As The Worm Turns

The casual observer might think that the people running Washington would be better suited to be actors in a soap opera. The worms keep turning the same ground over and over. While most analysts believe there might be a brief shutdown of non-essential services, they also believe that some systemic accommodation will be reached at the proverbial 11th hour.
 
The reason why the right wing now is fighting so hard to "defund" the Affordable Healthcare Act is that next week consumers will be able to enter the health insurance market and "shop around" for good rates. Once that goes on for a few weeks, those shoppers will be entrenched in their new choices, most of which will cost less, and the devil himself will not move them out of their new situation.
 
So, while we expect that the machinations leading up to October 1st, (the date of the so-called shut-down), will affect gold prices, the effect will be short lived and time and energy will be focused on tapering.
 
Chicago Fed President Charles Evans gave a few mixed signals while speaking in Oslo today, although the crux of his message is in line with the official FOMC strategy of trying to lower unemployment and keeping inflation quashed. Provocatively, he mentioned a possible target of 3% inflation. Many months ago we said that in order for the economy to grow there had to be at least3% inflation. 
 
That's not an arbitrary figure. What 3% inflation means is that the unemployment rate will have fallen to 5% and wages will have risen. It is clear as day until we get more consumer spending, the economy will blossom one month and wither the next. Consumer spending accounts for 70% of the American economy.
 
Evans's address was read as bullish for gold and silver. Another, non-voting member of the Fed seemed even more dovish than Evans. 
 
Minneapolis Fed chief Narayana Kocherlakota said the Fed should do "whatever it takes" to achieve its goal of maximum sustainable employment.
 
"If that [kind of] announcement is credible, [it] has enormous power in and of itself," said Kocherlakota.

This is germane to precious traders because more tapering - or at least the communication of the notion that the Fed cares and is ready to act - will support prices, especially those of gold.

We haven't had much in the way of physical gold-buying news recently because of the logjam in India and a dearth of festivals in that country, China and southeast Asia. The Wall Street Journaltoday reported this, however:

"India's gold imports are expected to pick up in October after a three-month slump as festival-season sales kick in, and because of a government push to clear shipments that were stuck because of confusion over new import rules.

"Volumes have already started rising with government officials clearing this week imports which were stuck since August."

India is heading into festival season now and there is a lot of pent up demand because of a host of restrictions and a tariff.

Physical buying should also come back into play in China, which had a disappointing Autumn Festival gold-buying run. China is closed part of next week for its Golden Week holiday. "Views vary on what this will mean," says Kitco. "Those who see weaker prices said the absence of Chinese buyers will mean a slump in physical demand and thus lower prices, noting that during the week-long February holiday, gold prices fell."

However, Bernard Sin, global head of precious metals trading at trading house MKS (Switzerland) SA said he believes physical demand will stay firm enough even without Chinese buyers. 

Ironically, the failure of the U.S. Congress to reach a compromise over budgeting and debt is one of the key things that is driving the Fed to keep bond buying and low, low interest rates in place. As we've said before, having no fiscal policy allows monetary policy to steer the boat.

As bulls we want more QE3 and when the time comes, we also want a coherent, symmetrical tapering that is communicated clearly.

Wishing you as always good trading,