Weekend Update For January 30

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

 

ABSTRACT: This week was marked by a pullback in precious metals that erased some of gold’s considerable gains to start 2015. U.S. stocks swung back and forth while Treasury yields continued to nosedive. All eyes are on Europe as it attempts to sort out the mess with Greece while keeping the European Union intact.

GOVERNMENT & POLICY

We Trust In the Fed, Instead

Our paper money may already read “FEDERAL RESERVE NOTE,” but the Treasury Department might as well replace the religious motto with “IN THE FED WE TRUST” at this point.

The U.S. central bank held a two-day meeting of its Federal Reserve Open Market Committee on Tuesday and Wednesday, and the outcome was rather predictable: an ambiguous stance left observers to decide for themselves whether the Fed’s position on the economy is leaning in a dovish or hawkish direction.

Though there was no press conference with Fed Chair Janet Yellen following this month’s meeting, the language of the FOMC announcement gave the markets plenty of fodder for drawing their own chimerical conclusions about where Fed policy is heading in 2015. It should come as no surprise that the takeaways from the FOMC meeting have ranged from “no rate hikes until the fourth quarter” to “rates rising much sooner than expected.”

The choice of words and timbre of the Fed statement is, in fact, tailored for this purpose. It’s like a bookie creating a betting line: you need action on both sides, otherwise the entire speculative enterprise falls apart. Therein lies the Fed’s real job; forget cultivating currency stability or maintaining full employment–the Fed is America’s biggest bookie, making speculators out of untold numbers of ordinary investors since 1913.

The Fed likes to throw its bones evenly on each side of binary trades. It claims that the oil crash is transient, and that the U.S. is well-insulated from the global downturn, and then asserts that “international” concerns could delay a normalization of policy. It rejects the idea of time-based forward guidance in favor of data-dependent analysis, yet offers up very specific (“not before April”) time frames for action when the data comes too close to reaching its own targets. Ambivalence and hypocrisy are its tools of choice, and they have been terribly effective tools in manipulating the markets, at that.

At any rate, our central bookie has been preaching “patience” of late, vowing to hold off on any rate hikes until the path of the global economy becomes clearer. Much of this depends on how Europe resolves its dispute with Greece, and how quickly energy demand recovers to help crude oil prices bounce back.

But, until then, the betting window is always open.

MARKETS

Let’s Call It a Wreckovery

The U.S. economy sent a series of mixed signals to investors this week, and the result was still more volatility on the markets. The Dow Jones has been undulating from trading sessions that venture 200 points into the negative to sessions that end 200 points in the green; after plunging over 480 points between Tuesday and Wednesday, the bellwether index recovered 225 points on Thursday.

Precious metals have been equally volatile over the last fortnight. After gold and silver rallied in earnest a week ago, they quickly consolidated those advances this week: gold gave back about 3% over that span while silver was hit even harder, shedding some 7% on Thursday alone. Platinum also tumbled, falling well below the gold price and increasing the spread between the two metals. Meanwhile, palladium has been mostly steady amid the volatility, trading in a relatively tighter range than its precious metal counterparts.

The volatility is partly due to seasonally low trading volumes, which can amplify the effects of individual trades, and partly a result of mixed economic data. Although weekly jobless claims came in at a 15-year low, homeownership sank to a 20-year low; while Apple Inc. posted record-setting earnings for the fourth quarter, the markets still plunged as other big firms like Amazon and Google posted lower-than-expected revenues.

Much of the narrative behind this week’s poor earnings reports has focused on the U.S. dollar. Many companies reported falling revenues due to the surging dollar, which is eating away at overseas sales for these firms. There are both positive and negative consequences of a particularly strong dollar: although this gives U.S. consumers more purchasing power–prompting Bloomberg to declare that the American consumer is the “hero” of the economy–it saps the competitiveness from U.S. exports, ballooning the trade deficit. Chronically low oil prices aren’t helping, as the dollar’s bull run has coincided almost perfectly with the dramatic drop in crude prices. The DXY dollar spot index eased up slightly this week, but remained strong around 94.8 by Friday afternoon.

