Dissent And Debate

March 21, 2014 - 4:21pm

 by Gary Wagner

Sometimes the clearest thinking comes from dissenters. In the case of the Fed and the results and blowback from the latest FOMC meeting, that certainly seems the case. It may be only a matter of wording, but there seemed to be a slight policy shift.

The Fed's future policy statements will no longer cite a specific unemployment rate that might lead to its eventually raising short-term interest rates. The Fed instead says it will monitor a "range" of information before approving any rate increase.

Narayana Kocherlakota, president of the Minneapolis Fed, said the shift, which the Fed approved 8-1, will hurt the American economy.

"The new guidance fosters policy uncertainty and thereby suppresses economic activity," Kocherlakota said in a statement explaining his dissent.

Kocherlakota said that lowering the threshold for considering a rate hike from 6.5 percent unemployment to 5.5% would have enhanced the Fed's commitment to low rates until inflation nears its 2% target. Inflation is now running around 1% percent, and the unemployment rate is 6.7%.

Kocherlakota said a better approach would have been a statement saying the Fed intends to keep rates at record lows until unemployment has fallen below 5.5% - as long as expected inflation was below 2.25 percent and any "possible risks to financial stability remain well-contained."

Gold bulls know that faster growth and the threat of inflation are key ingredients for a rise in prices.

But, Kocherlakota may have something in mind deeper than a scarcely even tangential concern for gold bulls.

How can an economic/social entity as large and rich as the United States settle for anything except full employment? Even a 5.5% unemployment rate doesn't bring us to full employment. that begins when we dip under 4%, which should be the ultimate goal of policy. 

Can it be done without damaging inflation? It certainly has happened before. And why pick any number for inflation? The2% level seems a bit of magical thinking to us.

Weekend psychology is an impressive thing. It seems that equities traders became a little weak-kneed heading into Friday afternoon and stopped yesterday's rally in its tracks, although there were only a few drops of blood shed.

Gold enthusiasts behaved exactly in the opposite fashion, bidding up the yellow metal $9.00 to $9.50 at 3:30 PM in New York. So, you have to read some confidence in gold at that development.

Silver is growing more problematic fundamentally.

It fell 5.2% this week, the worst showing since 2013, the four-day slump being its longest since September. What is more troubling is that the industrial metal complex is at its lowest in nine months, as well.

This is the smell of smoke in the house of China burning. Either manufacturing is going to get further slammed, or they have overbought their supply and are now drawing down on metals in house. Or it could be some combination of those two tales. either way, the industrial metals are hurting and silver along with them.

As always, wishing you good trading,

Gary S. Wagner - Executive Producer

Sentiment Indicator:

Gold Forecast: Proper Action

We pulled profits on our gold trade earlier this week. Yesterday we issued an Aggressive buy signal in both gold and silver. This trade has high risks in that we are trying to get into the trade a little early. Stops therefore need to be tight to maintain low risk exposure.

Maintain long gold @ 1333 stop just below 1320

Maintain long silver @ 20.35 Stop Just below 19.75 

Gold Market Forecast

Although we have seen dramatically lower pricing in gold and silver throughout the week, yesterday we received our first technical clues that the bearish faction might be running out of steam. Considering that gold was trading at an intraday high of 1390 at the beginning of this week, we have in fact seen a strong round of profit taking occur. As I said in yesterday’s market forecast, it is been my opinion that it wasn’t so much if a round of profit taking would occur, but when and at what price point would occur. Since beginning of 2014 we have witnessed gold prices move roughly $200 higher. With that in mind this $60 retracement this week was not only expected, but I believe healthy.

However we are still getting mixed signals as to the status of this current retracement. Of course the long-term charts are still showing a bearish tendency, but the short-term studies are showing a potential pivot point or bottom in this market. Today’s show will detail three components. First we will look at our trade which we concluded midweek. Secondly we will look at our most recent signal that was issued yesterday along with the technical studies that prompted the call. Lastly we will look at our forecast for next week.