Gold, Silver, Oil, Treasuries and Stocks soared after statements by Federal Reserve Chairman Ben Bernanke cleared all doubts that the world's biggest economy will continue to need monetary stimulus. As an immediate aftereffect, the US Dollar tumbled against a swathe of currencies. Bernanke said yesterday after a speech in Cambridge, Massachusetts, that "highly accommodative" monetary policy will be needed for the "foreseeable future." Bernanke backed sustained stimulus in a speech yesterday, after the FOMC minutes (of the Fed's June meeting) showed officials want to see more signs of job growth, though about half of the 19 participants in the Federal Open Market Committee wanted to halt the central bank's bond-buying program by year end. FOMC minutes showed many participants wanted to see more signs that employment is improving before backing a trim to asset purchases. Money Ben's statement on foreseeable future sent the U.S. Dollar Index down 1.7% today. The Japanese Yen strengthened against the greenback as the Bank of Japan kept its bond-buying program unchanged. The BOJ said it would retain its plan for monetary stimulus at the end of its two-day meeting today and the Bank of Korea kept interest rates unchanged.
Gold, Silver, Oil and Stocks Rally:
Gold for immediate delivery gained as much as 3.1% to $1,298.73 an ounce, the highest level since June 24, and was at $1,296.79. Silver surged 4.6% to $20.288 an ounce, the highest since June 20, while platinum rose 3.1% to $1,411.30 an ounce, also the highest since June 20. West Texas Intermediate (WTI) Crude Oil rose to $107.41 a barrel from a close of $106.52 yesterday, the highest close since 27 March 2012 while gaining for a third consecutive day.
Emerging-market stocks rallied the most in 10 months, currencies gained and government borrowing costs fell today, on assurance the U.S. economy remains fragile and will continue to need monetary stimulus. The MSCI developing-nation gauge has tumbled 11%, Global equities have lost more than $3 trillion in value and 10-year Treasury yields have surged about 70 basis points since May 22, when Bernanke indicated the central bank may scale back bond purchases as economic risks subside. His comments had triggered outflows that dragged benchmark gauges from all over the Asian continent. Russia's Micex Index climbed 1.2% to the highest level since May 30. Turkey's stock gauge gained 1.9%. Thailand's SET Index (SET) added 3.2% while India's S&P BSE Sensex climbed 2%. Trading volumes for the Shanghai Composite Index (SHCOMP) were 70% above the 30-day average, data compiled by Bloomberg show. Volumes in Taiwan, Malaysia and Indonesia were at least 25% more than the average.
Is the Future really Foreseeable for the Fed?
Despite several self contradictory statements, stands and views on the state of the US economy, how does the Fed justify the "Foreseeable" part of the statement regarding the future? Bernanke has just returned the markets to the point where he has lost control of monetary policy, again. If that then is the credibility of the Foreseeable-ness, then we can be more than sure, that this money printing may never come to an end. How much has the world changed from mid June 2013 till now? Ask the Fed.
Inflation and jobs signal more Fed stimulus needed: Low inflation and high unemployment mean the Fed needs to press on with its stimulus, Bernanke said following the release of the June 18-19 policy meeting minutes. After the Fed's meeting last month, Bernanke said asset purchases may be trimmed this year and halted in mid-2014 should the economy track policy makers' forecasts. In other words, Bernanke is happy to take the equity gains in hope they will trickle down to wealth effect, inflation and employment even if credit is spooked. After all, Bernanke is always ready to do more oblivious of the effects.
As Zerohedge rightly mentioned -
The day's real fireworks occurred after hours as the Chairman's Q&A comments at a speaking engagement sent the Dollar crashing and risk assets (Gold, Oil, Bonds and Equities) flying. Yes, Bonds are a "risk asset" these days. Having watched the press conference, we think nothing notably new was said to indicate a policy shift. When asked about the policy outlook, the Chairman said, "I think you can only conclude that highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy." This is not new considering the Fed has promised to keep rates low until 2015 and the Fed has repeatedly stated that reduced asset purchases equates to additional easing. Most of the Fed Chairman's remarks were consistent with the statements he made at the press conference.
