On this week’s Metals & Markets The Doc & Eric Dubin discuss:
- A break from the traditional Friday cartel bashing as gold and silver blasted higher through $1400 $24, and closed at $1398 and $24.08 respectively!
- Triggering Friday’s precious metals rally, a weaker than expected July home sales report, coming in at 394k vs consensus of 486k, and a 13.4% decline over June- the steepest monthly drop in 3 years!
- Silver options expiration Aug. 27: Expect cartel to desperately attempt to defend $25.50 and then, $26. Look for a pause and short correction in silver prior to a massive assault on $30!
- The Doc’s report on physical market trends for the US bullion market
- War: When all else fails, it’s the “go to” solution; Why would President Assad gas his own people when he knows the US has declared the use of chemical weapons as a “red line” that if crossed would likely mean escalation/intervention? Russia may very well be correct in accusing the US backed rebels as being behind a false flag.
We dive in to these topics and much more in this week’s SD Weekly Metals & Markets!
SD Weekly Metals & Markets Editorial & Analysis
By Eric Dubin
We don’t often slog through FOMC minutes because, quite frankly, there are usually far better things to share with you. But this time is different. The Fed forced itself into an inflection point period with all this tapering talk. We’ll get to that in a minute.
Try as they might, the powers that be failed to damage the ongoing development of this precious metals bull market. During the three days leading up to the release of the Federal Reserve’s FOMC minutes, we saw sizable attacks on gold and especially silver during thinly traded overnight sessions.
Some in “our camp” have become so used to cartel flogging that a sense of dread and expectations for a bigger smash fell upon many in the stacker community as the cartel executed these nightly drive-by shootings . But the importance of the fast rebounds after each capping attempt cannot be over-emphasized. Yes, it was clear an effort was being made to set the stage for the FOMC minutes release. But the reversal off the first attack was so strong, it further confirmed the change in character in these markets. We’ve highlighted this change for weeks, and discussed this specific upside reversal in our article spotlighting the confirmatory sentiment shift visible in mining shares. Click here to read that article.
Digging into the FOMC minutes
Much of the FOMC minutes contained the usual boring babble. But there was a portion that directly relates to bond market vigilantes occasionally flexing their muscles – and the bond market vigilantes are of grave concern to the Fed. In classic Fed-speak, the following discussion is downright humorous:
Staff Review of the Financial Situation
Financial markets were volatile at times during the intermeeting period as investors reacted to Federal Reserve communications and to incoming economic data and as market dynamics appeared to amplify some asset price moves. Broad equity price indexes ended the period higher, and longer-term interest rates rose significantly. Sizable increases in rates occurred following the June FOMC meeting, as investors reportedly saw Committee communications as suggesting a less accommodative stance of monetary policy than had been expected going forward; however, a portion of the increases was reversed as subsequent policy communications lowered these concerns. U.S. economic data, particularly the June employment report, also contributed to the rise in yields over the period.
Well, duh… These dolts were talking up an early end to QE and tapering in June, and subsequently flip-flopping faster than a freshly caught fish on a dock. This ineffectual, downright embarrassing “communications strategy” remains one of the Fed’s primary tools. Who can blame them? They’ve placed themselves inside a box with little room to maneuver. Cut QE meaningfully and long-term rates will spike higher, “the economy would tank” (Bernake’s own words), asset prices would drop and US budget deficits would not be able to be funded by newly issued debt. But failure to speak about taking away the punch bowl (or even “tapering” the size of punch cups) contributes to asset bubbles and an a further unstable situation. The Fed is stuck, in a quagmire of it’s own making. Bottom-line: the up trend in long-term rates will continue, has we have consistently warned since May; this dynamic will ultimately be the undoing of the “extend and pretend” bad joke that passes for economic policy.
Another portion of the minutes is also worth highlighting (and translating):
Increases in total bank credit slowed in the second quarter, as the book value of securities holdings fell slightly and C&I loan balances at large banks increased only modestly in April and May. M2 grew at an annual rate of about 7 percent in June and July, supported by flows into liquid deposits and retail money market funds. Both of these components of M2 may have been boosted recently by the sizable redemptions from bond mutual funds. The monetary base continued to expand rapidly in June and July, driven mainly by the increase in reserve balances resulting from the Federal Reserve’s asset purchases.
This is a perfect illustration of contradictions growing out of hyperactive policy management. Translating the above into simply English: As interest rates rose, the price of bond holdings declined, lowering the total value of bank balance sheets. In turn, banks made fewer loans, resulting in a slower rate of increase in bank credit to the real economy (loans to businesses, etc.). Meanwhile, as the Fed freaks out about rising long-term interest rates and understands the necessity of continuing QE to slow the rate of long yields ascent, the Fed’s QE purchases reduces the aggregate pile of garbage mortgage backed securities on bank balance sheets, which liberates the banks to conduct more speculative activity in the financial markets. That, in turn, is starting to have an impact on M2.
Net result? Deep incentives to the real economy go wanting while policy makers desperate to buy time and “extend and pretend” further distort the economy by furthering inflation’s expression throughout asset markets.
The only FOMC voting member to vote against continued QE was Esther L. George. That combined with the intractability of the Fed’s position strongly implies that there will be no tapering in September. Even if we do get tapering (which is what most Wall Street big money speculators anticipate), it will likely only be no more than a $10 billion reduction to the current $85 billion program.
Have a good weekend, everyone. Rest-up. Get ready for September. It’s going to rock and roll. – Eric Dubin
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