“There Will Be No Tightening Any Time Soon,” Notes One Analyst
Gold surged higher by more than 1% on Tuesday, running up almost to $1,295, as new Federal Reserve chief Janet Yellen delivered her first official testimony to Congress since taking the reins from Ben Bernanke.
Continuing Monday’s momentum, gold enjoyed its biggest one-day gain in three weeks and hit its highest price since Nov. 14. Silver also rose by about 1% to $20.21.
Yellen’s message? She is staying the course. Though tapering of the Fed’s massive bond-buying stimulus program known as quantitative easing will continue, she plans to keep benchmark short-term interest rates at zero “well past” the time the jobless rate falls below 6.5%. That’s what gold investors wanted to hear, since the metal thrives in low-rate environments.
“Let me emphasize that I expect a great deal of continuity in the Federal Open Market Committee’s approach to monetary policy,” Yellen told the House Financial Services Committee, referring to the Fed’s policy board (the FOMC). And like Bernanke, she also emphasized that tapering is very much data-dependent and not on a “preset course.”
“The overall tone of Yellen’s comment is a carbon copy of the Fed’s existing policy under Bernanke, so the market is relieved that there will be no tightening any time soon,” said Bill O’Neill of LOGIC Advisors.
“Yellen’s comments have been right down the middle of the road,” added Gold Newsletter publisher Brien Lundin. “All the gold market needed was an absence of damaging remarks from Yellen, as the price continued to strengthen as she talked. This indicates that underlying bullish posture for gold is strong.”
Yellen also dismissed concerns about a bubble in the stock market, which also posted a strong Tuesday performance based on her remarks, as well as the emerging-market currency crisis.
“Our ability to detect bubbles is not perfect, but looking at a range of traditional valuation measures doesn’t suggest that asset prices broadly speaking are in bubble territory,” she said in response to a question. As for emerging markets, she noted: “Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”
However, investors shouldn’t take solace in Yellen’s benign view of U.S. equities and the global economic backdrop. One need only reflect on her predecessor Bernanke’s assessment of the U.S. housing market in 2005:
“Unquestionably, housing prices are up quite a bit,” he said. “I think it’s important to note that fundamentals are also very strong. We’ve got a growing economy, jobs, incomes. We’ve got very low mortgage rates. We’ve got demographics supporting housing growth. We’ve got restricted supply in some places. So it’s certainly understandable that prices would go up some. I don’t know whether prices are exactly where they should be, but I think it’s fair to say that much of what’s happened is supported by the strength of the economy. … We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize: might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.”
When it comes to the emerging-markets crisis, we could well be in the eye of the storm. Meanwhile, many market watchers are noting a disturbing similarity between the Dow Jones’ performance now and in 1929. Given the fallibility of the Fed so many times before, the safest course of action remains portfolio diversification.
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