The Chairman's statement that caught our attention and that we could see exciting markets was "And I guess the final thing I would say in terms of risks of course is that we have seen some tightening of financial conditions, and that if, as I've said and as I said in my press conference and other places that if financial conditions were to tighten to the extent that they jeopardize the achievement of our inflation and employment objectives then we would have to push back against that." There is nothing like a clear affirmation of the "Fed Put" to create another round of risk taking and aggressive behavior in the markets. The simplistic interpretation is that the Fed will never take away the accommodation, because the central bank cannot let markets "tighten," which is a euphemism for go down. In a simple stroke, the Fed Chairman has undone the work of his communications of last month. The credibility that began to emerge from the June 19th press conference is gone. There is a large segment in the investment community that believes the Chairman cannot exit this policy, and his statement about not letting markets tighten only strengthens their case.
Early in the Q&A when asked whether, with the benefit of hindsight, he would have done the press conference differently he answered no. He was willing to stem the risk taking behavior to avoid a larger problem in the future. "…where we don't provide any information -- it's very likely that more highly levered, risk-taking positions might build up, reflecting, again, some expectation of an infinite -- infinite Asset Purchase Program." In addition, he continued to refer to QE as a policy tool in temporary terms - "The first asset purchases, we have thought about, and I have frequently described as, providing some near-term momentum to the economy … We've made progress on that, but we still have further to go. But again, that's the objective of the asset purchases is to provide near-term momentum to try to get the economy moving forward more quickly." Despite having said he was glad the press conference had the result of reducing risk taking and referring to QE in short terms, the market only heard the Fed Put. Thus, the Chairman has reiterated the "Tepper Trade."
We don't believe the Chairman's intentions have changed. Regardless, the Fed Chairman's credibility is once again damaged. If the Dollar breakdown continues, it will be a sign that the market believes the Chairman has again lost control over policy. The asset clearly in the best position in such an environment is Gold. After such a notable correction in the past 9 months, the precious metal once again becomes a very attractive global asset if monetary policy in the largest economy of the world spins out of control.
Despite a Congressional mandate that the Federal Reserve pursue policies to foster sustainable US economic growth in an environment of contained inflation, those issues are secondary to the Federal Reserve's primary mission, which is to preserve the stability of the banking system. While Fed Chairman Ben Bernanke has acknowledged that there is little the Fed can do at present to boost economic activity, the weak economy remains the foil for banking-system difficulties, serving as justification for more easing by the Fed.
With reference to an article posted earlier - As fundamental US dollar selling kicks in, full-fledged dollar dumping along with heavy sales of US dollar-denominated paper assets are likely to unfold. Preceding, or coincident with that, the global reserve status of the US dollar should be challenged. As the rest of the world moves out of the US dollar, domestic confidence in the US currency will falter as well, eventually fueling severe domestic inflation, and setting the early base of a likely hyperinflation. Such an environment is one for which physical gold and silver would serve as primary hedges against the ultimate debasement of, and loss of purchasing power in the US dollar.
As for my friends invested in gold and silver - simply add to your inventory on bounce ups from depressed levels. And don't worry about missing the bottom; history shows investors who waited to buy until gold or silver had retraced 30% of their decline still netted about a 70% gain once they returned to prior highs. Though time consuming, odds favor gold and silver emerging from a period of price consolidation and volatility. Remember - Big gains follow big sell-offs. We can't be certain if the final bottom is in yet, but buying at these extraordinarily low levels will ultimately net big profits if you're willing to patiently hold on to your gold and silver. Especially more so for silver as price volatility in silver is rather extreme.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long in Silver and also holding some Gold. Will add more Silver if declines are seen.
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