Weekend Update March 27

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: It was a solid week for the precious metals, which all advanced (excepting palladium) on mounting geopolitical risks and deceptive rhetoric from the Federal Reserve. Equities in the U.S., Europe, and even Asia pulled back this week on uncertainty over the strength and health of the global economy.

GOVERNMENT & POLICY

The Fed Made Its Bed–But Will It Sleep In It?

The Federal Reserve appears to have boxed itself into a corner, as it were. The central bank is intent on holding off its first incremental increase to the federal funds rate (a dovish position) for as long as conceivably possible, but must at the same time convince the markets that this is not a risk-off situation for investors to throw their money into the flames of the overheated stock markets (an ostensibly hawkish position).

Despite the shift toward a “meeting-by-meeting” strategy of offering forward guidance, the Fed can’t help but seem dovish, at least to the reasonably astute observer. Investors have simply seen this movie too many times before: around the time of each meeting of the FOMC, the markets get skittish about the possible tightening of monetary policy, only to find out that these fears were aroused in vain.

As obvious as the Fed’s reluctance to normalize monetary policy too soon should be by now, the mouthpieces of the country’s central bank are still doing their darndest to try and sway public sentiment to the opposite direction. After both St. Louis Fed President Bullard and San Francisco Fed President Williams each made sufficiently hawkish comments about the need to raise rates sometime in the ambiguous blob of the somewhat near future, this week saw Fed Vice Chair Stanley Fischer offer that a rate hike was “warranted” by the end of the year.

Conveniently, Fischer said that the timing of the first rate hike would be “data driven”–another one of the favorite phrases of the Fed. The problem with the reliance upon hard data is that the Federal Reserve’s yardstick for determining whether or not the data meets its targets is essentially chimerical: anytime the numbers seemingly get too close to the Fed’s desired levels, they can just push the goalposts further down the field, so to speak. They can always introduce some caveat or some previously unforeseen factor that must be brought into an ideal range before action can be taken.

As it stands, most analysts and economists don’t expect the Fed’s “looming” rate hike to come before September. It should be telling that in spite of this expectation, there are still plenty who aren’t even convinced that the rate increase will happen during this calendar year.

One of the two sides is going to be wrong in this rhetorical tug-of-war. In either case, the Fed will have succeeded in pulling the puppet strings of the markets to its advantage; it would merely need to play the contrarian to whichever faction is proven (momentarily) correct about rates.

Although it’s tempting to simply write off what the Fed does and says as an utter farce, it’s probably more prudent to simply stay abreast of the news and rumors coming from the central bank with the most critical of eyes.

 

2016 Presidential Race Officially Kicks Off

Ted Cruz, the junior Senator from Texas, hated by liberals and the establishment GOP alike but the champion of conservatives and tea partiers, announced his bid for the presidency in 2016 this week. He is the first candidate to officially throw their hat into the ring for the 2016 election. Cruz is expected to be joined in the Republican primaries by, among others, former Florida Governor Jeb Bush; Florida Senator Marco Rubio; Wisconsin Governor Scott Walker; New Jersey Governor Chris Christie; and Kentucky Senator Rand Paul.

MARKETS

Precious Metals Rally On Poor Data, Softer Dollar

The markets felt a bit of a hangover from Fed Day last week, as stocks performed sluggishly and the dollar pared its fantastic gains from the last month or so. Though this may not be the death knell of the USD’s six-month bull run, a 3% pullback is nothing to sneeze at.

Despite the drop in purchasing parity for the dollar, the euro (its primary competitor) didn’t see as much upward pressure as would normally be the case due to the continued sovereign debt purchases by the European Central Bank (i.e. ECB QE). By the end of the week, the euro sat at $1.08.

In Asia, Chinese shares were largely flat this week. Both the Shanghai Composite index and Hong Kong’s Hang Seng index dipped slightly at midweek before recovering to their original levels. Japanese shares fared worse, plunging more than 2% off their recent highs on signs that the Japanese economy is again dealing with the risk of a deflationary spiral. The country’s core CPI was unchanged year-over-year in February, indicating non-existent short-term inflation. The Nikkei 225 has still advanced more than 11% year-to-date, and is up a staggering 33% over the last year.

