government is to protect the people who control it – almost always the people who own the most assets.
That is why government is (almost) always extremely conservative… looking into the future and doing its best to prevent it from happening.
But capitalism is forward-looking. It needs the air and light of an open economy… where people can fail as well as succeed.
So, the elites gradually pervert capitalism, turning it from a dynamic system full of booms and busts into a crony program meant to protect the rich from crises of “creative destruction.”
Why Didn’t Goldman Go Bust?
Before the feds stepped in, Bear Stearns and Lehman Brothers had collapsed. The crisis of 2008-09 was on course to destroy all major Wall Street institutions.
When the papers applaud Ben Bernanke for having “avoided another Great Depression” what they really mean is he saved Wall Street speculators from getting what they deserved.
Even Goldman Sachs probably would have gone broke and been forced to reorganize.
The crisis also left the feds with sharply lower tax revenues… and should have brought much lower spending. Left to live on tax revenues alone, US federal government spending would have been cut by one-third in 2010.
Lobbyists would have been fired. Contracts would have been lost. Giveaways would have stopped for the simple reason that there was nothing to give away. And real wealth would have been reclaimed by the productive private sector. (This money would have been redeployed in new ventures by now… with new hiring and new output.)
In other words, a good old-fashioned crisis was lost. And with it was lost an opportunity to cut back the zombies… the insiders… the Wall Streeters… the K Streeters… and the undeserving “rich” generally.
But here at the Diary, we also look on the bright side: There will be another crisis and another opportunity to clear away the rot.
Gold is a ‘Falling Knife’
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
We’ve been debating the trajectory of gold in these pages for some time…
But yesterday’s action was a game changer. That’s because gold sunk below $1,200 an ounce… a level not seen since June.
If gold doesn’t bounce off these levels, it will be technically very bearish. Gold speculators have seen this as the “line in the sand” for gold for the past six months or so.
Gold is already down 37% since its September 2011 peak of just over $1,900 an ounce. A bear market is widely seen as a downturn of 20% or more over at least a two-month period. So, gold is clearly in bear territory.
What to do?
If you already own gold, hold your position. Gold has proven to be a solid store of wealth over the long term. I don’t see any reason for that to change.
But I wouldn’t advise adding to your positions until we see if the yellow metal can find support at the June lows… and make its way higher from there.
Until that happens, gold is a “falling knife.”
And catching falling knives is notoriously dangerous…