Fed official warns taper could take years with economy "treading water"
Gold rebounded back above $1,315 on Wednesday, reclaiming most of Tuesday's 3% loss as the U.S. government shutdown dragged into a second day and the debt-ceiling battle looms on the horizon."The market is jittery because of the government shutdown. If the economy numbers continue to be weaker than expected, we may see a slide in the dollar, and money in equities flow back into Treasuries and metals for the time being," said Tom Power of R.J. O'Brien.
Gold also found support from a disappointing ADP report on U.S. private-sector employment, showing a gain of only by 166,000 jobs in September, versus expectations of 180,000, while both July's and August's job gains were revised down.
"And while, finally, some 1,000 manufacturing jobs were created in September, for the first time in over a year the high-paying financial sector saw an exodus of 4,000 jobs,"Zero Hedge noted. "Wave goodbye to the 'third half' 2013 recovery."
Fed official: "We should not reduce" stimulus
Jobs creation is important to gold prices because the Federal Reserve has linked the continuation of its bullion-friendly stimulus program to the unemployment rate. If the jobs picture improves, the Fed will taper its massive purchases of Treasuries and mortgage-backed securities (currently at a pace of $85 billion a month). On that note, Boston Fed chiefEric Rosengren warned Wednesday that the central bank shouldn't stop those purchases prematurely.
"If the economy evolves as expected, policy should in my view include only a very slow removal of accommodation over the next several years," he said. "It would have been premature to begin reducing the rate of Fed asset purchases," at its meeting last month, he said.
The most recent data show the economy is only "treading water" rather than getting stronger, he said. While Fed officials still think the economy will pick up, they have pushed out that improvement until 2014, he noted. In any case, the Fed should not begin the tapering process until this improvement is apparent, he said.
"If the economy is not improving as expected, we should not reduce the monetary policy accommodation," Rosengren said. Specifically, the Fed will want to see that fiscal headwinds are subsiding and that consumers have become more confident, he said.
Shutdown could even force more QE
The Boston Fed president did not dwell on the government shutdown or the looming debt-ceiling deadline except to note that fiscal policy is generating uncertainty that could have "collateral impact" on the rest of the economy.
However, one analyst thinks an extended government shutdown could bring about added monetary easing. "The longer the shutdown goes, the more economic data is done, the more the Federal Reserve will print money," Brian Kellyof Brian Kelly Capital said Tuesday.
On CNBC's "Fast Money," Kelly said that the Fed could ramp up its $85 billion-per-month stimulus program — the opposite of tapering. "Whether it's effective or not doesn't really matter to the market, and it doesn't really matter to the Federal Reserve," he said. "They've shown already if they can get a half a percent of GDP, that's fantastic. I actually think if you get a three- or four-week shutdown, you end up with a Fed flare."
Indeed, several studies have shown that the shutdown will hurt fourth-quarter GDP. If the political stalemate over the budget causes difficulties in reaching agreement over the debt ceiling, the U.S. could be thrown back into recession, ex-Treasury official Mark Patterson told CNBC on Wednesday. "If [the shutdown] is allowed to persist and it really affects confidence, or it gets too close or merges with the debt ceiling debate -- and God forbid we actually have a problem getting the debt ceiling lifted -- then obviously it's a different ball game altogether," said Patterson, former chief of staff to Treasury chief Jacob Lew. "If the debt ceiling doesn't work out as it should then you could see serious negative economic effects [on the U.S. economy] including a potential return to recession."
"The debt ceiling and shutdown are conjoined"
"The partisan battles over the U.S. government shutdown and a potential debt default are beginning to merge into a single fiscal fight, raising the stakes for Republicans and Democrats to end the impasse," Bloomberg reported. "Lawmakers from both parties are linking the two issues more closely, a connection the White House is reinforcing, according to an administration official who asked for anonymity to discuss strategy. President Barack Obama met today with financial industry executives to focus attention on the risk of a default."
"There's no doubt in my mind now that the debt ceiling and shutdown are conjoined in one big tar baby," said Steve Bell, a senior director at the Bipartisan Policy Center in Washington.
With the U.S. poised to hit its debt ceiling on Oct. 17, default would follow if the limit isn't raised. That would be "catastrophic," declared Erskine Bowles, Campaign to Fix the Debt co-founder. If the U.S. hits the debt ceiling and defaults on its obligations, it would be catastrophic not only domestically but around the world, he said. "This shutdown is bad. It's painful. It does hurt some people. It costs the taxpayers some real money. But it's not catastrophic. We hit this debt ceiling, That's catastrophic," Bowles said.
Gold rises during shutdowns, history shows
As for the shutdown, the longer it lasts, the better it is for gold prices. "Renaissance Macro Research looked at how key markets moved during 17 previous shutdowns between 1976 and 1996," The Wall Street Journal reported. "There is a low, but noticeable, positive correlation between how long a shutdown lasts and how much the gold price goes up. In particular, for the six shutdowns that lasted three days or less, five saw gold prices drop by an average of 1.1%. By contrast, of the five that lasted 10 days or more, three saw gold rally by an average of 3.5%. ... The biggest gain for gold came during the 18-day shutdown in the fall of 1978, when it rose 5.5%."
Indeed, a longer term shutdown could boost gold prices, ETF Securities exec Mike McGlone told TheStreet. "The last shutdown in 1995 ... the debt-to-GDP level was about 65%. Now it's 100%. Investors should be looking at the bigger picture here. We're not getting it right; we've got to do something in this country to control our debt. ... We wouldn't be here if we weren't spending more than we're bringing in."
"We're expecting it to recover," he said of gold. "The key thing to watch is unemployment. Why did (Fed chief Ben)Bernanke not taper? Why did he continue the bond-buying program? The key reason was the unemployment number was weaker than expected. … If that continues, gold should continue to increase. ... I think $1,400 is good resistance" for gold, with solid support at $1,200." McGlone also pointed out that gold tends to rise along with the debt ceiling. "The debt ceiling has to be increased," he noted.
If price holds, gold "will go back to $1,425"
With the shutdown still simmering and the debt ceiling still ahead, stay exposed to gold. With bullion bouncing on Wednesday,Jeff Kilburg of KKM Financial sees a possible bullish trade taking shape. "$1,305 is critical for the gold bugs," he said. "If we stay above $1,305, we will go back to $1,425."
And Grant's Interest Rate Observer publisher Jim Grantsays gold is still a good buy. "The world ought to have much less faith in central banks, and as that reasoned distrust of a broken model grows, the gold price, I think, will appreciate," Grant told Yahoo Finance's "The Daily Ticker." "Gold is cheap at this price."
More information can be found online at http://www.goldbullionadvisors.com
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