Live another day: Gold can bounce back by 2014-end riding hyperinflation

Last Updated : 09 May 2013 at 12:35 IST

November 28, 2012 Wednesday: Gold for February delivery on the Comex shed weight, $26 dollars to be precise, as the session came to a close and settled at $1,718.80 an ounce. Spot gold, on the same day quoted down $25.20 at $1,717.25. Silver shed 1% and was seen at $33.725 an ounce.

From there, gold prices began to chart a downhill registering incremental losses.

April 12, 2013; Friday: With investors moving money out of gold and silver, the futures tumbled at a breathtaking speed on Friday night. Gold futures for delivery on June 13 closed at $1482.65 registering a loss of $82.25 or 5.26%. Silver for delivery on May 13 closed at $25.915 a loss of $1.782 or 6.43%.

The objective of this article is not to exhume the past. But it is worthwhile to think what took gold prices to astronomical heights way back in 2011 to $1900 levels and from where it fell miserably.

Clearly, it was some QE frenzy that caused the rise!

Quantitative Easing, in effect money printing, became a hit with central bankers around the world to such an extent that it led to bubble formations across various asset classes; especially commodities and real-estate. The easy money received by financial institutions were parked in asset classes like commodities.

And commodities include gold. As the money-printing machines began to work overtime, the fear of inflation and currencies losing their purchasing power became an apparition in its own right.

No wonder, gold assets were heavily sought after and herd mentality took over; gold zoomed. One has to note that with the commodities going up, manufacturers of commodities and goods found it a reason to start investing in facilities that would yield more commodities and more of money. This led to further investments and job creation. (Interest rates ruling at record lows ensured cheap loans that facilitated investments.)

Thus, the easing measures indirectly kick started money flow and some activity in the economy. Once again the world economy 'recovered' in official parlance.

But all these unconventional tools do have their limitations. The money printing cannot go on forever. Interest rates cannot remain low forever. It has to stop/rise somewhere, it will have to.

Because, at one point in time, the hydra-headed inflation would begin to bite; what you have seen as of now is just inflation in teens. The fact that it has not bitten yet shows the acute severity of the Great Recession. At some point in time, probably by the end of 2014, this scenario would change and chances of a hyper-inflationary environment taking a firm hold on the global economy would emerge.

“By 2014 end, or in 2015-16, we may see inflation climbing across the board,” said V.K Vijayakumar, Chief Investment Strategist, Geojit BNP Paribas, Kochi, South India.

This would once again create the potential for gold to be potent investment and hedge against inflation.

The rest would be history!

As published here: http://www.commodityonline.com/news/live-another-day-gold-can-bounce-back-by-2014-end-riding-hyperinflation-54338-3-54339.html

Why Gold prices are crashing? Answer: QE3 !

Last Updated : 05 December 2012 at 11:35 IST

Gold prices may have recovered a bit aided by the uncertainty prevailing in Eurozone area; but investors seem to abandon the commodity in droves as US fiscal cliff issue continues to keep markets on tenterhooks.

While only a handful would predict that US would go off the click, the day-to-day developments in the US political arena is adding to the uncertainty in markets in a big way. When there is uncertainty in the markets, people hardly invest. They would simply sell and markets yesterday saw just that!

“Gold is being sold along with just about everything else in commodities with the worries on the fiscal cliff,” Bart Melek, the Toronto-based head of commodity strategy at TD Securities, said in a telephone interview to Bloomberg. The metal “is usually said to be a safe haven, but the threat to economies globally from the fiscal cliff is having knock-on effects.”

Now, one would be surprised if I say that QE 3 is having a role in this crash. The money supply did improve subsequent to $40 billion a month unlimited QE 3. But the Adjusted Monetary Base of the US Federal Reserve remained flat.

I can explain citing Dennis Gartman.

Many analysts are bullish on gold on wrong reasons, money supply (M1, M2) is expanding but a more crucial variable, the Adjusted Monetary Base of US Federal Reserve remains sideways, said Dennis Gartman Editor of Gartman Letter in November.

US Federal Reserve is buying $45 bn worth Morgan Securities regularly but they are all nearing maturity and hence Fed is not over expansive as many analysts explain, he had pointed out.

