The Perverse Focus on the FOMC and Jobs Data

This week will bring the types of news that are generally considered to be among the most important for gold – the FOMC statement, as well as the July payrolls report (which in turn derives its perceived importance from its effect on central bank policy). It should be pointed out here that it actually makes very little sense for the market to focus on these data points (even though it is clear that the focus exists and cannot be ignored).

Let us consider the payrolls report first: what does it actually tell us? In reality it is a fairly meaningless datum. Not only is it merely an account of the past, it is not even a particularly precise account of the past. The report gets revised several times (at least thrice if memory serves, with the final revisions being done a full year after the report's first publication, when the BLS does its annual revisions). Even the thrice revised version of the report isn't really all that meaningful. After all, the employment statistics are collated in such a manner that all those who are long-term unemployed and considered 'discouraged' are simply no longer counted as unemployed, even though that is what they are. Lastly, even if there were some way of obtaining a perfect payrolls report, it would not really mean much or tell us anything about the future. Employment is a lagging economic indicator. The economy could well be in recession already, even in the face of employment data that still 'look good'.

 

That is in fact what happened in late 2007: in hindsight it was determined that the economy entered a recession in late 2007, even though most of the real time economic data releases at the time – including payrolls data –  appeared to still look fine. In fact, the Fed, whose reaction to economic data is what the market really cares about, still proclaimed in summer of 2008 that the US economy was likely to 'avoid a recession'. At the time, the recession had been in train for more than half a year already. In short, the Fed is not only incapable of forecasting an economic downturn, it is not even able to recognize a recession that is staring it right into the face.

Now let us consider the FOMC statement, which this month may contain news about the planned 'tapering' of 'QE' as well as refined 'forward guidance' regarding the Fed's interest rate manipulations. Fresh Hilsenblather to that effect has been published late last week, entitled: “Up for Debate at Fed: A Sharper Easy-Money Message”. Apparently we need a more forceful reminder that there will be easy money for as far as they eye can see, or for however long it takes for easy money to bring the economy to utter ruin, whichever comes first.

A pertinent excerpt:

 

“At their July 30-31 meeting, Fed officials are likely to discuss whether to refine or revise "forward guidance," the words they use to describe their intentions for the next few years.

With short-term interest rates near zero, the Fed sees such guidance as an important part of its monetary-policy arsenal. For instance, telling investors that short-term rates will stay low for a long time, Fed officials believe, helps hold down long-term rates, and that encourages borrowing, spending, investing and growth.

The Fed has said that it intends to keep short-term interest rates near zero at least until the jobless rate drops to 6.5% or unless inflation rises to a 2.5% annualized rate. Mr. Bernanke suggested at his June press conference that the Fed might lower that 6.5% threshold for unemployment, which was set in September. Such a move would drive home to markets that short-term interest rates will be low for a long time.

Some Fed officials argue it would be too soon to raise short-term rates even after joblessness drops below 6.5%. In part, they see inflation as unthreatening, which means rates can stay low longer. They fear the jobless rate, now 7.6%, doesn't reflect other weaknesses in the labor market, such as people leaving the workforce or working part time when they want full-time work.

"There are a number of problems with the labor market," Mr. Bernanke told lawmakers earlier this month. He pointed to "underemployment," people who work fewer hours than they would like or at jobs below their skill level.

There are other rhetorical steps the Fed might take in its forward guidance. One would be to match its publicly set upper bound for inflation with a new lower bound. The central bank has said it will raise short-term rates if inflation is seen as rising above the 2.5% target. It hasn't said what it would do if inflation drops much below the Fed's 2% medium-term objective. One option is to say that short-term rates won't rise if inflation falls below some threshold, perhaps 1.5%. Mr. Bernanke has already suggested as much.

"The [Fed] would be unlikely to raise the funds rate if inflation remained persistently below our longer-run objective," Mr. Bernanke said at congressional hearings this month. A formal assurance might amplify the Fed's message that rates are staying low and address the concern of some officials—notably St. Louis Fed President James Bullard—that the Fed needs to show resolve in preventing inflation from falling too low.

One issue likely to be on the table next week: Whether changing its words will clarify its intentions or further confuse investors and stir market volatility”

 

(emphasis added)

What hubris to think that tinkering with the price of credit can alter conditions for people who are 'employed below their skill level'. Anyway, to the above we can only say: you heard it here first.  We already pointed out many months ago that the Fed would eventually lower its '6.5% unemployment rate target'. We also emphasized the importance of Mr. Bullard's dovish dissent (which the markets ignored at the time) on the grounds that 'inflation' is allegedly 'too low'.

That such nonsense sees print without the entire economics profession up in arms over the futility and dangers of such misguided interventionism reflects very badly on the economics profession. No wonder many people today no longer even believe economics to be a science or say things like 'the laws of economics don't exist', as was recently asserted in an article in the Atlantic. This is the end result of the quackery promoted above. Essentially, the functional equivalent of a coven of witch doctors is in charge of the economy. Their organization should not even exist: the economy does not require meddling to 'function better'. It works best when it is left to its own devices.

