I had a brief off-line discussion with DFM this morning as I noted this line in his morning wrap.
Watch out for non-farm payrolls tonight – a strong number could feed on the fears unearthed by the minutes and we might see a perverse reaction of equity weakness and dollar strength.
It got me thinking that the latest Fed minutes could be a trigger for a reversal for the “bad news is good news” meme on markets as the members of the US Fed board appear to be showing some resistance to the idea of further QE. Whether this is just chatter or actually come to pass is another thing, but together with the politicking around the fiscal cliff and the idea that the US economy is slowly improving it got me thinking about the direction of markets, specifically metals.
I’m not a gold bug by any means, and my opinion on the metal has been quoted previously on MB.
Gold is the ‘people’s fiat‘, that is it has no real value however humans intrinsically trust it to have value. So when central banks are devaluing ‘State fiat‘ via “printing”, the people will run to gold as they trust it to store value.
It is actually very odd behavior when you think about it because gold is about as useful as paper to the average Joe. However the fact that it is completely immutable and, thus far, inimitable, seems to have some ‘magic’ effect.
This all comes back to the perception that “printing” leads to inflation and gold is a hedge against that process. I’m not completely on-board with that analysis (see more here) , but like many things in the real world being “correct” and being “right” aren’t necessarily the same thing.
So overall, my thoughts are, rightly or wrongly, that once there is a perception that the US government is going to stop “de-facing” it’s own currency then the people’s fiat would see a fall in value.
The overnight market response to the Fed’s statements appear to be in-line with these thoughts.
Gold prices fell more than 1 percent Thursday on signs that Federal Reserve officials are increasingly concerned about the risks of the Fed’s asset purchases on financial markets, reducing bullion’s appeal as a hedge against inflation.
Minutes from the Fed’s December policy meeting showed a growing reticence about further increases in the central bank’s balance sheet, which was expanded sharply in response to the financial crisis and recession of 2007-2009.
The minutes also showed several officials thought it would be appropriate to slow or stop asset purchases well before the end of 2013, citing concerns about financial stability and the size of the balance sheet.
If that is the case then a strong non-farm payroll tonight should see further falls which is something I’ll be looking out for.
I’m not saying I’m right on this, metals certainly aren’t my area of expertise, so I’d be interested in getting other opinions on how they think gold will perform in the case that we do see continuing economic growth from the US over 2013 in an environment of an increasingly hesitant Fed.