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t would appear that, despite all the market jawboning to the contrary, the US Federal Reserve remains convinced that its quantitative easing program should continue at the present rate of $85bn each month until such time as unemployment returns to what it considers to be full employment levels namely 6.5%. In recent months, there has been much in the way of chatter around the prospect of the US central bank could begin tapering off its program as early as this summer in light of more encouraging economic data from the worlds largest economy but, with signs that the recovery in the employment space may not be as robust as originally thought, yesterdays Fed statement suggested that it considered that timeframe to be somewhat premature. The Federal Open Market Committee (FOMC) issued a statement on Wednesday reaffirming its intention to forge ahead with ultraeasy money policies because, at least in part, the rate of inflation is running somewhat below its target of 2%. As far as most of us are concerned, inflation is generally considered a bad thing so one might reasonably ask, Why does the Fed want it? Now while there are those who believe that a little inflation is actually benign, its fair to say that the official rate and that which prevails in the real world are and have always been very much at odds with each other. The official figures point to inflation at below 2% but families struggling to make ends meet when paying for lifes essentials like food, energy and fuel will attest to a rate closer to 10%. Russell Kovic at Belfrey International explains, The Fed wants inflation to rise because it believes that a little bit of inflation is good for growth as opposed to deflation when prices fall and both businesses and consumers may put off the purchases that, in a consumer-driven economy like Americas, serves to create jobs. Of course, there is much consternation among investors as to how, exactly, the Fed would exit its policies without causing an adverse reaction in the bond markets. With the Fed as the biggest buyer of mortgage-backed securities and government bonds, prices are at a level most consider too high. Yields are approaching all-time lows set last year but if the central bank reins in its asset purchasing program, prices would fall and yields rise eventually making it very expensive for the US government to borrow the money it needs. Mr. Kovic says, The answer is that there is no easy way for the Fed to extricate itself from the bond market without causing a highly damaging stampede that could potentially crush the US dollar.
ith US stock market indices continuing to hover around all-time record highs and with the wary sentiment from Marchs non-farm payrolls data still hanging around like a bad cold, should investors be giving serious consideration to implementing the time-honored investment strategy of selling in May, going away and returning on St. Legers Day? Without doubt, equities have enjoyed a scintillating year so far with both the Dow Jones Industrial Average and the S&P500 setting alltime highs on the back of promises of an uninterrupted supply of cheap and easy money from the Federal Reserve in the form of ultra-low interest rates and quantitative easing but Marchs payrolls number served as a sobering reminder that the US economy is far from fixed. Just 88,000 jobs were created by the worlds largest economy in that month despite a marked pickup in the countrys recovering housing market. Belfrey International is quick to point out that, over the last three years, the Sell in May strategy has proven to be particularly profitable. Selling in May has trounced the buy and hold strategy in each of the last three years and, against a backdrop of less-thanstellar macro-economic data, its clear that there are clouds on the horizon, said Russell Kovic, head of research at the firm. Were advising our clients to take some risk off the table and take some profits going into May. The firm believes that a poor April non-farm payrolls number, one of the most keenly watched economic indicators, could be the spark that sets off a correction in US equities. Markets have been dining out on quantitative easing since the current rally began late last year but, with market participants seemingly convinced that the Fed will begin tapering off its controversial asset purchase program as soon as late summer, there is reason to suspect that the QE meal ticket may be pulled just as the waiter presents the bill.
With many commentators barely able to conceal their glee at the setback for the so-called barbarous relic, it is hardly surprising that sentiment towards gold is at its lowest ebb for years. Not since the swoon in prices in the aftermath of the collapse of Lehman Brothers Holdings in 2008 when gold fell from $1031.00 to a smidgen below $700.00 an ounce has bearish sentiment been as intense as it is right now. Then, as now, there was unprecedented coverage in the media in which many predicted that gold prices would sink towards $500.00 an ounce as faith increased over the ability of central banks and governments to financially engineer their way out of the monumental predicament the global financial system had found itself in due, in no small part, to the actions of reckless banks and the inaction of regulators. In the fullness of time, those putting faith in central banks were proven wrong. Fast-forward to 2013 and gold has rallied somewhat from its lows and now stands some $150 per ounce higher than it did on 16th April. Nevertheless, sentiment towards the metal remains cooler than at any time since 2008. Russell Kovic, chief researcher at Belfrey International says, In the days following the rout, we received many inquiries from clients concerned about the current and future value of their precious metal holdings. Our view then and now is that when sentiment is as overtly bearish towards an asset as it is toward gold right now, it is those who elect to go against the herd mentality that are eventually proven right. The fundamentals for owning gold remain decidedly intact. The worlds central banks are still printing money, global economic growth is still anemic enough that deflation remains a very clear and present danger and the purchasing power of fiat or paper-based currencies is still being eroded. Right now, equities are very much the favored antidote to that but with growth experiencing something of a swoon in the US, Europe and China, there is every reason to believe that the easy-money policies will continue despite increasing speculation that quantitative easing will be reined in. Mr. Kovics word ring true. One only has to look at the bearish sentiment towards equities following the stock market rout postLehman. Expectations were for equities to track lower as investors speculated that central bank intervention would fail to stem the deleveraging caused by subprime contamination but anyone investing in, say, the Dow Jones Industrial Average or the S&P500 in those dark days and weeks would be sitting on very impressive gains today. Of course, asset prices equities or commodities remain volatile thanks to the distortions resulting from central bank policies but, for gold, it is these very policies that will serve to support and keep prices buoyant in the months and years ahead.