As to the gold market, the main reason why it would do best to ignore the FOMC, is that the damage has already been done. It is clear that at some point the 'QE' program will have to be curtailed or stopped, because not doing so would be playing with fire. However, the negative effects of the policies already implemented have yet to play out. It takes time for these effects to become manifest. In terms of broad and noticeable effects on consumer prices, the lag between too loose monetary policy and the outbreak of 'inflation' as measured by CPI and similar attempts to discern the mythical 'general price level', can amount to many years.

 

Consolidation Period Ahead of the Data

In any case, both gold itself as well as the gold stocks are consolidating ahead of these data releases, which are presumably going to serve as the 'trigger' for the next major move. Once again, the data themselves are actually irrelevant. Whether or not the FOMC statement is considered 'dovish' or 'slightly less dovish' (we can rule out 'hawkish' a priori) and whether or not the payrolls report is held to be 'strong' or 'weak', it is the market's reaction to the data that will be important, not the data themselves.

In order to better show where things stand, we have taken a closer look at the lows of 2000/2001 in gold stocks. In a previous update on July 17 we pointed out the following with regard to the HUI index:

 

“From the point of view of bulls, an ideal progression would therefore be: closing of the gap, followed by penetration of the 50 day moving average, followed by a successful test of the moving average as new support on the first pullback, followed by a flattening and upturn of the moving average.”

 

Here is what this process looked like when the 2000-2001 bottom was put in after a relentless decline into the final low; as you can see, all the conditions listed above were fulfilled, step by step:

 


 

HUI-2000-2001

The HUI index 2000-2001. A detailed view of how the turn from bear market to bull market progressed at the time – click to enlarge.

 


 

Now let us take a look at the current situation and compare it to the turn shown above:

 


 

HUI-today

The HUI today: the 50 day ma has been overcome, there was an RSI/price divergence at the low, and so far,  the tests of the 50 day moving average have held. In addition, the moving average is beginning to flatten out – click to enlarge.

 


 

All in all, this looks quite constructive so far: several of the preconditions for a durable turn are in place. There is however still one caveat, namely that the time spent above the 50 day moving average is still quite short. As can be seen in the year 2000 example, there have been several attempts at the time to cross above this moving average that ultimately ended with a rejection. These occasions were marked by the market spending at most a few trading days above this demarcation. Therefore it remains possible that the index will be rejected once again at this point.  However, once the 50 day ma actually turns up, one can probably give the all clear. This week's data releases will likely provide the decisive impetus one way or the other.

Gold itself has been mired in a corrective looking formation, oscillating around its 50 day moving average over the past week. It is currently consolidating just below the important $1,350 level. Once again, this is an area where the market may be rejected again, but if a breakout occurs, it will be quite convincing. In the former case, we would have confirmation that the bearish phase is not over yet, in the latter case we would have confirmation that at least a medium term rebound is now underway.

 


 

Gold, one week, 30 minGold, August contract, 30 minute chart. This looks like some sort of corrective formation – click to enlarge.

 


 

Gold spot, daily annotZooming out to the daily chart of spot gold, it is now oscillating around the 50 day moving average, just below the important $1,350 resistance level – click to enlarge.

 


 

In short, both from a fundamental and technical perspective, this week is likely to be quite important for the market's short to medium term direction.

There was one event late last week that is worth mentioning. After Newmont Mining (NEM) delivered its earnings report on Thursday after the close – which was as bad as widely expected – the stock opened with a gap down on Friday, but soon found a low and spent the remainder of the day recovering. It ultimately closed in positive territory. Since NEM is a 'bellwether' stock for the sector, this has to be taken as a positive sign:

 


 

NEM, 5 minuteNEM recovers after opening 'gap down' following its earnings report – click to enlarge.

 


 

And finally, here is a long term chart of the BGMI from our friend Bernard that further illustrates the previously discussed long term 'A-B-C flat correction' idea:

 


 

Expanded Flat BGMI

The BGMI from the 1940s to today: the action since the 2008 high is likely a 3-3-5 flat correction  – see the stylized form to the right – click to enlarge.

 


 

Of course there remains one fly in the ointment, namely the fact that flat corrections in which wave C ends above the low point of wave A are very rare. Normally one would therefore expect a low below the 2008 low to be eventually made. However, there is one point worth considering in this case, namely the fact that what happened in 2008 was a crash wave. That may well have skewed the correction toward producing a lower A wave low. One reason why this appears increasingly likely is that the wave counts of a number of individual shares look complete.

Nevertheless, one should not dismiss the possibility that wave C could still become bigger. Ironically, although it would then be among the very worst bear markets in gold stocks in history, it would still be technically regarded as part of a secular bull market.

