22 August 2011, 3:45 p.m.
By Debbie Carlson
Of Kitco News
http://www.kitco.com/
(Kitco News) -The Federal Reserve will hold its annual symposium in Jackson Hole, Wyo., at the end of this week and all eyes will be on Federal Reserve Chairman Ben Bernanke when he addresses the group on Friday.
It was at last year’s meeting that Bernanke hinted the Fed would start another round of asset purchases to stimulate the economy. In November the Fed said it would buy $600 billion in bonds in a program that ended in June, dubbed a second quantitative easing.
Now with concerns that economic growth is slowing in the U.S. market watchers are
debating whether or not the Fed will try another method to stimulate the economy. This comes on the heels of a downgrade of the U.S. debt outlook by Standard & Poor’s which caused an already weak stock market to accelerate losses and sent gold to record levels.
“It’s definitely caught everyone’s attention. The feeling is that they (policy makers) know they have to do something,” said Mike Daly, gold and silver specialist at PFGBest.
According to a Bloomberg News story, the bond market is already pricing in that the Fed will announce new bond purchases of $500 billion to $600 billion.
A new stimulus program would give gold prices more room to rise, Daly said. “Printing money is always supportive for gold,” he said.
The markets will turn to Bernanke for guidance, said Ross Norman, chief executive officer at London-based gold dealer Sharps Pixley.
“In Jackson Hole, the market seems to be reaching for some sort of long-term plan, something that will alleviate the situation, but stir growth. Right now there have just been palliatives, such banning short-selling in Europe, the CME raising margins on gold,” he said.
What’s needed are jobs. “Not just any jobs, but economically useful jobs that will help North America get back on its feet,” Norman said.
Market participants wonder what the Fed could do to stimulate the economy further since they seem to have run out of options. Interest rates are already at rock-bottom and on Aug. 9 at the latest Federal Open Market Committee meeting, the Fed said it would leave interest rates low until mid-2013. Further, two rounds of stimulus have not had the desired effect of stabilizing the economy and producing jobs.
Shawn Hackett, president, Hackett Financial Advisors, said there are still some avenues left open. The Fed hinted that there are other instruments in their “tool box” to use, although they have stayed quiet on those devices.
Hackett said one of those methods would be for the Fed to do a reverse repurchase agreement, often called a “reverse repo.” A reverse repo is a purchase of securities with an agreement to resell them at a higher price at a specific time in the future.
The idea behind the reverse repo would be to get banks to lend, something the two quantitative easing programs did not do, he said. Banks have $1.8 trillion deposited with the Federal Reserve in its non-borrowed reserves. Non-borrowed reserves can be leveraged 10:1 which would allow the extension of bank credit by up to $18 trillion without printing any more money, Hackett said.
“(This) would launch an even greater asset inflationary boom to hard assets than we have already seen and provide huge opportunities to reenter the long side of commodity markets and commodity related equities. It would appear that the parabolic moves in precious metals this year as well as the huge out performance of overall commodities in relation to stocks is already suggesting that the big money may already be preparing for this massive reverse repo bank credit expansion policy,” Hackett said.
Some market watchers said it’s possible that Bernanke might only reiterate what was said recently.
Carlos Sanchez, associate director of research with CPM Group, noted that the Fed’s decision Aug. 9 to put a timestamp on how long they will hold rates at near-zero was a change from previous comments. “That in itself was a very strong signal. I don’t know if the Fed will be so quick to act with another policy tool to help stimulate economic activity – it takes time to trickle through the larger economy,” he said.
CPM Group’s Sanchez and Brown Brothers Harriman analysts both said the U.S. economy is in a different spot than it was last year. In 2010, deflation was a significant concern and that is not as much of an issue now, especially after last week’s consumer price index showed a rise to 0.5% in July.
Sanchez said that unemployment last year was rising and now it is stable. “While the economy isn’t great, is hasn’t worsened,” he said.
BBH analysts said even if there is no stimulus planned, that doesn’t mean the current risk-off trading atmosphere is over.
“All told, with the Fed unlikely to announce a dramatic policy shift this week we suspect that market sentiment is likely to remain negative and thus expect safe havens to remain in demand,” they said.
Gold has been a favorite safe haven for nervous investors.
Sanchez said some precious metals traders could wait to see how this week plays out before coming back into the market. Gold’s recent move to near $1,900 an ounce is more technical-chart driven than based on fundamentals.
That could leave it vulnerable to a break – PFGBest’s Daly called buying gold up here “scary.”
If gold can rally above $1,900 it could quickly move to $2,000, Sanchez said, but a move under $1,860 could led to a break of$50 to $100.
Norman, of Sharps Pixley, agreed that gold is overpriced at current levels based on fundamental factors. He said a break could come - and the Jackson Hole symposium might be the peg, depending on what is said.
If gold breaks, he said a move of $50-$60 is feasible, but he didn’t think it would fall much further because of strong demand.
“It’s clearly underpinned – there’s buying at each dip. We don’t know who, some of it comes out of Asia, it might be central banks, but we don’t know. Look at how gold behaves during adverse conditions,” he said, adding that the quick rebounds are the sign of a strong market.
By Debbie Carlson of Kitco News dcarlson@kitco.com
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