Taper talk boosts gold. Is this a fundamental change in direction?

Does the recent upwards movement in the gold price on the suggestion that Fed tapering may be imminent constitute a major shift in gold market sentiment?

There seems to have been the suggestion of something of a turnaround in sentiment on gold, ironically as virtually every bank analyst and his dog has been predicting a continuing downturn in the gold price – which, I suppose is the time to buy on true contrarian thinking. Now whether the latest move upwards – not a big one so far by any stretch of the imagination – is sustainable, remains to be seen, but the factors surrounding the upturn are, to say the least, interesting.

One does not exactly need a long memory to recall that every indication that the U.S. Fed may actually implement any kind of taper since the proposal was first put forward by Ben Bernanke has been met with a sharp downturn in the gold price – until perhaps a couple of weeks ago when the opposite seems to have happened. For the person in the street – and the investment herd which should know better but never does – the recent seeming improvement in U.S. employment statistics has been taken as suggesting the Fed may implement some form of taper sooner rather than later. Never mind how distorted these figures may have been by the government statistical shutdown in October, nor how downwardly massaged they have been by changes in assessment criteria in recent years. Other (massaged) official statistical data have also purported to suggest the U.S. economy is improving to the extent that a tapering of the Fed bond buying program, even a small one, could actually happen. Yet news supporting such a scenario over the past couple of weeks has seen the gold price rise, rather than fall. What does this mean?

We have said all along that the U.S. stock market is as vulnerable to tapering as is the gold price – indeed probably more so. Some highly respected commentators, like the Tocqueville Gold Fund’s John Hathaway, speaking recently in London, emphasise the point. Hathaway, who basically doesn’t believe tapering will happen – ever – because the banks and financial markets are so hooked on the easy money provided, suggests that if the Fed, contrary to his basic viewpoint, does implement a very limited taper to test the waters (which in our view is a possibility) it will be ‘horrified’ at the results. The major U.S. stock market indices have been driven onwards and upwards over the past few years by the Fed’s Quantitative Easing programs effectively pouring more and more money into these financial markets – although this money has not appeared to have drifted down to the general populace – and any indication that this monetary easing may be coming even to a limited end could be devastating  – so the theory goes.

See also: Paper implosion bullish for gold, says Tocqueville’s John Hathaway

As an aside we believe that the Fed’s Quantitative easing program is one of the biggest con tricks ever played on a perhaps naive American general public. The rising stock markets give the impression that all is well with the U.S. economy, when in fact it is drifting along at the bottom rather than improving in any real form. All QE has done is make the rich (the bankers and those who invest in the stock markets) richer while the vast majority of the population, which does not have the money to invest, remains mired in high unemployment (far worse than official figures suggest), frozen or even reduced incomes and inflation again running at a far higher level than official figures make out. Personal debt levels remain horrendous, but if the impression can be given by the authorities that things are getting better it will encourage people to go out and purchase goods they cannot afford (and thereby further increase personal debt) and hopefully help stimulate the economy, so far without any real success.

But back to gold. What has happened over the past week or so is indeed that taper talk has, instead of knocking the gold price, been supportive for it and it is the Dow and S&P which have suffered, although only marginally so far, coming down just a little from their highs. Not enough yet to define a trend and if no taper decision is taken at the Fed FOMC meeting, next week, will probably move to new highs. But one suspects that just perhaps the seeds of doubt are indeed beginning to appear in the investment fraternity’s minds.

Brien Lundin – admittedly a member of the strongly pro-gold fraternity which is perhaps colouring his viewpoint, puts gold’s better recent performance down to short covering. He notes in his latest Alert to subscribers to his Gold Newsletter “Thus, gold’s failure to go lower last week as economic data and taper talk moved against it…and in fact it’s ability to actually rise in the face of these headwinds…have apparently convinced many speculators that a QE taper really is imminent. And thus, it’s time for them to cover their short bets on gold. In short (no pun intended), it seems that the gold price has finally discounted a taper, and we’ve run out of sellers. If so, we are witnessing a major shift in the gold market.”

Couple all this with the continuing flow of physical gold eastwards, thus diminishing the availability of bullion and potentially leading to premiums developing for physical delivery, we could effectively be entering a two-tier market for physical gold as we are already seeing in India, Singapore and China where sometimes large premiums are the norm. Whether all this will translate into gold price rises on COMEX in the U.S., which is effectively controlling the gold market at the moment, remains to be seen, but it is almost certain to do so at some stage as Western supplies diminish and Eastern holdings continue to rise.

But although gold did rise on the latest Fed data, and the suggestion that a taper decision might be made as early as next week, which is certainly a change in track for gold compared with previous such suggestions on tapering, the metal effectively still remains in a downtrend – and some of yesterday’s gains are already coming back down in the markets today. The gold price will need a return to higher levels, and sustain these, if it is to shake off the bears, and the bank analysts predicting lower prices still may yet be proved right. But if our reading of overall trends in the market is correct, gold will again have its place in the sun, but timing remains uncertain. If the Fed does announce a limited taper next week (which we feel is probably unlikely, but we could be wrong) then the impact on the gold price and the S&P and Dow will be interesting to see and could give a good guide as to where gold and the general stock markets are headed next.

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