Wall Street spent the majority of the week in the red, with Wednesday seeing the steepest decline. The Dow Jones Industrials shed 293 points during the trading session, while the other major stock indices each lost more than 1%. This was in spite of Tuesday’s release of new home sales, which finally rose, as well as the first increase in CPI since October. These positive indicators were simply outweighed by the bulk of unfavorable data (and the resultant market uncertainty) that has been building up over the last two weeks. Meanwhile, Treasuries saw significant demand during the market’s slide, sending 10-year yields tumbling as low as 1.84%. As the week progressed, however, the 10-year T-note eased back to yields just below 2.00%.

The precious metals were the beneficiary of the discord in equities, with silver hitting $17/oz on Monday and gold reaching a 2-and-½-week high on Tuesday at $1,194/oz. After the dollar slid below 97.0 on the DXY at midweek, gold touched its 50-day moving average near $1,219/oz before settling back at $1,205/oz. Platinum and palladium both fell sharply on Friday on weak global demand, although the former still eked out a positive week of trading. Meanwhile, spot silver hung around $17.10/oz by Friday.

Crude oil rallied this week despite record oil inventories in the U.S., China, and Saudi Arabia. This rise in oil benchmarks was closely tied to the unrest brewing in Yemen, where airstrikes and clashes with insurgents could cut off normal flows of oil from the Arabian Peninsula. After beginning the week in the mid-40s, WTI crude advanced to about $50/bbl by Friday on the back of its first five-day winning streak in over a year. Brent crude continued to hover around $57.50/bbl.

GEOPOLITICS & WORLD EVENTS

China Simultaneously Challenges, Establishes Ties With, the West

While Greek officials continued to meet with the country’s EU lenders in Berlin this week, several European nations lined up to join the incipient Asian Infrastructure Investment Bank (AIIB), led by China. An interesting corollary to this development is the strengthening of ties between the People’s Republic and Germany, Europe’s strongest economy.

In addition to forming a new economic partnership, the two countries are also pushing for the yuan (renminbi) to become part of the currency basket for the IMF’s SDR (Special Drawing Rights). China has also expressed a desire to see physical gold included in the SDR basket in order to counterbalance the fluctuations of the fiat currencies in the SDR. With the world’s second-largest official gold reserves, Germany is an unsurprising candidate to support this measure.

Proxy War in Yemen?

Rebels in Yemen, located on the southern coast of the Arabian Peninsula, are clashing with state forces in an uprising that is beginning to ensnare much of the Muslim world. While Saudi Arabia, a Sunni country, and its various allies have supported the Yemeni monarchy, regional rival Iran, a Shiite country, is supporting the insurgency. In addition to being a dangerous proxy war between competing factions in the Middle East, the Yemeni situation also threatens to disrupt the oil market: Though Yemen only contributes about 0.2% of the global oil supply, it is a strategic location for oil pipelines and distribution throughout the region, as it shares borders with Saudi Arabia, the Red Sea, and the Indian Ocean. Prolonged violence and instability could create a choke-point for Saudi oil.

India’s Love Affair With Gold

Already in the fiscal year 2015, India has seen its gold smuggling rise to a total value of $150 million. Earlier this month, a North Korean official attempted to use his diplomatic immunity to smuggle a whopping 27 kilos of gold bullion–worth more than $1 million–into the country through Bangladesh. (India is seeing record silver imports, as well.) As it stands, China and India alone make up 50% of global gold demand, though they also account for nearly 40% of the global population.

A LOOK AHEAD: A mix of economic data comes out abroad on Monday, including the Swiss leading indicator; the European Commission (EC) Economic Sentiment gauge; and German CPI. In the U.S., Personal Income and Outlays, the Pending Home Sales index, and the Dallas Fed Manufacturing Survey will all be announced. Fed Chair Janet Yellen will also be speaking again on Thursday morning.

 

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.