This means, what the Federal Reserve bought in effect was not sold!

Now, the latest data from Federal Reserve suggests that the case remains the same. Adjusted monetary base still remains flat.

So, where are the fundamentals supporting gold?

The Bernanke talk had enlightened many a gold bull Buddhas, only that the same was a passing phenomenon. All Buddhas collapsed and bears had the last laugh.

The great QE3 lie was not uttered by Ben Bernanke, but was heard by markets to be so.

As published in: http://www.commodityonline.com/news/why-gold-prices-are-crashing-answer-qe3!-51660-3-51661.html

How long will US QE3 drive last

Last Updated : 16 October 2012 at 11:30 IST

Now there is a widespread fear that the QE3 drive by Ben Bernanke and his team may get suspended, if not abruptly, but eventually as job markets and US retail sales exhibit signs of recovery.

“I expect the QE3 drive to continue well into March next year. In the meantime, we may possibly see reduction in the firepower by half or so. It has to be noted that a mark of permanent recovery is still far away for US economy and hence the QE3 may not get suspended abruptly.” said Martin Patrick, a Kochi based economist.

The third round of QE is an instance to buy Mortgage Backed Securities or MBS to the tune of $40 bn dollars a month. Now, when Operation Twist comes to an end by the end of this year, Bernanke may choose to purchase additional $45 bn worth of treasuries as well.

If sustained improvement is visible across the economy, then the funds allocated to QE3 may dip by half. "But given the recent corrections in gold, I think the investor community has already factored this in." he added. 

On gold and crude oil

The gold markets, like any other commodities are driven by factors that pop up out of the blue and change the fundamentals.

“I think for the short-term, gold is not having favourable winds on its sails. It may go up considerably higher to $1800 levels as new factors pop up.” Martin Patrick observed.

Brent crude demand is not expected to come down significantly as there is still some growth happening in emerging economies, he added.

No hyperinflation

He also rubbished claims from certain quarters that a global hyperinflation is on cards. “The term is often loosely or irresponsibly employed by many.” he noted. There would be and there is inflation, but not something to the tune of hyper-inflation.

African economies and Iran would be the most vulnerable pockets in this regard, he concluded. We are living in an era of new normal in inflation.

As published in: http://www.commodityonline.com/news/how-long-will-us-qe3-drive-last-50890-3-50891.html

Inflation: Can you have your Gold cake and keep it too?

Last Updated : 01 October 2012 at 21:55 IST

This morning, when the gold retreated in markets, nobody should have thought of a tsunami in gold prices invading the bearish sands.

The prices reached $1,794.40 an ounce, the highest for a most- active contract since Nov. 14 on Monday.

It simply happened and all it took was a few words from the President of Federal Reserve Bank of Chicago, Charles Evans. He maintained that unemployment probably will not fall to 7 percent until 2014 and that the Federal Reserve can do a lot more to boost the economy. He said that the Federal Reserve can back off from its easing drives if inflation presented a greater threat. The market interpreted this as impending series of inflation data and pounding hoofs of gold bull.

This announcement when broken down means a couple of things:

1. The US authorities consider it a top priority to rein in unemployment

2. The US authorities do not give a damn to inflation until it may rise to uncomfortable levels.

Perhaps Evans knows it. That inflation on a moderate scale is always a boon for growth and prevents the US economy from turning Japanese. That unemployment is a bane and can have political ramifications especially in the election year. Choose the one that apparently does not appear evil.

But it is also dangerous when central bank officials, thorough-bred economists, start talking politics.

Look at the nature of the third round of QE. It is a measure of buying mortgage backed securities or MBS from the markets on a monthly basis at $40 bn a month until the labour markets show substantial improvements.

What is this if not politics, one may argue.

The US authorities may resort to additional buying of treasuries too as and when the Operation Twist comes to a close by the end of this year.

All these measures, when added together mean a scourge emerging from thin air: inflation.

But herein lays the caveat: if inflation gets way too ahead of job creation and becomes a drag on the economy, the Federal Reserve may simply increase the lending rates or other umpteen tools with them to heal the economy.

The question is can inflation be reined in so easily after the economy has marched ahead in supersonic speeds.

