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Value buyers continue to accumulate silver bullion. Jim Rogers, one of the most prescient investors of recent times and who arguably has a better track record than Soros in recent years, remains bullish on gold and particularly silver.
Silver Ready to Breakout - Technicals and Fundamentals Suggest $50/oz in Early Autumn
One final note on terminology: for simplicity, we have decided to label as "QE" any program of large-scale asset purchases that removes a significant amount of duration from the market, regardless of whether it is financed by creation of excess reserves or sales of short-duration securities
A: Yes, we think so. At this point, we believe that the majority of the FOMC expects real GDP growth of around 2.5% in the second half of 2011, and perhaps 3% in 2012
Chairman Bernanke noted three ways of providing additional stimulus: (1) more explicit guidance about future policy, (2) changes in the size or composition of the Fed balance sheet, and (3) a cut in the interest rate on excess reserves (IOER) from its current 25 basis points (bp).
By stating their expectation that the funds rate will stay exceptionally low until at least mid-2013, Fed officials have already gone as far as they are likely to go with respect to (1). Moreover, while a cut in the IOER as per (3) is possible, it is unlikely to have a sizable effect given that the effective funds rate is only 8-9bp at present. This leaves (2) as the most straightforward option
to finance the asset purchases via sales of shorter-duration securities as opposed to the creation of excess bank reserve
A: Probably mostly longer-duration Treasuries. To be sure, the recent widening in agency MBS spreads has somewhat raised the probability that Fed officials might go back into that market, and a further widening could raise it further. It is also possible that MBS would be incorporated into a possible "twist" via sales of high-coupon securities (which have relatively short duration because of a higher probability of refinancing/prepayments) and purchases of low-coupon securities (which have relatively long duration)
As a result, our base case for September 20-21 is for the FOMC to state its intention to reinvest MBS paydowns at the longer-end of the Treasury yield curve, but only to signal the possibility of a larger program at a later date.
A: Yes, but the hurdles are very high, and a more radical approach is unlikely unless the economy and/or the financial markets perform substantially worse than we are forecasting. There are three main ways in which the Fed could be more radical: (1) an extension of the QE program into markets other than Treasuries and agency MBS, e.g., private sector securities, (2) a much bigger QE program, up to the extreme version of a promise to buy as many securities as needed to hit a specific yield target (i.e. a "rate cap" further out on the yield curve as then-Governor Bernanke suggested back in 2002), and (3) an explicit or implicit change in the Fed's policy targets.
Regarding (1), the general understanding of the Federal Reserve Act is that it does not allow purchases of assets which could result in an outright loss for the Fed. Therefore, a purchase of private sector assets such as nonconforming mortgages or corporate bonds (let alone equities or real estate) almost certainly requires funding from Congress, which is unlikely to materialize unless the level of distress in the economy or the markets rises sharply.
Regarding (2), while our base case is a QE program that removes a similar amount of duration as QE2, a bigger and bolder approach is certainly possible. The bigger the program, the more likely it is that it would ultimately need to involve a sizable expansion in the Fed's balance sheet because the scope for a "twist" reaches its natural limits. However, the limiting case of a "rate cap" would again require an extreme situation. Fed officials would undoubtedly worry about the tail risk that they might need to buy up the entire supply of securities in the targeted sector to make good on their promise.
Finally, regarding (3), we have again received some questions about the possibility that the FOMC might move to a nominal GDP target (see "The Fed Discusses Easing Options," US Daily, October 12, 2010, as well as this week's Economics Focus in The Economist). It's important to note that depending on the interpretation, the Fed's dual mandate (in which policy responds to both employment/real GDP and inflation) already has some similarities with a nominal GDP target (in which policy responds to the product of real GDP and the price level). The key differences are that (1) an announced nominal GDP target is much simpler and therefore more powerful than the hazier dual mandate, which is interpreted differently by different people; and more importantly, (2) the dual mandate is defined in terms of rate of change of prices, while a nominal GDP target depends on the level of prices. (There is not such a clear distinction with respect to the employment/real GDP component, which is typically understood to refer to levels in the dual mandate definition as well.) The implication is that a nominal GDP target, Fed officials attempt to "make up" for past undershooting of inflation via future overshooting. In other words, a move to a nominal GDP target is tantamount to a temporary increase in the inflation target. We believe that the skepticism expressed by Chairman Bernanke's in his 2010 Jackson Hole speech still applies, and do not expect a move to either a higher inflation target or a nominal GDP target.
he mooted German proposal to use periphery nations’ gold reserves as collateral was back on the agenda in Germany yesterday.
The United States M2 money supply accelerated 2.2% in July from the prior month, the fastest pace in 52 years, and grew 8.2% yoy, the highest reading in 23 months. The correlation between total U.S. M2 and gold has held above 0.90 since November 2004, as currency debasement creates safe haven buying for the precious metal. At the moment Asians seem more worried regarding inflation but this sort of money supply growth is likely to lead to inflation in the U.S and much of the western world.
Premiums for physical bullion in Asia remain high showing continuing strong demand.
Indian premiums were strong again yesterday as were those in Vietnam and Shanghai.
Reuters reports that Hong Kong dealers quoted premiums for gold bars as high as $1.50 an ounce to spot London prices, from $1.20 last week. Bullion markets were closed in Singapore, Indonesia and Malaysia for the Muslim Eid al-Fitr festival.
Physical dealers in Tokyo saw selling from local investors, but they also noted buying interest from China, where demand for jewelry increases during the mid-autumn festival in September.
Journalist John Brimelow, who publishes the JBGJ, reports in Lemetropolecafe.com that according to the Shanghai Gold Exchange website a “substantial proportion” of the trade there is for delivery. “This is not just a paper phenomenon.”
Brimelow said that “bearing in mind the huge gold importing by China in the latter part of last year, in JBGJ’s opinion this is currently the key issue in the gold market.”
The UBS daily note reports that “the mood among gold investors appears to be to buy the dip rather than chase the market, which is understandable given last week's volatility.”
UBS conclude that the “violent sell-off hasn't done any lasting damage to gold, and the reasons investors bought gold in recent months remain valid. Our one-month forecast of $1950 remains in place.”
UBS three month price view is $2,100 per ounce.
SocGen raised its average gold price forecast to $1,950 an ounce for the fourth quarter of 2011 and to an average of $2,275 per ounce in 2012.
Bank of America-Merrill Lynch said in a research note it was revising its 12-month gold target to $2,000 an ounce.
JPMorgan said that gold could reach over $2,500 per ounce prior to year end.
The recent sell off has not seen banks and analysts revise down their price forecasts.
GoldCore has said since 2003 that the real high of $2,500 per ounce (inflation adjusted and based on CPI) would likely have to be reached prior to gold being a bubble.
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