 

 

Charts by: BigCharts, StockCharts, Sharelynx/Bernard, BarCharts


 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Canada: Risks of a Parliamentary Democracy
      A Vulnerable System Parliamentary democracy is vulnerable to the extremely dangerous possibility that someone with very little voter support can rise to the top layer of government. All one apparently has to do is to be enough of a populist to get elected by ghetto dwellers.   Economist and philosopher Hans-Hermann Hoppe dissects democracy in his book Democracy, the God that Failed, which shines a light on the system's grave deficiencies with respect to guarding liberty. As...
  • Federal Reserve President Kashkari’s Masterful Distractions
      The True Believer How is it that seemingly intelligent people, of apparent sound mind and rational thought, can stray so far off the beam?  How come there are certain professions that reward their practitioners for their failures? The central banking and monetary policy vocation rings the bell on both accounts.  Today we offer a brief case study in this regard.   Minneapolis Fed president Neel Kashkari attacking a block of wood with great zeal. [PT] Photo credit: Linda Davidson...
  • Thoughtful Disagreement with Ted Butler
      Too Big to Fail?   Dear Mr. Butler, in your article of 2 October, entitled Thoughtful Disagreement, you say:   “Someone will come up with the thoughtful disagreement that makes the body of my premise invalid or the price of silver will validate the premise by exploding.”   Ted Butler – we first became aware of Mr. Butler in 1998, and as far as we know, he has been making the bullish case for silver ever since. Back in the late 90s this was actually a...
  • On the Marc Faber Controversy
      Il n'y a rien à défendre - by Vidocq   Dr. Marc Faber, author of the Gloom, Boom and Doom Report Photo credit: Michael Wildi / RDB     Il n'y a rien à défendre - There is nothing to defend Personne n'a lu ce qui a été écrit. - Nobody read what was written. Personne n'a pensé avant d'agir, comme la plupart des gens de nos jours. - No one thought before acting, like most people nowadays. L'homme que tu pends est l'homme que tu as fait, pas l'homme que...
  • Donald Trump: Warmonger-in-Chief
      Cryptic Pronouncements If a world conflagration, God forbid, should break out during the Trump Administration, its genesis will not be too hard to discover: the thin-skinned, immature, shallow, doofus who currently resides in the Oval Office!   The commander-in-chief - a potential source of radiation?   This past week, the Donald has continued his bellicose talk with both veiled and explicit threats against purported American adversaries throughout the world.  In...
  • The Donald Can’t Stop It
      Divine Powers The Dow’s march onward and upward toward 30,000 continues without a pause.  New all-time highs are notched practically every day.  Despite Thursday’s 31-point pullback, the Dow is up over 15.5 percent year-to-date.  What a remarkable time to be alive.   The DJIA keeps surging... but it is running on fumes (US money supply growth is disappearing rapidly). The president loves this and has decided to “own” the market by gushing about its record run. During...
  • Precious Metals Supply and Demand Report
      Fat-Boy Waves The prices of the metals dropped $17 and $0.35, and the gold-silver ratio rose to 77.  A look at the chart of either metal shows that a downtrend in prices (i.e. uptrend in the dollar) that began in mid-April reversed in mid-July. Then the prices began rising (i.e. dollar began falling). But that move ended September 8.   Stars of the most popular global market sitcoms, widely suspected of being “gold wave-makers”. From left to right: Auntie Janet...
  • 1987, 1997, 2007... Just How Crash-Prone are Years Ending in 7?
      Bad Reputation Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.   Sliding down the steep slope of the cursed year. [PT]   Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007,...
  • Stocks Up and Yields Down – Precious Metals Supply & Demand
      Where the Good Things Go Many gold bugs make an implicit assumption. Gold is good, therefore it will go up. This is tempting but wrong (ignoring that gold does not go anywhere, it’s the dollar that goes down). One error is in thinking that now you have discovered a truth, everyone else will see it quickly. And there is a subtler error. The error is to think good things must go up. Sometimes they do, but why?   Since putting in a secular low at the turn of the millennium,...
  • Tales From a Late Stage Bull Market
      Pro-Growth Occurrences An endearing quality of a late stage bull market is that it expands the universe of what’s possible.  Somehow, rising stock prices make the impossible, possible.  They also push the limits of the normal into the paranormal.   This happens almost every time Bigfoot is in front of a camera. [PT] Cartoon by Gary Larson   Last week, for instance, there was a Bigfoot sighting near Avocado Lake in Fresno County, California.  But it wasn’t just...
  • The 2017 Incrementum Gold Chart Book
      A Big Reference Chart Collection Our friends at Incrementum have created a special treat for gold aficionados, based on the 2017 “In Gold We Trust Report”. Not everybody has the time to read a 160 page report, even if it would be quite worthwhile to do so. As we always mention when it is published, it is a highly useful reference work, even if one doesn't get around to reading all of it (and selective reading is always possible, aided by the table of contents at the...
  • The Falling Productivity of Debt
      Discounting the Present Value of Future Income Last week, we discussed the ongoing fall of dividend, and especially earnings, yields. This Report is not a stock letter, and we make no stock market predictions. We talk about this phenomenon to make a different point. The discount rate has fallen to a very low level indeed.   We add this chart to provide a slightly different perspective to the discussion that follows below (and the question raised at the end of the article)....

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com