Inflation-Sanitized For Your Protection

The mere mention in the same sentence of the words “Fed” and “bond purchases” gave rise to a fresh, albeit somewhat hesitant spree of risk asset purchases that was manifest on Thursday. Some newsletter scribes were quick to declare that “QE3” by any other name was upon us, and that the resultant hyperinflation would certainly send certain assets (but gold and silver mostly) into deep-space. Of course, as is often the case, had the aforementioned pundits bothered to actually read the news releases on the subject at hand, they might have come to a slightly…different conclusion, based on comments such as the one by Richard Gilhooly, the US director of interest-rate strategy at TD Securities.

Mr. Gilhooly, in an e-mail note to TD clients, said that “the new sterilized QE would allow the Fed to buy more assets with an eye toward keeping inflation expectations low. This would be dollar supportive and would be negative for risk assets such as gold.”  This take is based on the fact that, this time around, the Fed is considering offering additional bond purchases (if conditions require them at all) in a “sanitized for your protection” kind of way — one that does not play directly into the hands of the Tea Party alarmists who keep warning that the Obama Fed is about to lose control and drag Americans into a new iteration of the Weimar Republic (or Zimbabwe circa 2009).

In this morning’s US employment report it was noted that the US economy added 227,000 jobs in February. This was a very solid metric and it was certainly above economists’ expectations. While the figure was not good enough to make a palpable dent in the nation’s overall unemployment rate (the unemployment rate remained at 8.3%, largely because more people entered the workforce in search of jobs), it certainly was sufficiently positive to send stock futures sharply higher and gold prices notably lower at the same time.

Whereas gold had opened in New York right around the pivotal $1,700 mark, the Labor Department data sent the yellow metal some $20-25 lower, and to a low of $1,675 per ounce, within the first hour after the figures were released at 8:30 AM. Gold’s three-and-a-half year bullish line is currently crossing near the $1,591 area and its 200 DMA is at $1,672 (nearly the figure touched this morning again). UBS metals strategist Edel Tully remarked that “with sentiment now on very shaky ground, it's hard to identify where a floor might arise."

Meanwhile, economist Dennis Gartman in his eponymous letter yesterday commented that "there are times to be bullish [on gold], there are times to be bearish and there are times to just watch. We shall probably join the Bugs again eventually on the aggressive long side of gold but not right now." Hopefully, would-be Indian buyers might find price tags sufficiently attractive at their local bazaar over the weekend and make some sorties. The market needs physical buyers quite badly, and they have not reported to "duty" at levels above $1,700 a whole lot.

Monetary policy expectations and inflation expectations (or the lack thereof) have become the principal drivers of the price of gold in recent weeks. The general idea is that if the US economy continues to show such signs of improvement, the Fed would be less and less inclined to offer anything that smacks of a QE3 or even the aforementioned “OT2” (Operation Twist 2). That is not gold-positive, as we learned on the 29th of February and once again on the 7th of this month.

Silver dropped more than 60 cents to a low of $33.04 per ounce in the wake of the US jobs report while platinum and palladium headed lower as well. The former was quoted at $1,647 per ounce (down $14) and the latter fell to $685 (also by $14 per ounce). Rhodium was quoted unchanged at $1,475 the ounce. As could have been suspected, the US dollar climbed robustly after the data, showing a gain of 0.71 to 79.88 on the trade-weighted index. The pivotal 80 level on that index is now in play. Doomsayers, beware.

The euro did not enjoy to pop one might have expected in the wake of Greece successfully restructuring its debt and (for the time being) avoiding a messy default; it remained just above $1.31 against the greenback. The Greek bond swap deal notwithstanding, the basic problem in Europe remains unresolved. As the twin issues of growth and austerity are mutually exclusive, Europe will need to find the answer to the former, first. Crude oil slipped 44 cents to the $106.14 per barrel mark. The Dow Jones Industrial Average was ahead by about 30 points shortly after the opening bell in New York this morning.

We have already noted here that job gains for January were revised up to 284,000 from 243,000 — the biggest monthly increase since the recession ended — and December's employment gains were revised up to 223,000 from 203,000. The past three months of full-time job growth the USA were the fastest since early 2006. The string of six straight months of job additions actually has no peer until we look back into the Reagan era, circa 1983-1984. It was reported yesterday that US consumer confidence climbed to a four-year high, and that US household net worth rose by 2.1% to 58.5 trillion in the final quarter of 2011.

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