In other words, is inflation so obedient a genie?

The debate, I think can continue forever. May be Bernanke could shed more light on the impending measures in today’s speech scheduled at 11.00 PM IST.

This time around, Ben Bernanke is expected to address the QE skeptics and may stress on two things: the QE 3 measure—the third round of Quantitative Easing wherein the Federal Reserve would buy mortgage-backed securities to the tune of $40bn a month until the labour markets recover —has the potential to work well and can be managed well. He will speak on ‘Five questions about Federal Reserve and Monetary Policy’.

Meanwhile gold prices retreated to 1780.5 levels on positive PMI data.

As published in: http://www.commodityonline.com/news/inflation-can-you-have-your-gold-cake-and-keep-it-too-50641-3-50642.html

Two reasons why QE3 did not set the Gold bull on fire

Last Updated : 01 October 2012 at 14:50 IST

In fact, Quantitative Easing measures are supposed to be the holy grail of commodity markets. Cometh a QE and the gold bulls rev up, it is widely thought.

Outrageous projections dotted the markets almost on a daily basis in the run up to the third round of Quantitative Easing. But it seems the gold prices have not gone beyond a point subsequent to the QE3 measures. It has not climbed the great plateaus that it was supposed to be. May be a hillock, it has.

Why this has been so?

There are two reasons:

--The gold prices had already been at a high when the QE3 was announced.

--The QE3 is not akin to an atom bomb this time around, blasting of which would pump up enormous amounts of liquidity pressure; but more like a sniper. It spares a bullet a time but definitely serves the purpose.

A look at a rudimentary gold chart will tell you how gold prices have appreciated since the Quantitative Easing measures have been announced each time. The second round of QE, the QE2, saw liquidity to the tune of $600 bn getting injected into the markets in one go. That was a massive bond buying program and took gold to dizzying heights.

And when the prices are at a rational high, it is almost impossible to climb from that levels to further highs given the leverage potential of the commodity and many other factors including psychological. Now, what if the prices are at insane high levels?

The government is not intending to inject massive liquidity at one go into the markets this time around.

The US Federal Reserve intends to buy mortgage backed securities or MBS to the tune of only $40 billion a month. It may also buy treasuries at the end of this year to the tune of $45 billion a month, as Operation Twist comes to an end. Though the figures may sound huge, it is just a drop in the ocean.

The QE3 is open ended and is tied to the labour market figures, meaning the initiative would continue until the $40 billion a month program brings about tangible differences in case of labour market data.

Now, the effect of these measures would require that it takes at least many months before some effect is on the commodity markets and the bullion.

Nevertheless it would happen!

As published in: http://www.commodityonline.com/news/two-reasons-why-qe3-did-not-set-the-gold-bull-on-fire-50627-3-50628.html

Opinion:QE3 to the tune of $300 bn may be expected

Last Updated : 28 August 2012 at 11:10 IST
Gold and Silver prices have comedown this morning as media reports banking on JP Morgan Chase say that Federal Reserve Chairman Ben Bernanke will not use his Jackson Hole speech to suggest a bond-buying program is “imminent”.

Actually, the markets are in a wait and see mode, said David Lennox, a resources analyst at Fat Prophets in Sydney toBloomberg News. “The data to date continue to suggest this wait-and-see approach is vindicated.” he added.

Meanwhile, Martin Patrick, a Kochi based economist is of the opinion that a QE 3 may be expected as election in US looms and the government seeks to impart some momentum to the current U-turn the economy has taken.

“The government would want to create a feel-good ambience in the country.” he said. “The Jackson Hole speech could see Bernanke announcing a QE3 worth $300 bn”, he added.

The measure, if carried out would drive precious metals higher.

Gold for September delivery dipped as much as 0.4 percent to $1,657.50 an ounce and was at $1,661.13 at 12:41 p.m. Singapore time.

As published in: http://www.commodityonline.com/news/opinionqe3-to-the-tune-of-$300-bn-may-be-expected-49958-3-49959.html

What no-stimulus speech by Ben Bernanke can mean

Last Updated : 30 August 2012 at 12:45 IST
Even as pure play investors and investment companies look forward to Jackson Hole speech, what does it mean if Bernanke says there is no stimulus?

