Last Friday, Federal Reserve Chairman Ben Bernanke gave his much awaited speech at Jackson Hole and it did not disappoint the gold (GLD, DGP) and silver bulls (SLV, AGQ). Rather than focusing on the mainstream press reporting that his speech laid the groundwork for additional QE (it did not) he admitted that the Federal Reserve has been making it up as they go along.
"As a result, central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing."
This is a striking statement for gold and silver bulls as it confirms what there already know. There is no real plan to lift the economy out of ZIRP and return to full employment. It is just reactionary policy making depending on which way the winds of the markets are blowing.
Later on in the speech he talks about the effectiveness or rather the ineffectiveness of the large-scale asset programs or LSAP's.
The LSAP's were a disaster if you look at the cost versus the overall benefit. The first LSAP program cost $1.7 trillion dollars and returned a 40-110 basis point reduction in 10 year yields. The second LSAP program cost $600 billion dollars and returned a 15-45 basis point reduction in 10 year yields.
Adding the cost of both programs together the Federal Reserve spent $2.3 trillion dollars on purchases of Treasury and agency securities while receiving the benefit of a 55-155 basis point reduction in the 10 year yield.
In terms of basis points, the Federal Reserve spent between $14.8 and $41.8 billion to achieve a one basis point fall in 10 year rates. Let that sink in for a moment and you will understand why the Federal Reserve is so hesitant to start another program.
Bernanke also fails to mention in his speech the effects of his policies on the elderly and savers. By pushing down interest rates the elderly have been unfairly punished by his actions. CD rates are below 1% and the elderly who seek safety in bonds and CD's have seen their savings depleted with no hope in sight if the Fed holds to their mantra of not raising interest rates before late 2014.
His mention of forward guidance as a policy tool only works for so long. Jawboning the market higher will only work until people see the words as empty promises. Even now the markets are unlikely to move much higher given the S&P 500 (SPY) now sells for around 16 times earnings with no earnings growth expected this quarter.
One would think additional QE is right around the corner and it may be right around the corner after the election not before. The reported GDP numbers are unfortunately in a sickly sweet spot where growth is not strong enough to encourage additional hiring yet not weak enough to demand a new QE program or slide the economy into a recession.
The potential effectiveness of any new QE program will be ineffectual at best. QE did not work, in part because of the drama playing out in Congress, which has made the business community hesitant to expand. In addition, the amount of money spent per person to achieve a minimal reduction in the 10 year Treasury when balanced against the savings being destroyed from senior citizens across the country indicates a tremendous amount of wasted money.
But all this is great news to gold and silver investors. It vindicates the gold and silver bulls when we talk about the destruction of the US Dollar with all of the wasteful and ineffective spending. Everyone knows that when the next tranche of QE comes around both gold and silver will move to brand new highs.
Those expecting a new round of QE may be in for a surprise when the Federal Reserve meets later this month. Given the limited effect of the LSAP's and the fiscal gridlock constraining the US economy the Federal Reserve is unlikely to start or continue a new bond buying program. It is more likely they look at other programs to satisfy the market until the fiscal situation and uncertainty surrounding the election clears.
Disclosure: I am long DGP.
Additional disclosure: I am also short the broad market through SPXS.