Quintessential Expectations Gather Pace for QE

The worst month for gold prices in 30 years was suddenly followed by the best daily climb since last August on Friday, the first day of the new month. The principal catalyst for the $66 upward move in bullion was the unexpectedly dismal report on May’s US job creation activity as reported by the US Labor Department. Whereas economists had hoped to hear about 150,000 positions having been created in the US in May, the actual number of 69,000 (more on that later) was a stunner that immediately translated into a flare-up of expectations of another round of QE.

Indeed, if judged by the small (0.19) decline by the US dollar on the trade-weighted index and by a $1.24 euro at the end of the trading session, the out-sized move was largely anticipatory (of a QE) in nature even though – for a change – it did restore the typically inverse relationship between bullion and equities. As if on cue, most of the previously shelved hopes for some kind of QE by the Fed were dusted off and brought back to the gambling table like so many stacks of chips.

Investors are now once again actively “demanding” that the Fed to pump another several hundred billion into the financial system in order to keep bullion, equities, and anything but the dollar “shining.” This would be the third year in a row when such clamoring for central bank action has become manifest in the spring and when market “tantrums” have been thrown whenever accommodation seemed to be not in the Fed’s game plan. The problem, of course, is that with rates already at record lows the QE “treatment” may prove to be about as effective as a placebo would be against a super-virus. But, there’s always hope, and you saw the consequences of it in action on Friday. 

Of course, before such hopes can be turned into certainty, such players will have to keep parsing every single word related to monetary policy that comes out of the US central bank or out of the mouths of some of its official policy-making members. The Fed will “speak” after its June 19-20 meeting but a few of its team members have already been doing so, and often at odds with each other. Here is a small and very recent sampling:

Cleveland Fed President Sandra Pianalto said late last week that more Fed easing isn’t necessary even though the US may have to contend with slow-to-moderate growth and a relatively elevated jobless rate. Ms. Pianalto also said that Friday’s jobs report, taken by itself, “wasn't likely to lead to a substantial change" in her outlook and thus didn't change her view that the Fed should stand pat. She also believes that adjustments or the lack thereof for seasonal labor market swings may be at work in the dramatic changes we have seen from month to month on the that front.

Ms. Pianalto may be more than just minimally correct on her take, as it turns out. Consider the fact that while the Friday headlines tallied only 69,000 jobs as having been created in May, the “real” gain was on the order of…789,000 positions. Kid you not. The Wall Street Journal notes that, “That much bigger number is what you get when look at the job figures that the Labor Department hasn't adjusted for seasonal swings—like the tendency of hotels and home builders to hire more workers on as summer approaches.” Thus, the WSJ asks: “What’s The Real Jobs Number?”

How did we get to such a conundrum? “The aim of the seasonal adjustment is to present data that more accurately reflects the underlying trend of the economy from month to month,” according to statisticians. However, even Fed Chairman Bernanke recently remarked that the "seasonality issues that have arisen because of the unusually large recession in 2008 and 2009" were making economic data more difficult to interpret.” As for pol-iticians, well, some (candidate Romney) took the stat-isticians’ figures and used them as election year cannon fodder immediately after they were released. Fire in the hole!

On the other hand, also late last week, normally dovish Boston Fed President Eric Rosengren said that in light of the Friday news the Fed ought to prolong OT (Operation Twist) which is set to expire at month-end. Mr. Rosengren feels that the extension of OT “would have the impact of helping to reduce longer- term interest rates without expanding our [Fed’s] balance sheet.”

The knee-jerk price reaction to the US jobs data brought the yellow metal back to the trend-line which it had broken during the month of May. A number of other factors also played into gold’s Friday ascent, including first notice day, a good dose of panicky short-covering, and the jumping on-board of momentum-oriented speculators. “Game-changer” declarations were rolled out within hours. The same news outlets that just two weeks prior had labeled gold as having slipped into a bear market suddenly relayed the sense that perhaps gold’s safe-haven appeal had been rehabilitated with this move.

On the other hand, the by-now-all-too-familiar declarations of dollar doom and hyperinflation appear not to have panned out for their originators. In fact the US dollar is trading at about the same level on the trade-weighted index that it was at five years ago. In fact, inflation has not acquired the “hyper” prefix with a reading of 50% monthly price appreciation (which is what it would take to apply that label). What has happened, is, that the prognosticators of doom have either backpedaled on the scale of their projections or are actively avoiding revising such dire warnings.

Others, such as CNBC’s Oppenheimer analyst Carter Worth do not buy into the Friday gold bounce but see merely a throwback to resistance levels and an opportunity to still play the short-side of the market. Nevertheless, the Friday news release prompted Morgan Stanley to assess that the odds of some type of Fed accommodation are now up to 80% from 50%. Meanwhile, the view from the EW technical analysis camp notes the importance of the $1,527 support shelf in gold which was touched five times (and has thus far held). The late afternoon EW update however also cautions that gold’s sizeable move was not confirmed by silver and that an inter-market divergence has become manifest and could remain in place so long as silver stays under the $28.97 per ounce level.

This morning’s spot dealings started off with profit-taking action across the precious metals complex. Gold was bid at $1,617 down $9 per ounce while silver was off by 23 cents at $28.45 in New York. Spot platinum fell $9 to $1,434 and spot palladium declined $3 to $609 the ounce. Rhodium remained unchanged at $1,225 per ounce on the bid-side. News from China overnight was once again not very metals-friendly. It was reported in an official survey that China's non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing. Thus, the country’s slowdown in manufacturing activity reported in May has now spread to the services sector as well.

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