“It could mean two things. Either the Fed reading the writing on the wall is positive about growth prospects of US economy, or it is trying hard to hide something.” said Martin Patrick, a Kochi based economist from South India.

The Federal Reserve, by postponing a stimulus, would be feeling comfortable about the recent data. He added.

“But if they postpone it could also be that something is wrong about the treasuries. This, however, we may have to dig deeper. By not announcing a stimulus, either they are postponing a U-turn or they are hiding something about the state of the economy. If the latter is the case, it would be a case of political motives overriding economic motives”he said.

The Bernanke speech is widely awaited as traders and investors have seemingly abandoned the precious metal markets.

Gold is stuck in tight range of 30800-31000 before Fed speech scheduled for tomorrow, according to Amrita Mashar, Manager- Research, Commodity Online.

“Traders seems to be absent in market ahead of Federal Reserve Chairman Bernanke Speech.” she said.

A QE 3 may be expected as election in US looms and the government seeks to impart some momentum to the current U-turn the economy has taken, Martin Parick had said recently.

“The government would want to create a feel-good ambience in the country.” he said. “The Jackson Hole speech could see Bernanke announcing a QE3 worth $300 bn”, he added.

The measure, if carried out would drive precious metals higher.

As published in: http://www.commodityonline.com/news/what-no-stimulus-speech-by-ben-bernanke-can-mean-49991-3-49992.html

Commodity markets: The yearning for stimulus amid mixed news

Last Updated : 14 August 2012 at 15:35 IST
While France has registered zero GDP growth for the second quarter, Germany's GDP has grown 0.3% quarter-on-quarter compared to a Reuters forecast for a 0.2% rate. In the case of France, investors were worried that growth would be headed in the negative direction signalling a recession. But this appears not to be the situation.
However the Euro Area GDP has contracted by 0.2% in 2Q from prior quarter, Bloomberg reported.

The GDP figures of France and Germany do not feature as a bad news; but neither it is a good news. And the Euro Area contraction could herald a stimulus.

“There was a positive news from Germany and France, so that has helped lift the base metals from negative opening to positive market. A slightly better-than-expected growth data from Germany and France helped ease concerns about the two biggest economies of the euro zone.” said Amrita Mashar, Manager-Research, Commodity Online.

Meanwhile, crude oil futures bounced back, gold remained firm and importantly copper emerged out of red as investors clung to stimulus expectations.

The fact that gold and base metals are remaining correlated at the same time in the same direction speaks volumes about the conflicting interests and signals a lack of direction in the market.

On the one hand markets are expecting stimulus measures from various quarters, especially Japan, China, US and Europe. On the other, a cardinal fear of a complete global meltdown deters them.

However some of the Japanese bank officials are reportedly favouring a stimulus package. Europe contraction is yet another case for stimulus. Chinese slowdown warrants a stimulus and US situation is possibly demanding one. 

As published in: http://www.commodityonline.com/news/commodity-markets-the-yearning-for-stimulus-amid-mixed-news-49723-3-49724.html

US Federal Reserve may opt for a mini QE3: Economist

It may not be that the US Federal Reserve has run out of all the options, yet; but the fact remains that it has nothing much left to do. The global economic crisis looming, the markets are looking to the Federal Reserve with an intent in their eyes which is too seductive to ignore. It reminds of a battered wife cuddling to her husband coyly with an intention for redress and a panacea; a solution.

So can we expect a QE3 (Quantitative Easing 3)?

“Slim chances exist. But we cannot expect the Federal Reserve to go overboard and do something which falls short of vigilance. In place of $2000bn in QE injection requirements, the Fed may, for this time opt for $300 billion-$500 billion in stimulus.” said Martin Patrick, a Kochi-based economist.

A policy meeting by US Federal Reserve is on cards this September.

But it is another question, if the stimulus would help find a solution.

“The Democrats, when they should be employing an offensive strategy, has gone defensive and in place of opting for aggressive fiscal stimulus package, is signing up for austerity.” Martin said.

Another round of QE3 or mini-QE3 could help create some jobs. But it may not be a permanent solution. Fiscal measures could be the key, he said.

So, what are the other policy options before the Fed?

