On Wednesday 13th, 2012, the US Fed announced additional monetary stimulus in an attempt to make the economy grow. We wrote about the Fed’s commitment to buy 85 billion US dollar per month in a bond buying program and keep the interest rates near zero till 2015. For the first time, to our knowledge, the Fed has committed publicly to work towards a target: the quantitative easing program will continue until the unemployment figure in the US drops from today’s 7.7% till the intended 6.5%.
Logically, the news would be in favor of gold and silver. The initial reaction of the gold price was indeed a positive one, and the silver price rose sharper, which was in line with the expectations of the market. In the overnight Asian trading, however, an unexpected and rather sharp drop occurred in both gold and silver.
As we could not explain this price action, we asked the question to Ronald Stoeferle, one of the specialists. He is the editor of the well-known and respected “In Gold We Trust” reports and was our guest recently when he provided an update on the negative real interest rates. What follows is the view of Ronald Stoeferle specifically on the counterintuitive price action on Wednesday December 12th, 2012.
The price drop happened in a light trading session. We saw several times recently, for instance in October and early November. It is a tactic with a simple recipe: place a massive sell order during light trading and trigger easily stop loss limits. Market participants get discouraged and nervous. That is exactly what happened this week. On top of that, we experienced a “buy the news, sell the rumor” effect.
Once again we see the thin line between manipulation and intervention as explained in the “In Gold We Trust” reports. We all know that price controls are taking place in several markets by government interventions. It is obvious and “official” in bond rates, currency markets, food prices. It would be naive to think that gold would not be “manipulated”.
The key point is that gold is likely subject to interventions, but according to the Dow Theory the primary trend cannot be manipulated, even not in the light of intra-day or intra-week interventions.
There was indeed some “disappointment” in 2012, but Ronald Stoeferle considers it a reliable contrary indicator (just like Goldman’s call a week ago).
When focusing on the bigger picture we see the following:
- The COT reports are improving.
- 2012 is closing with a 7% gold price increase.
- The Fed confirmed negative real rates for the coming 3 years.
So the key question to ask oneself is what the purchasing power of one ounce of gold will be in 3 years, given the type of environment that the Fed has created.
Ronald Stoeferle commented additionally on the quantitative easing announcement:
- It is the first time that the Fed is linking its stimulus program to a specific unemployment rate target. It reveals desperateness. One of the themes in the “In Gold We Trust” reports was the observation that of a diminishing marginal effect of additional monetary stimulus. Moreover, it is particularly dangerous: if the Fed will not reach the intended objective, it will become blatant that their policy is not working.
- The Fed confirmed low interest rates for the coming 3 years. Starting in 2008, it means we are going through a period of (minimum) 7 years of low interest rates. The Fed is setting the stage for the next big bubble, in which oil and precious metals will be the winners.
- The unemployment statistics will probably continue to being rigged (after all, there are many ways to make up creative statistics). We all know in the meantime that the current figures doe not take into account the population that is unemployed for a while. Still, the target of 6.5% seems extremely ambitious so say the least.
Only a week ago, we saw the proof for Ronald Stoeferle’s point about the unemployment statistics. Right before the presidential election, the October unemployment figures suddenly reversed and showed a positive picture. A month later, a rather dramatic revision was announced by the Labor Department. The NY Times (amongst many others) reported the following: “Although job growth in November exceeded expectations, the Labor Department revised downward its figures for the preceding months. For September, the Labor Department said the economy created 132,000 jobs, down from an earlier estimate of 148,000, and the figure for October was lowered to 138,000 from 171,000.” Indeed, the revision of the October statistics was about a 20% difference.
This article is based on a Q&A with Ronald Stoeferle. He is born October 27, 1980 in Vienna, Austria, is a Chartered Market Technician (CMT) and a Certified Financial Technician (CFTe). During his studies in business administration and finance at the Vienna University of Economics and the University of Illinois at Urbana-Champaign, he worked for Raiffeisen Zentralbank (RZB) in the field of Fixed Income/Credit Investments. After graduating from University, Stoeferle joined Vienna based Erste Group Bank, covering International Equities, especially Asia. In 2006, he began writing reports on gold and gained media attention when he expected the price of gold to rise to USD 2,300/ounce when the current price was only at USD 500. His six benchmark reports called “In GOLD we TRUST” drew international coverage on CNBC, Bloomberg, the Wall Street Journal, Economist and the Financial Times. He was awarded “2nd most accurate gold analyst” by Bloomberg in 2011. He also writes reports on crude oil. The latest oil report by Stoeferle, entitled “Nothing to Spare” was published earlier this year. Stoeferle is managing two gold mining funds and one fund with silver mining equities. As of December 2012, Stoeferle will become a partner of Liechtenstein based Incrementum AG.