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GOLD: Waiting for the Fed

By: Jeffrey Nichols

Bad news for the American and other major world economies is usually good news for gold and silver – especially when it triggers expectations of more accommodative, more reflationary, monetary policies.After all, easy money is what these precious metals thrive upon.

Indeed, the near-term outlook for gold and silver is now very much dependent on U.S. monetary policies and, to a lesser extent, the unfolding European debt and currency crisis.

With the U.S. Federal Reserve’s next policy-setting meeting set for June 19th/20th, the next week or so may be the last chance for investors to buy gold at under (or even near) $1,600 an ounce . . . that is if Fed Chairman Bernanke and his colleagues at the Fed vote to pursue another round of quantitative easing (QE3) or other stimulative monetary actions.We think this is likely, if not at next week’s Federal Open Market Committee meeting, then soon after.

The announcement of more monetary stimulus alone could send gold skyward by $50 to $100 in a flash, triggering the beginning of a sustained advance to $2,000 an ounce – or more by later this year or next.

Right now, the Fed is looking at inadequate economic activity, a still-depressed housing market, unacceptable labor market conditions, and consumer-price inflation below the Fed’s target range.At the same time, it is worried that Europe’s intractable sovereign debt and banking crisis will damage the American economy and put U.S. banks and financial markets at risk (despite the recent 100 billion euro bailout of Spain’s banking system.And it fears U.S. fiscal policy will become even more restrictive as the automatic year-end tax increases and spending cuts take hold.

Former President Bill Clinton recently opined that we’re already in another recession. Princeton economist and Nobel laureate Paul Krugman thinks we’re in a depression.Wherever we are, it’s not good.

Bernanke and company know the risks of policy inaction – simply doing nothing – are greater than the risks of pro-active, pro-growth, monetary policies. Perhaps signaling the coming monetary actions, Federal Reserve Vice Chair Janet Yellen last week said “A highly accommodative monetary policy will be needed for some time to help the economy mend.”

Counter-intuitively, the bad news from Europe during the past year has often weighed gold and silver prices down – as the sinking euro has given the dollar a false illusion of strength.Capital flight from Europe has sought a safe-haven in U.S. dollar-denominated debt, mostly U.S. Treasury securities – and the resultant appreciation of the dollar has been reflected in lower prices, not just for gold, but also for commodities and other assets customarily quoted and paid for with the American currency.

The ink is hardly dry on the latest European bailout – this time, a rescue of Spain’s banking system – and already the financial markets don’t buy it as anything more than another short-term fix, another band-aid that doesn’t address the real problem of deepening recessions and rising unemployment. As long as the peripheral nations (Spain, Portugal, Italy, Ireland, Greece) pursue austerity, their economies cannot grow their way out of worsening budget deficits and declining creditworthiness – and the vicious downward spiral continues.

But something has changed for gold and precious metals investors: They are reacting differently to this news. Although the greenback is again reacting positively to the weakening and discredited euro, gold and silver are managing to move higher, possibly signaling their return to “safe-haven” status.

With the U.S. economy in rougher waters again, with U.S. fiscal policy in disarray, and with U.S. monetary policy set to turn still-more reflationary, I believe gold’s safe-haven appeal will increasingly reassert itself and the metal’s price will soon react more positively to Europe’s travails.

Jeffrey Nichols

Jeffrey Nichols, is Managing Director of American Precious Metals Advisors ( and Senior Economic Advisor to Rosland Capital ( ), and has been a leading precious metals economist for over 25 years.

Posted Wednesday, June 13 2012

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