September 13, 2014
The dollar surely weakened against gold these past few weeks because of political and military tensions in the Middle East and Ukraine. But this week, the dollar strengthened as "peace broke out." This weighed against gold as did continued happy talk about the US economy; the prospect of climbing interest rates pushed the dollar up against gold this week.
It was a Fed white paper that did the most damage. Released by the San Francisco Fed, it suggested that even the most dovish Fed officials were less accommodative than the market seemed to think. More on this below.
This Week's Monetary and Industrial Trends
Once again, US economic "happy talk" has created a dollar updraft – and that means that the gold price against the dollar moved down. The US is said to be in recovery with the various collateral impacts that presents for stocks, interest rates and, of course, the gold/dollar price ratio.
In fact, while military jitters diminished, the market found a new stick with which to beat up gold against the greenback. Janet Yellen, et. al, it is said, will have to raise rates sooner rather than later given an uptick in price inflation and economic animal spirits.
According to a Kitco News article, "U.S. Dollar, Interest Rate Expectations Short-Term Drivers," economist Caroline Bain predicts that these factors will eventually lose some of their persuasive power, though this past week they seemed adequate to the task.
Bain's firm, Capital Economics, expects the U.S. central bank to raise rates in March 2015, a little more than a half-year from now.
Where will the dollar end up? According to the report, "[the firm is] expecting a gradual rise in the Federal Funds Rate with a peak at 2.75% to 3.00% by 2016."
Impact on Gold
Bain mentions a slower equity performance if rates move up, and that might benefit precious metals. Stock markets have been galloping of late, and a slowdown might drain some funds in favor of a traditional safe haven. She is quoted as saying, "Taking all this together, we remain cautiously positive on the prospects for gold and expect prices to rebound to $1,300 per ounce by end-year."
That's certainly higher than where gold is now. December gold futures settled at $1,231.50 an ounce on the Comex division of the New York Mercantile Exchange, which was a 2.8% drop for the week. Kitco's gold survey showed that 24 out of 37 market respondents provided feedback, with five seeing higher prices, 18 lower and one sideways.
The damage does not provide us with a pretty picture when it comes to gold's performance in September. The chart, as we can see below, shows us graphically that the dollar's resurgent price against gold has continued into the last four months of the year.
A recent paper published by the San Francisco Fed added to market unease this week by making the case that market expectations were not necessarily in line with Fed sentiments. The paper claimed that markets were more "dovish" than the Fed was apt to be.
Even though there is little expectation that the Fed will move rates up this year, the eventual – and possibly inevitable – hikes will weigh on stocks and gold alike. The dollar index reached a high not seen since July 2013.
The Week's Political and Military Trends
For the past several weeks, Ukraine uncertainty has occupied Western politicians and generals alike. But the signing of a ceasefire seems to have damped the worst of the tensions. On Friday, Ukraine President Petro Poroshenko appeared more upbeat than previously and vowed at a Kiev press conference to pursue negotiation rather than military confrontation.
He claimed the recent ceasefire signed at Minsk would reduce further military action while advancing Ukraine's "sovereign integrity." This was disputed by other Ukraine politicians including Yulia Tymoshenko, a former presidential candidate who now heads a prominent opposition party.
Tymoshenko voiced considerable distrust of Russia and urged that Ukraine not hold bilateral peace talks but, for now anyway, Poroshenko's decision to take a less confrontational approach seems to be in favor both in Ukraine and on the world stage.
One might think the crisis of the growing Islamic state would be heightening tensions around the world and in securities marts as well. But US President Obama's speech on Wednesday night merely confirmed what many had already concluded – that the US and its allies had no appetite for a further shooting war in the Middle East, or at least not at this point.
Obama said Wednesday evening that the weapons of choice for the US military would be planes and drones, despite the ordinarily accepted wisdom that air power seldom if ever wins wars without "boots on the ground." Perhaps it will come to that, but not at the moment. As in Somalia and Yemen, the Pentagon will depend mostly on its superiority in the sky to control the "enemy" on the ground.
Impact on Gold
Nothing is forever when it comes to financial markets, and the current lull in battlefield activity could be broken at any time in both the Middle East and Ukraine. Conditions in Iraq and Syria remain fluid to say the least and one can easily imagine further crises erupting with an immediate or subsequent impact on gold.
When it comes to Ukraine, Russia remains entrenched in regions outside of Crimea, which is now a Russian protectorate. Dislodging the Russians from their further gains will certainly be high on the list of ceasefire items, and one that could prove a sticking point.
Additionally, further sanctions against Russia are going into effect and whether these shall have the effect of retarding Russian aggression or provoking it remains to be seen.
Economic news over the next weeks and months may have an impact on the dollar/gold ratio and subsequent gold price, but it is potential military confrontation that is most likely to provide significant impacts. These cannot be anticipated, of course, but the likelihood should not be discounted.
Gold Trend Summary and VESTS Analysis
We mentioned, above, some significant news next week that might have an impact on markets and gold alike. Chief among these is the Federal Open Market Committee meeting (FOMC) that will reaffirm or reposition monetary policy in the US.
This week's dollar rise against gold was mostly driven, as discussed, by technical factors and an easing of military tensions. But expectations of Fed sentiments turning more aggressive regarding rate tightening also fueled the downdraft – and these could become more formalized next week as a result of FOMC deliberations.
From a VESTS standpoint, all of this is perfectly predictable.
Entrenched sociopolitical and economic interests always stand against the dollar's depreciation regarding gold. The dollar is infinitely fungible and endlessly printable. Gold is scarce and difficult to produce.
Gold and the fiat money are at war with one another and this is the story of 20th century finance and economics – and will doubtless remain the story in the 21st century as well, at least for the foreseeable future.
One must decide for himself or herself how this tug-of-war will play out over the next few years. Gold bugs were surprised by market movements that raised the dollar by nearly one-third against gold – and gold may yet see further declines given the forces arrayed against it.
- Peace broke out this week, and the dollar rose against gold as a result. This may or may not be a continuation of a larger trend toward a permanent cessation of hostilities in Ukraine.
- Traders and investors became aware that Fed officials might be more aggressive regarding rates than expected.
- At least one major trader predicts a gold price of US$1,300 by year's end.
- Other professional traders were gloomier about gold's near-term and even mid-term prospects, given the prospects of hikes in the new year.
As always, if one accepts this view, a "brighter future" is a matter of timing.
Posted from TheDailyBell