No golden eggs yet

2016 has been a great year for gold, at least so far. You will remember that over the previous years Expertise Asia had called for gold to sink to 1,000 dollars per ounce. Well, we didn’t quite get there. 1,050 was the low in December, but close enough if I may say so. Just ahead of this last move down I wrote a piece about the gold price doing exactly what it was supposed to be doing.

What I meant then was that the Fed hadn’t lost its credibility yet. Despite Janet Yellen already being in her seat we were still emerging from Ben Bernanke’s 8 years at the helm of the very institution that adopted a central role in cushioning the blow of the financial crisis. He was the man that started quantitative easing and ended it, tapering it off in an impressively disciplined fashion.

Yellen was walking in his footsteps, initially at least. She was deemed to be a safer bet for the post-crisis world than Larry Summers, dovish in her historical voting patterns and exerting a cautious stance in this new era. The dithering around last September’s quasi pre-announced rate hike, when stocks dumped in late August, wasn’t seen as a major hiccup. If anything, it confirmed the caution Yellen’s actions were defined by.

Other than that, it felt like the Fed had cut out a clear path going forward. December was finally kick-off time, and a very detailed plan with regards to quantity of hikes into 2016 had been laid out. While the state of the economy didn’t venture that first move, and no one had a sense of what was to come with regards to February’s market volatility, at least the pundits bought it, and to them the next step of the monetary system’s normalisation was declared.

More importantly, the mainstream inflationists had no more leg to stand on. Commodity prices were at or just close to their lowest price levels. Oil had fallen to 35 dollars and was gearing up for its final capitulation move to 26 dollars a month later. Even though it continues to be such a general misconception that gold would serve as an inflation hedge, you can’t hold against the tide of a majority of believers. And so, gold wasn’t shiny then.

Consequently, the dollar as a paper currency was in high demand against pretty much everything, not just commodities and gold. The Euro hit a low of 1.06, the Yen of almost 125. It doesn’t happen all that often, but dollar cash was seen as an asset class, and why hold gold, the process of which costs quite a bit of money, when you can keep money in the bank, certainly at no yield but at no cost either.

Let’s do a fast-forward. Since then, gold has appreciated almost 25%. That’s not nothing of a performance for a 9-month period. Why? Well, a number of things happened. Firstly and contrary to the earlier perception, the Fed in the history of its existence might not have seen more of a zig-zagging than year-to-date 2016. How many times were rate hikes “to be expected, appropriate, probable, inevitable” etc. And then they weren’t. What an exhaustion of vocabulary.

According to the Fed lingo going into the new year we should have had at least 2 if not 3 hikes already. How many have we had? None. This space was daring enough to offer a start-of-the-year view that we will have no hikes in the entire 2016. There may still be one, or so they say. But how many times have they said it? Even data dependency won’t help, least the Fed. Members would need to have the guts to be forward- not backward-looking.

If only that was the worst… You could understand the Fed members to unanimously or even only by majority decide against a hike, even though they were drumming it up beforehand. The world has become so interdependent and a fickle place. Things change overnight, and monetary policy needs flexibility. But what is inexcusable is the fact that the members seem to even propagate to have arrived at completely different assessments from each other.

As I pointed out in one of last week’s posts, it has become next to impossible to gauge what the Fed really wants to do. I don’t want to labour the point, but I have never observed so many statements of a different nature. And Stanley Fisher to almost contradict Janet Yellen’s speech in Jackson Hole was the icing on the cake. The current chair does not seem to be able to exert sufficient leadership over the very institution that is meant to guide us.

If the Fed doesn’t have its house in order, how can the world believe in the sound stability of the monetary system? No wonder then that the gold price did what it was again supposed to do. There, in the rise of its price the real meaning of a hedge comes into play, not against inflation but being the only hedge against the demise of the money system as we know it.

However, the Fed is in a bind now. It’s come to that point. They can say whatever they want. They can even raise rates again during the remainder of the year. The disappointing PMI numbers overnight wouldn’t exactly call for a hike, but much will depend on tonight’s labour numbers in how they will be swayed. In the end though, all this might not matter much. The dithering has taken its toll. The influence of the Fed is waning.

For now, underlying market forces have taken over. Libor has already preempted rate policy, regulatory impact by the SEC or not. Financing costs across the spectrum have risen visibly. The yield curve is getting flatter and flatter and will potentially even invert. We know what that implies. And the dollar remains strong, which means deflation is still being imported from the rest of the world. Let’s see what the G20 on the weekend will do to it.

These are all the makings of a gold price running out of steam, not because the Fed is strong but for now the system manages to remain stable even without it. Gold may not tumble quite back down to 1,000 dollars, but don’t put all your eggs into that shiny metal’s basket. As long as things keep lingering along, with little volatility and in a half-way stable manner, gold has little ground to ascend further.

It will eventually be the Fed again though that will make the gold price move more sharply, on the up. This will happen when Yellen and colleagues are engineering the Fed’s monetary u-turn, due to their hand being forced by natural forces of gravity. It will be on the eve of the US facing a coming recession, when easing of potentially new sorts commences, the money system is back in risk territory, and gold rises again.