Based on our latest gold Market Overview report.
There is much speculation on how the inflated Fed’s balance sheet is to be adjusted in the near future. In general the Fed communicates to the public the program as it is aimed at some particular macroeconomic variables such as GDP growth, inflation rate and so forth. Actually it is more probable that the program is based on direct considerations about the financial market. After all, the Fed acts in this area, which means that it can only use an available pool of assets, and this pool has no direct and necessary relation to any macroeconomic variable. For example the level of government bonds depends on the structure of the federal budget; and the pool of mortgage-backed securities depends on the banking-real estate market. At some point, when the asset pool is significantly shrinking, there is no inherent sign which will be present in a macroeconomic variable such as GDP or inflation rate. It may just be the case that too many assets have been bought, and that is it.
Did the “taper” happen because things are so much improved in the economy? The truth is that the “taper” (taperie) might have happened because the Fed has run out of assets that it wanted to buy. Various reasons could contribute to this. One example would be a budget deficit in 2013, which at the end of the year 2013 appeared to be smaller than expected. Under the circumstances of lower public deficit, there may be less government paper issued to finance it. Therefore the Fed buying the existing bonds at such a sustained pace may be swiping too much paper away from the market. This has an important effect upon the credit market.
Most usual monetary doves would probably find the program great. It increases the money supply, stops assets deflation, and makes sure that spending is higher than otherwise would have been. Overall, maybe they are some inflation concerns, but who cares – isn’t unemployment supposed to be brought down by interventionist actions? Despite all this there are even doves who are expressing concern about the Fed’s boost in the balance sheet. One of them is Michael Woodford, an expert on monetary policy, and certainly more of a “dove” than “hawk”. Yet he still believes that tapering should be the option on the table.
One is really inclined to ask the question, “why?”. The truth is that there are big differences between regular intervention, lowering in the interest rates, and a special type of intervention – boosting of assets. Special buying programs are killing the asset market. Every such asset is valued accordingly in the market; this also includes pricing of risks. When the central bank engages in the various operations involved, that results in putting those assets onto the balance sheet, and then the mechanism of pricing is crippled, or actually ceases to work. Unfortunately the government is still there actively pushing out market mechanisms. And the usual safety buffers stop playing their healthy and natural role.
Henceforth, the endangerment of the dollar economy is still present, undermining its future strength. This also means that the demand for gold as a system hedge, should remain present in the coming months and years. Consequently, we can expect higher prices of the latter even if they are not seen in the coming weeks.
Thank you.
Matt Machaj, PhD
Sunshine Profits‘ Market Overview Editor
