By Barani Krishnan
Investing.com – What the world knows and what it fears are two different things. The long-only crowd in gold probably knows this better than most others.
Gold bulls suffered their worst week since the 2020 Covid outbreak as prices fell almost 6% this week on the Federal Reserve’s expedited timetable for rate hikes and stimulus tapering.
The Fed’s maneuvers had been somewhat expected – yet generated fear beyond necessary and a mauling in gold that played to the advantage of bears in the yellow metal.
Going by some media reports, the U.S. central bank is embarking on an overly hawkish rate hike and stimulus tapering proposal that could lift off as soon as possible, after a year of super-easy pandemic-friendly monetary policy.
There are two things that make this assertion wrong.
One: The Fed is NOT raising rates tomorrow. Its so-called dot-plot plan suggests the earliest increase – albeit two hikes – will come before the end of 2023, which if my math is correct, is 2-½ years, or 30 months, away.
Two: The central bank is still seeking data that will point to the appropriate time for it to start scaling back the $120 billion in asset purchases it has been carrying out for the past year to shield the credit markets and the economy from the worst impact of the Covid-19.
In fact, Fed Chair Jerome Powell went to great pains during his news conference to emphasize that asset tapering – a term so overused in headlines now that its mere print or mention is enough to send shivers down traders’ spines – will NOT occur until the Fed sees adequate signals to justify such action. Powell also assured that the Fed will telegraph its taper intentions well in advance to avoid an inordinate market response.
“Our intention for this process is that it will be orderly, methodical and transparent,” Powell said.
I’m wondering which part of the Fed chief’s language that short sellers in gold didn’t get.
To me, what’s most amusing is the inanity of gold bears and Wall Street analysts (read: airheads) who find one ridiculous narrative after another each day to justify the continued selling and cheapening of a commodity that’s supposed to be the world’s number one hedge against inflation – in what is interestingly described now as one of history’s most supercharged moments for inflation.
If not for the pain of their loss, it might actually be comical from the perspective of gold longs to chase the market from $1,900s highs at the start of the year to mid-$1,800s and sub-$1,700s at one point, before seeing it bounce back to the $1,900s and collapsing again this week to $1,700s.
Technical charts now indicate a return to mid-$1,800s. To those who’ve followed gold’s wacky ways over the past 10 months, I’ll say you know the drill: Rinse, repeat.
What made this week’s plunge in gold more absurd was that it came on the back of the first hike in US unemployment claims after seven straight weeks of declines that once raised questions about the consistency of the labor market recovery from the pandemic.
If gold is indeed a protection against financial and political troubles, then an inconsistent job market certainly ticks one of the boxes for investors to get into the yellow metal. Instead, what we witnessed was a near $87, or 5%, plunge on the day that brought to more than $100 altogether gold’s losses for the week.
Listening to the talking heads of CNBC and other financial show hosts and their guests right after the Fed meeting on Wednesday, one might have gone away with very a different idea than the central bank intended as both the rate hike and taper were made to appear imminent, as though they were just a quarter away from happening.
Ostensibly, almost every guest on these shows has a position in the markets and they are there to talk their book; unlike independent analysts (me included) who do not trade for the sole reason of wanting to stay objective and unbiased with my market views. To be sure, I’m not a fan of gold, but a fan of reason and objectivity.
To me, Powell’s words were clear and to deliberately act against the message of the Fed can be deemed as both irresponsible but stupid; if not for the fact that shorting gold itself in an environment of manufactured hype and fear can be very profitable for the bears and their clients.
I’ll grant some concession though to St. Louis Fed President James Bullard’s observation on Friday that the…