New Week, New Direction for Gold

Gold is up today, winning a few dollars from both dollar weakness and regular trading. It may not be time to break out the champagne, fundamentally speaking, but the week is off to a good start for gold bulls. At 4PM, spot gold is up around $4.00.

It may be better than we think, as well. Equities are a little shaky to start the week for a variety of reasons. They may very well maintain that stance as we move into the middle of the week.

Crude oil, despite an alleged firmness among OPEC and affiliated producers, dropped about 1.00%. First, there are too many long positions in crude and traders are seeking to re-balance as we get nearer to the next contract date in November. Second, once again, American producers added four more rigs to the already-rising count. Finally, Iran said that it’s not changing anything until it gets its market share back and then some (to allow for some sense of growth after years of sanctions by the West).

The dip in crude put pressure on stocks, which are down about a third of a percent across the three major indexes.

Also putting pressure on stocks were somewhat cryptic and contradictory comments by Stanley Fischer, the Fed’s vice chair.

On one hand Fischer said that long-term low rates could create a deeper recession the next time one hits. On the other hand, he said low rates are no threat to the economy at the moment. Thanks for clearing that up.

But he made another set of comments that we find intriguing. “I am sure that the reaction of many of you may be, ‘Well, if you and your Fed colleagues dislike low interest rates, why not just go ahead and raise them? You are the Federal Reserve, after all.’ One of my goals today is to convince you that it is not that simple, and that changes in factors over which the Federal Reserve has little influence — such as technological innovation and demographics — are important factors contributing to both short- and long-term interest rates being so low at present,” Fischer said.

Many observers have spoken about the demographic factors at large in the U.S. There is a huge cadre of people retiring as we speak now. Ten thousand Baby Boomers per day are eligible to retire. That does a number of things to the economy, but primarily it means that people of a certain age will hold tighter to their money and spend less of it on durables like cars and washing machine. It will go into savings.

Of course, those same people will be spending more on health care, travel and eventually burial expenses. In the next twenty years, an enormous amount of wealth will be transferred from Boomers to their offspring.

Meanwhile, savings accounts (or stock accounts or bond portfolios) will be growing at the expense of discretionary spending.

But wait just one darned minute, Fischer said in the way of a hint, we believe. He said there are two ways the U.S. economy could kick into a higher gear.

The first is a more expansionary fiscal policy, such as a massive infrastructure program passed by Congress. (Not likely, given the panic over the overall size of the debt.)

The second is more organic. John Maynard Keynes called a certain movement “animal spirits.” Fischer used that expression today. In Keynes’ "The General Theory of Employment, Interest and Money," the term "animal spirits" is used to describe human emotion that drives consumer confidence. According to Keynes, animal spirits also generate human trust.

That means, once a contractor starts spending money at my local bistro, bistro owner has an “aha moment” and asks contractor to build his new patio, which he’s been putting off. Child of contractor is about to get married and now she or he can have a bigger wedding. Wedding caterer feels better, etc.… The hip bone’s connected to the thigh bone.

It’s about feelings. Man may be an economic animal, but we are, when all is said and done, animals and we have emotions.

Wishing you as always, good trading,