“The Fed may go in for open market operations, can opt to buy and sell securities. But, given the ambience it is difficult to assume that such a move can be successful.” Martin said over phone.

But isn’t the demand for US bonds going up?

“Not as big as it used to be”, he said. “Even India and China are shying away, in that the data does not give a robust picture.” He added.

So, how about Europe?

“In the current quarter, we may expect to see the problems aggravating for Spain and Italy. In UK, the problem is already out” he said.

“Strengthening inter-state trade among the European Union members can help get some leverage for the countries in the region.”

Will it help, if Germany and France ditch Euro and return to their respective currencies, leaving countries like Greece to hold Euro? Some economists have already pointed out the benefits, such a move could bring about.

“It would definitely strengthen economies of Germany and France.” He said. “But, it would aggravate the problems for Greece and other debt-stricken nations.” He concluded.

As published in: http://www.commodityonline.com/news/US-Federal-Reserve-may-opt-for-a-mini-QE3-Economist-42124-3-1.html

Why Ben Bernanke of The US Federal Reserve stopped short of QE3

Back in 2002, Ben Bernanake, spoke at a gathering to commemorate 90th birthday of Milton Friedman, the dean of free-market economics. He referred to the seminal work of Friedman on Great Depression, which Friedman co-authored and said, “thanks to you, we won’t do it again.”

Big Ben tolled that he was sorry (he being in the Federal Reserve), that a depression occurred in 1930s and he will not let it happen again.

By not announcing a QE3, Ben Bernanke was simply keeping his word!

Yes, a QE3 would have ushered in an era of ‘super-uncertainty’, a tongue for depression.

The two rounds of QE or Quantitative Easing was a monetary stimulus initiated by the Federal Reserve at the instance of US government. Spawning billions of greenbacks, the Federal Reserve re-purchased US bonds from banks thereby injecting liquidity into the markets.

Rather than boosting investments in productive assets, the said money (being cheap) was actually invested in boosting consumption around the globe.

This ultimately led to a rally in commodities and equities starting 2010. With food prices shooting up, billions were dragged back to poverty. Social unrests marked the era as Arab Spring sought its soul.

But this prima facie unsustainable cycle ended with QE2 expiry.

QE3 and global hyperinflation

If Ben Bernanke had opted for a QE3, it would have kicked in a fresh cycle at a higher threshold. As experts at NIA warn, the world and US would slip into hyperinflation in dollar—the world’s reserve currency.

This anticipated rout in dollar value will spark another round of dollar sales starting from countries like China and India followed up by other nations. Result would be a monetary vacuum and a fiscal nightmare! Dollar would cook you food replacing logs and twigs, as they would be much more expensive to burn!

This global hyperinflation has not simply happened before and can prove to be something worse than depression.

We have seen hyperinflation in countries like Bolivia and Zimbabwe which made living a vegetative process. A global extension of the same...unthinkable; and that too if you care to live!

No doubt, Bernanke is farsighted and has not reneged on his promise.

What next

Ben has left the Federal Reserve rates untouched. But the decision was least surprising, given that there were nil alternatives. In fact I was surprised to see markets rebounding! My perception was that markets had already discounted the event.

The important thing is that markets felt some certainty after Tuesday’s Fed announcement; a date, a few statistics and some confidence as Bernanke announced he would spare rate hikes at least until 2013. May be that dose of certainty can be accounted for the rebound in markets.

But, with the rates down, a virtual, subdued QE3 would come into force. Credit would be cheap and banks would continue to lend. US would be identical to the proverbial frog in the boiling pot where temperature is raised one micro degree a time.

The resultant inflation would be exported and the Emerging Markets, the only ray of hope, would tighten credit situation, stalling growth.

Ben has only postponed a slow down by averting a depression.

Meanwhile, the European Central Bank is also taking the credit route. By buying into the debts of Italy and Spain, the bank is playing with fire. The credit scenario in Europe would be aggravated despite European Financial Stability Facility (EFSF) and to solve a credit crisis, a new deeper credit crisis would be created.

As published in: http://www.commodityonline.com/news/Why-Ben-Bernanke-of-The-US-Federal-Reserve-stopped-short-of-QE3-41524-3-1.html