Gold was modestly lower Wednesday morning after posting the biggest one-day rise in about three months on Tuesday. The rise back above the $1600 level can be largely attributed to Ben Bernanke’s clarification of Fed policy before the Senate Banking Committee.
When gold dropped sharply last week, it was weighed in part by more concerns expressed in the January Fed minutes about the effectiveness and costs of quantitative easing. The market read this as an increase in the risk that the Fed would be removing accommodations sooner rather than later. Bernanke put those concerns to rest yesterday, saying that the benefits of QE still outweigh the costs.
I’m not sure I personally agree with Mr. Bernanke, given that the costs have resulted in a Fed balance sheet in excess of $3 trillion. That’s a lot of money in anyone’s book; and yet economic growth remains tepid at best and the jobless rate remains elevated.
In fact, the latest data showed a 0.1% contraction in Q4 GDP and the unemployment rate ticked higher to 8% in January. One might expect a little better performance from a $3 trillion investment by the Fed on top of trillions of dollars in deficit spending over the last several years by the federal government.
Not surprisingly, the Fed chairman reiterate the guidance provided by the FOMC back in December. “The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability,” Bernanke said in his prepared statement. Translated that means the Fed will keep rates pegged at zero and continue with $85 bln in monthly asset purchases until the unemployment rate drops to 6.5%, or inflation as measured by PCE exceeds 2.5%, neither of which is going to happen any time soon.
Bernanke has proven once again to be gold’s best friend. A truth that was nicely illustrated in yesterday’s MoneyGame Chart of the Day, which showed gold’s performance under the last four Fed chairmen.
GOLD PERFORMANCE UNDER PAST FED CHAIRS
G. William Miller from March 1978 through August 1979, gold rose 47.5%.
Paul Volcker from August 1979 through August 1987, gold rose 65.0%. (Note: This period includes the drop in gold from the January 1980 record high of $850)
Alan Greenspan from August 1987 through January 2006, gold rose +14.5%.
Ben Bernanke from February 2006 to present, gold has risen 182.9%.
Bernanke’s term as Fed chairman doesn’t end until January 2014. Based on the Fed’s own central tendencies, the jobless rate will still be above the 6.5% target and inflation will still be in check, so presumably the central bank will still be engaged in super accommodative policy at that point. Consequently, I think the long term uptrend in gold is safe.
There has been some speculation that Bernanke might not serve a third term even if asked. The retirement of gold’s best friend of the last 35-years might be cause for concern, but Vice-chairman Janet Yellen is seen as a frontrunner to replace Bernanke. Yellen is an even bigger dove than Bernanke, and given enough time, I suspect she might prove to be an even bigger friend to gold.
