Gold Dips Back Below $1200
Peter Grant | Oct 30, 2014 02:42PM ET
Gold fell to a three-week low, probing back below $1200, on the back of a better than expected advance Q3 GDP print. The GDP beat came in the heals of yesterday’s FOMC statement, which was interpreted as being more hawkish than expected.
The Fed official ended the QE3 asset purchase program yesterday, as was widely expected. While the FOMC maintained its “considerable time” language, the committee expressed heightened optimism about the labor market.
The latter caught the market a little off guard, returning some measure of credence to forecasts that the first Fed rate hikes could come sometime in 2015. That pushed the dollar higher, which weighed on the yellow metal.
Wall Street Journal Fed watcher Jon Hilsenrath said Fed chair Yellen surprised with her willingness to displease the other doves on the FOMC. You may recall that the September FOMC statement was perceived as being more dovish than expected. Hilsenrath says Yellen is trying to be a consensus builder.
A more suspicious interpretation, is that in alternately throwing some seed to the doves, and then some fresh meat to the hawks, Ms. Yellen is purposefully attempting to keep investors off-guard. She wants to mitigate growth and deflation risks as best she can, while simultaneously preventing asset bubbles from becoming overinflated again.
Today’s better than expected Q3 GDP number moved the rate lift-off needle again, but it seems most of the firmness came from government spending. Consumption and investment in Q3 was actually pretty disappointing.
Even as the Fed took on perhaps a modestly more hawkish mantle, the Washington Post suggested today that the central bank was “upstaged” by former Fed chair Alan Greenspan’s investment advice.
In a separate interview, Greenspan said he expected gold to be “measurably” higher over the next five-years:
The WaPo points out that Greenspan correctly forecast that inflation would remain tame during the easy monetary policy regime he oversaw as chairman of the Fed. However, his recommendation to buy gold may be suggestive of his growing concern that inflation expectations may ultimately become ‘unanchored’.
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You probably can’t blow up a cental bank’s balance sheet to the tune of $3 trillion (not to mention all the liquidity pumped by other central banks) in a six-year period without some undesirable results manifesting. Gold is of course the classic hedge against inflation and so-called ‘black swan’ events.
Greenspan was pretty adamant in his speech yesterday that the Fed’s QE experiment has been a flop, noting that “effective demand is dead in the water.” So, even if deflationary pressures prevail, historically gold has served as a pretty affective hedge against those risks as well. Just look at what gold prices did during the Great Depression for proof.
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