Fed official warns inflation is too low and tapering remains data dependent
Gold rose about 1% Wednesday, rebounding from Tuesday's losses to close near $1,335, while silver performed even more powerfully, extending its largest six-day consecutive rally in nearly two years with an almost 2% rise to $21.85.The latest U.S. producer prices stoked fears about continued low inflation. Prices were flat in July, the Labor Departmentsaid, meaning that the Federal Reserve has more room to run with its massive stimulus, or QE, program.
Tapering was definitely on the back burner in remarksWednesday from St. Louis Fed head James Bullard. "Inflation has been running very low. I have been concerned about low inflation," he said. "There has not been much indication, so far, that it has been ticking back up toward target."
The Fed's policy-setting "committee has set a target. They've set it at 2%," Bullard said. "Once you've set it, you had better have some credibility that you are going to hit it. ... The committee still needs to see more data on the macroeconomic performance for the second half of 2013 before making a judgment on" tapering.
"Just a mere mention that there could be some potential inflation has moved gold up today," said Jeffrey Sica, chief investment officer at Sica Wealth Management.
New CPI number out Thursday
Thursday's latest Consumer Price Index number will be important for gold. The metal could make a run at the $1,350 resistance level or even higher, but "this will be more likely to occur on a lower-than-forecast CPI number," Lido Isle Advisors analysts said.
And despite the tame PPI data, rising U.S. Treasury bond yields suggest gold's inflation-hedge appeal could be growing. "The bond market is telling us that it's expecting some inflation," said Sean McGillivray of Great Pacific Wealth Management. "That can make me a buyer of gold."
Gold also got a boost from a faltering greenback. "The weakness in the dollar is helping gold," said Frank McGhee ofIntegrated Brokerage Services. "The market sees Chinese demand growing as the economy continues to improve."
One headwind, however, are new restrictions on the gold trade coming out of India almost daily as it struggles to lower its account deficit by targeting bullion, which accounts for much of its imports. Nevertheless, its consumption is expected to rise later this year on seasonal demand, with the festive gold-buying holiday Diwali in early November, wroteHSBC analyst James Steel.
There has also been "good physical buying" of gold in China, with Steel noting an indicator of demand is gold's premium on the Shanghai Gold Exchange.
"By 2015 we'll be seeing $2,000" gold
Gold's prospects are definitely looking brighter, says a rash of recent commentators, investing pros, and analysts. Adrian Day of Adrian Day Asset Management is one. "At some point we'll break through the $1,400 level and then the shorts will panic to cover, and gold will accelerate," Day said. "We could easily be at $1,600 by the end of the year. Certainly by 2015 we'll be seeing $2,000."
Investors have "grossly overreacted" to speculation the Fed will taper QE, Day said. "All the Federal Reserve is talking about is cutting back on the additional stimulus put in place. No one is talking of tightening or reducing the Fed's balance sheet."
Former Congressman Ron Paul, R-Texas, also suggested gold could make a serious recovery in an appearance onYahoo! Finance's "Talking Numbers" show. "I think what's going to happen to gold, it's going to explode when they realize that the economy is going down, that we're really in a recession," he said. On the dollar: The Fed "took a dollar and eliminated 98% of its purchasing power and they're doing that more rapidly than ever but it just hasn't been fully discounted. When it is, gold is going to be much, much higher."
And OptionMonster exec and CNBC contributor Jon Najarian remains a long-term bull on gold, seeing a push toward $1,600 next year, even if he thinks further short-term weakness could lie ahead. "We've seen some consolidation," he said, "but I think overall, demand for the metal is still high. … One of these times (billionaire gold bull) John Paulson is going to be right again. This time it's going to be on gold instead of housing. Just not yet."
Even gold bear Bill Baruch of iiTrader has turned bullish, at least for the time being. "What we believe now is that the landscape for gold has changed forever," he said. "Gold didn't press a new low compared to July," he noted. "It was a rejection" as the metal put together a six-week winning streak that saw every dip being bought. Since those lows in late June, gold has surged 10% or $150 an ounce, and as Baruch sees it, now has more to go.
Economy heading into a very uncertain September
Short-term trading of gold is one thing, but Blanchard and Company believes physical bullion is a long-term investment to be held in the portfolio for not only price appreciation but also diversification purposes if stocks take a sudden turn for the worse.
And chatter is increasing that the fall could be a serious test for the stock market -- indeed, the overall U.S. economy -- as the Fed potentially tapers QE, Ben Bernanke is replaced, and Washington heads for more budgetary deadlocks over the debt ceiling.
Doug Kass of Seabreeze Investors gave 10 reasons why the stock market has peaked, including: "Rising interest rates are going to hit growth"; "tapering in 2013 will turn likely out to be a policy mistake"; "Fed chief selection will be a bigger event than everyone thinks"; "politics are coming back to the agenda this fall -- debt ceiling, government spending, immigration"; and the equities bull market is "long in the tooth."
Michael Pento of Pento Portfolio Advisors largely agrees, detailing three reasons why "the stock market and the economy could be in for some serious trouble by the end of October":
1. The fiscal dysfunction and discord in Washington comes to a head once again in late September and into October.
2. The Japanese stock bubble has been extremely volatile of late, as the nation sprints towards a bond and equity market crisis.
3. Perhaps most importantly, the start of Fed tapering in the fall will send U.S. Treasury prices lower and pop the bubbles that exist in stocks and home prices.
"The odds of a correction in the magnitude of around 20% for the major averages have greatly increased during the next three months," he wrote. "The economic turmoil resulting from any one of the above scenarios should bring central banks around the globe into a new money-printing spree that would dwarf anything investors have seen to date."
Could this fall be a perfect storm for gold if the stock market stumbles, faith in the dollar is shaken, and demand for gold in Asia has to compete with renewed interest from the West? No one knows for sure, but preparation remains the most prudent course of action.
More information can be found online at http://www.goldbullionadvisors.com
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