Gold Takes Two-Fisted Knockout Punch

Gold experienced a two-fisted knockout punch yesterday thanks to the comments from Richmond Fed President Jeffery Lacker (as I discussed in yesterday’s Flash Gage) and the news that the ECB will be tapering QE.

Mr. Lacker opined that economic history suggests the interest rate should be about 1.5 percentage points higher than its current level given the current rates of joblessness and inflation. He also said preemptive increases in the federal funds rate are likely to play a critical role in maintaining the stability of inflation.

I find it interesting that Mr. Lacker’s comments had such an effect on the price of gold yesterday, as Mr. Lacker is NOT a voting member. My take is that his comments are just a tactic to try and influence some members who are against a rate hike as the data at this point does not justify his stance for a rate increase.

Yesterday’s Bloomberg report indicated that an informal consensus was building in the European Central Bank that quantitative easing will need to be tapered once a decision is taken to end the program. Those comments from the ECB, like some of the comments from some FED Presidents, only muddy the water and create uncertainties. And we all know the markets hate uncertainties. Japan of late is also wanting to taper back their stimulus as the hard push for a rate hike gains strength here on our shores.

A report released today indicated that China will continue to lead the world in production and consumption in gold. China produced 516 tons of gold last year, up 0.6 percent more than any other country. Increasing demand for gold jewelry and bars consumed 986 tons in China, up 3.7 percent which is also the highest in the world. Remember my comment from Monday explaining that the Chinese yuan had just become recognized by the IMF as the newest member of the SDR basket? This new report is the next step for China to reduce the dominance of the west in the global financial system. more gold in reserve translates to a stronger currency.

What does the U.S. have to back up the dollar? Just its good will and its failing government policies. Unless we fix the problems here with the uncontrollable debt, entitlements and healthcare, China will pass us up as if we are standing still. “Standing still,” sounds like
the only thing our lawmakers can take credit for.