European shares rose on Monday before reversing direction on the uncertainty over Greece’s future in the EU. The newly-elected government seems intent on breaking from the euro, as new prime minister Alexis Tsipras is already obstructing the union’s ability to impose new sanctions on Russia for its persistent incursions into Ukraine. The euro fell to fresh 11-year lows of just below $1.13 against the dollar.

The unpredictability in Europe is causing an alarming flight into U.S. Treasuries. Investors searching for yield during a global economic downtrend are also deciding that U.S. government bonds are seemingly the safest place to park their money in the near-term; after 10-year yields slid back to 1.80% on Tuesday, T-notes rose yet again, pushing yields all the way down to 1.67%. Though the bottom is probably here for crude oil, some analysts are warning that sub-1% yields on benchmark bonds are a real possibility, as we have already seen this occur across Europe and in Japan. Until this flight of capital into Treasuries abates, the outlook for precious metals will likely remain bullish.

GEOPOLITICS & WORLD EVENTS

Greeks, Russians Testing the Union In Europe

For better or worse, the European Union appears to be unraveling. We must acknowledge that the short-term effects of this development are a net negative: the lack of a clear direction–let alone a clear resolution–for resolving the tensions between Greece and the EU has heightened market anxieties, spurring greater volatility and less ostensible stability for the various international markets. As it stands, Greece shows no signs of cooperating with the Troika.

After a convincing victory for the left-wing Syriza party in the Greek elections Sunday, the group formed an unlikely alliance with the Independent Greece party, a far-right faction that shares Syriza’s stance against austerity measures. The new governing coalition has wasted no time in asserting itself, already roiling its erstwhile European partners by standing in the way of new economic sanctions the EU intends to impose on Russia. (The member countries of the EU must approve such sanctions unanimously.) By meeting with Russian diplomats before addressing any dignitaries from Europe, Syriza and party leader Alexis Tsipras are rather unambiguously aligning themselves against the Western European powers and the entire currency union that fragilely holds the continent together in political union.

While Russia can undoubtedly play the role of ideological benefactor for the Greeks, and offer some moral solidarity against the policies of the West that they oppose, the partnership is not exactly a marriage of economic titans. While global inflation levels remained mired near zero in much of the developed world, Greece and Russia fall on opposite ends of the inflationary (or deflationary) spectrum: Greece has seen falling consumer prices and, for all intents and purposes, negative inflation for the last two years. At the same time, Russia has experienced a rapid rise in consumer prices, with inflation gauged at a staggering 11.4% as of December.

Greece will likely refuse to pay back its bailout loan to the ECB, particularly if it exits the EU, while Russia’s central bank has been scrambling to save the crumbling ruble. Russian creditworthiness was downgraded to junk status by Standards & Poors this week, as the ruble has lost more than 50% of its value since last summer. The currency hit an all-time low on Thursday, as the exchange rate is now more than 70-to-the-dollar.

Though the two sides have found a convenient partner in one another for the moment, there are a number of hurdles that the Troika (the ECB, EC, and IMF) could present them with. In the absence of an agreement to resolve Greece’s bailout loan, it seems highly unlikely that the country can suddenly become self-sufficient, even with Russia’s backing. The former’s economy is based almost entirely on tourism, the ladder on oil exports. Such one-dimensional economies are especially vulnerable to being sanctioned and isolated by their rivals. One must wonder how much longer will Russia and Greece be able to play the spoilers before the fuse on the powder keg that is Europe is finally lit.

News & Notes

Deutsche Bank projects that India will surpass China in the pace of its economic growth by 2016.

Alibaba shares plunge after Chinese authorities accuse the site of knowingly allowing fake merchandise to be sold.

McDonald’s changes CEOs amid 3 consecutive years of falling profits.

Denmark cuts its benchmark deposit rate again, 15 bp lower to -0.50%.

The LBMA is expected to stop reporting GOFO (Gold Forward Offered) rates at end of this month.

The first U.S. bitcoin exchange opened on Monday, sending the BTC price on a much-needed rally.

 

A LOOK AHEAD: Forget about the markets for the weekend and enjoy the Super Bowl!

 

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

 

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