Silence of the Ben quietly beats up gold
Gary Wagner & Robert DiLallo
Normally, when United States Federal Reserve Chairman Ben Bernanke speaks, the world listens. However, on Tuesday people half-listened as the Fed chairman failed to give any new specific actions that the US central bank would take to kick-start the tepid American economy. Immediately following the Fed chairman's remarks to the Senate, gold actually firmed and was trading a couple of dollars higher on the day. No rally ensued and any upside movement was short-lived at best.
Even while giving a fairly pessimistic forecast, Bernanke did not mention any new stimulus to boost the economy. The Fed's plan of action currently seems to be to continue Operation Twist, a program with a clear downward pressure on gold. The fact that no new plan was laid out in light of these negative economic factors in the U.S. economy is disappointing to gold bulls to say the least. The question must be asked: has the Federal Reserve run out of ammunition? And what, if any, interim plans do they have to revivify the sluggish American economy.
But, what if? Let's imagine that there is a third round of Quantitative Easing (QE3) by the Fed in the near future. Chances are that the price of gold will indeed move up - in the short term.
But will it, as Goldman Sachs suggests, hit the mid $1800 range by year's end? One has to think not, given that virtually no analyst is predicting a financial markets/equities dive. So, a strange forecast from Goldman. But these are strange times.
In sailing, there is an expression- "in irons" - that can be briefly described as a sailboat that is stopped head to the wind. An elaborate set of maneuvers with the sails, called "backing," (sails being moved hard to one side), can be executed. But if the sail the captain picks to do this is too far astern, the boat actually begins to move backwards. Sailboats can indeed sail backwards, but it's not optimal, to say the least.
With no better term to describe the U.S. and the whole world's economy, let's settle on "in irons." That puts precious metals traders in the same boat, so to speak. So, for now, buying the dips and taking short rides up seems to be the best strategy until the economic winds pick up again.
Europe on hold hurts Gold:
As we look at our friends across the Atlantic, there are more worrisome signs that the euro zone does not have the necessary glue to hold itself together. The new European Stability Mechanism has been put in the deep freeze until a German high court can hear arguments about its legitimacy. (Never mind its efficacy, which many doubt.)
Meanwhile, European countries walking the edge of insolvency fret while the Germans fritter away time. That leaves Europe with a paltry leftover stew from the current European Financial Stability Facility, which has already backed bailouts for Greece, Portugal and Ireland and is low on funds.
Germany has been, and is, a fundamentally fiscally conservative country. They make a lot of money and keep plenty for themselves. While they could stomach bailing out weak sisters like Greece, and even Spain, there seems to be an innate aversion to possibly having to bail out one of the big players like Italy.
A peek at Asia
Gold players in the U.S. are wondering how gold’s mid-summer price swoon will affect physical demand in India and China, and to a lesser extent, Southeast Asia, Indonesia, etc.
The speculation is that the economies of the subcontinent and eastern Asia are worse off than generally recognized, although the rank-and-file consumer knows it and is acting upon his or her instincts. (In China’s case, a slowdown from crazily robust 9.2% growth to a merely mortal 7% is nonetheless a slowdown, even if the start and end figures are officially inflated. So, it is no wonder that physical demand is soft there except for internally produced gold jewelry.)
India’s inflation is troublesome, but the flight to cash is only partially explicable. The “fear factor” just goes so far in rationalizing irrational behavior. But, of course, here in the United States, the continuing stampede to low-yield government paper should tell you the American professionals’ sentiment is the same. Across the world, old notions of gold as a safe haven seem to be tarnishing.
There is a similarity that will be tying U.S. and Indian consumer behavior, namely the prices of food commodities and other staples: India, because of the deficient monsoons, the United States because of the severe countrywide drought. Consumers will not be thinking about much beyond their closely held wallets and purses. Throw in the rise in import duties in India and it is no wonder that gold purchasing in there is in free fall.
Regardless of the source of the impetus, gold prices suffer.
Technically speaking, all this places gold in a tight range. The “magic numbers” are $1580 as the middle of the range, around which everything will pivot; 1540, the worst-case scenario bottom price; and 1660, the flirtation price that, if breached, could send gold higher before it faced real technical resistance at 1660.