The Price Is Right

The Price Is Right

We said a number of weeks ago that, counterintuitive as it might seem, tapering of QE3 would benefit gold. That does not mean all that goodness will come without detours and potholes. But in the long run, returning the economy to "normal" - even the new normal - will help analysts and traders get a grip on market mechanism acting as they should be.

As the Fed trimmed another $10 billion in monthly bond and other paper purchasing, the equities markets, already on some shaky ground, saw their rally falter. Emerging markets have been taking a shellacking recently, too, and today was no exception.

Even with the cuts to the stimulus just in January and February, the Fed will have bought 140 billion dollars-worth of dubious paper. Nothing to sneeze at.

The real message that gold traders have to take away from this second cut in QE3 is that the Fed believes conditions are improving steadily. This doesn't mean we should break out the accordions and sing "Happy Days Are Here Again." It does mean that in an improving economy eventually more workers will be employed and earn higher wages.

As we have discussed in earlier newsletters and articles, wage stagnation has hurt the economy more than we can imagine. There are many who argue that raising the minimum wage hurts exports, but those individuals need to clean their lenses. The U.S. has almost no low-value manufactured goods for export. Low-wage workers work in menial jobs. They serve us food, they clean things, they work in nursing homes, and they work on farms and ranches. 

They don't make high-tech machine tools, automobiles or aircraft. They don't make high tech instruments. Most manufacturing jobs in the U.S., Europe, Japan and Korea call for a lot of skill, a fair amount of education or vo-tech instruction. Those jobs require computer skills, proficiency in graphical imaging tools, a deep understanding of materials technology. If people working in industry now are not engineers, they are getting closer and closer to needing a technical degree. 

Why is this key to precious metals traders, (gold especially)? Gold bulls want more inflation, plain and simple. Growth is important because it makes gold an attractive asset, whether you call it a haven or not. 

Gold and silver are up more than 1% in New York afternoon trading. Equities lost a similar percentage. Interestingly enough, the yield on 10-year Treasury bills is down. Maybe analysts are starting to take the Fed seriously. The Fed still doesn't plan on raising rates anytime soon. 

And you know low rates are inflation friendly lead to more growth.