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ABOUT BARRY RITHOLTZ
Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset management
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While the “big three” global central banks all have meetings next week, all eyes will be glued on the Federal Reserve Chairman Ben Bernanke on December 18 for the release of the meeting statement and his press conference. The big question, of course, is will the Fed taper its monthly asset bond purchases at this meeting, or will it wait until 2014? Either way, gold prices are likely to see volatile trade.
This week, Nomura conducted a client survey and concluded that “The market is relatively evenly split on expectations on the start of tapering among December, January and March meetings. Very few expect the FOMC to start tapering after the March meeting. The most popular response was 37.0% for a December start, which was higher than we were expecting,” Nomura analysts wrote.
How much tapering could be seen? “On the size of taper, the expected values of the first cuts to monthly UST and MBS purchases are ~$9bn and ~$4bn, respectively,” according to the Nomura client survey.
What are the big picture macro factors gold traders need to remember here?
1. Tapering is not tightening.
2. Tapering is coming, either in December or early 2014.
3. Expansive monetary policy is not the only reason investors purchase gold.
4. There are a bevy of risks lying ahead for the Fed with its “exit” strategy from these historically significant monetary policy actions.
5. The gold market is close to major multi-month chart support.
Drilling down to the December meeting, gold could be set up for a short-covering type of rally move if no tapering announcement is seen. From late August until early December, Feb gold has slipped from $1,433.70 to $1,201.10, or just over 16%. The start of tapering is already priced in. A statement of no tapering now would likely unleash short-covering higher in gold prices.
On the flip side, if the Fed does begin tapering its asset purchases, it won’t be any surprise to anyone. If a knee jerk sell-off reaction in gold does appear, the market is sitting just above major long-term multi-month support at the $1,187.90 zone, from late June. A brief test of that floor could be seen, but buying would likely emerge on a dip to that low from bargain hunters, physical buyers and speculative short-term trades looking for a volatility play.
The daily Bollinger bands have narrowed slightly in recent days as volatility has been contracting in gold prices. Get ready, a big explosion in volatility could be seen next week—with both tapering and no tapering offering good movement for short-term traders, and possibly a buying spot for longer-term physical gold investors.
Kira Brecht is managing editor at TraderPlanet.
By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht
More from Kitco:
Our Last major Elliott Wave Analysis of gold came in early September when gold (COMEX:GCG14) touched the $1,434 area, and in that analysis we called for a re-test of $1,271-$1,285 levels. This was based on our Elliott Wave Analysis of the patterns involved since the $1,923 spot highs in the fall of 2011.
Most recently, we noted that we are seeing patterns commiserate with whatElliott Wave Theory calls a “truncated 5th wave” pattern. All bear cycles have 5 full waves to the downside from the highs, and we have been in wave 5 since the $1,434 highs. The key then is determining how low that wave 5 will take you in Gold, and planning your investments and timing around that forecast.
To qualify for a truncated 5th wave, you have to have a very strong preceding 3rd wave to the downside. In this case, we had that as gold dropped from just over $1,800 per ounce to $1,181 into late June 2013. Recently, gold hit a bottom at $1,211 spot pricing last week and that is when we began to consider a truncated 5th wave pattern.
We sent our clients about a week ago regarding this possible Elliott wave theory bottom:
If we fast forward a week later, we had gold running up to $1,261, which was the pivot resistance line. We hit it on the nose and backed off to $1,224 yesterday. We now expect that if gold holds the $1,211 area, then we will again rally back up and over $1,261 and then head to the $1,313 resistance zone. We would like to see gold get over $1,313 and if so our targets are in the $1,560 ranges in the first half of 2014.
Aggressive investors should be accumulating quality small-cap gold producing and exploration, or gold itself depending on your preference during these last few weeks of December as our Elliott Wave Analysis is signaling a bottom is near. We would again watch $1,211 as a key level to hold for this possible truncated wave 5 to work out.
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Gold funds see unprecedented 31% slump with world losing faith
Will Bernanke’s swan song include tapering?
Over the past few weeks, I have been trying to push back against the usual contingent of bears. In particular, I have argued that this bull cycle is not yet over, markets are not in bubble and that people have been sitting for too long in way too much cash.
John Coumarianos of the Institutional Imperative is a prudent value guy. He wonders aloud in a recent blog post if I am too bullish?. He raises a number of interesting points via (mostly) valid criticisms.
I am not a rampaging bull, but if I come across that way to a reasonable guy such as John, then I am probably miscommunicating my thoughts. I am going to use his critique as a jumping off point to clarify some ideas and positions. I know that nuance and subtly are not necessarily my strong suits — nor the Internet’s, for that matter — but I will avoid all hyperbole in this discussion, click-throughs be damned.
Continued here
On November 19th at National Economists Club Annual Dinner Bernanke gave a speech which could be seen as a sort of testimony or farewell (probably one of many coming soon). The message he has sent was in perfect compliance with what was being communicating to the public. Firstly he offered a “forward guidance”, which was to reassure us that low short term interest rates are here to stay for the longer term. The possible boundary line, as we repeatedly heard, is lower unemployment and/or significantly higher inflation rate. Until then we are still in the ZIRP – zero interest rate policy – scenario.
Years ago it was supposed by many that unusually low interest rate levels were introduced as a temporary measure to combat recession. At first it was supposed to be for “some time”, then an “extended period”. It did not take a long to hear it’s going be 2013, then late 2014, and finally mid-2015. Since the public eventually got tired of this temporary (6-year!) low interest rate policy, we switched to qualitative signals. The interest stays low until things get better for labor markets and/or for inflation.
Yet even if we reach such levels, in Bernanke’s own words: we are in the realm of “thresholds, not triggers. Crossing one of the thresholds will not automatically give rise to an increase in the federal funds rate target; instead, it will signal only that it is appropriate for the Committee to begin considering whether an increase in the target is warranted.” Therefore even though recent official numbers of employed look very optimistic, it does not lead us to tighter monetary policy. At least not yet.
Bernanke is trying to reaffirm us that interest rate hikes are far, far away on the horizon. No tightening is to be seen anywhere soon. And just like Dennis Lockhart he is dehomogenizing interest rates policies and asset purchases. Therefore the “tapering” could happen even with a very expansionary monetary policy. Both of those tools are to achieve the same end: boosting the banking system and supplying more cheap money for it. Low long-term interest rates allow (in theory) for money debt issuance and more returns for those supplying the debt. Lower long interest rates are to be created by the Fed’s short-term rates, mostly through expectations. If people constantly expect low short-term future rates, this should be discounted, or in some way included, in the longer rates.
This we did not see. Therefore the Fed triggers another, now very famous, channel of QE: asset purchasing. This also is supposed to lower longer rates, but differently. If the Fed buys some of the assets from the market, less is available for the rest of the investors. Therefore scarcity of those assets is about to bid up their prices, ergo decrease the expected returns on them (higher expected returns are of course the same as longer term interest rates).
Even though those two tools have similar effects on the market interest rates, they are not viewed as equivalent. It is possible that one of those policy tools may be tapered. Yet it does not mean that easy monetary policy is over. Even with currently rising employment levels. Stay tuned.
Thank you.
Matt Machaj, PhD
Sunshine Profits‘ Market Overview Editor
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