Eric King: “Tom, we will
get to gold and the US dollar in just a minute, but first your thoughts in the
aftermath of the Fed decision not to taper?”
Fitzpatrick:
“The whole of the
market expectation, as guided by the Fed, was that we were going to see some
tapering of some sort. As we saw data deteriorate going into the Fed meeting
everybody thought that they were going to reduce, but nobody was ready for the
‘non-move.’....
...Eric King: “Where does that leave us as far as the
gold market, Tom?”
Tom Fitzpatrick: “You know that we
have always been of the view that the down-move in gold to the $1,180 area was
the end of the much larger correction in gold. But we are also watching the
dynamics of the action in the equity markets.
We are looking at how gold
performed during the stock market collapse during the 1973 - 1974 time frame.
Gold went up dramatically during that market collapse. You can also track the
next strong rally in gold very closely to the period when the subsequent market
rally ran out of steam in 1976 (see chart below).
We have also overlaid things like the interest rate surge in the 1970s, the rising oil price, consumer confidence, etc., when looking at the dynamic price action in gold during the 1970s time period.”
King World News note: On the chart above you can see
the huge move in gold during the massive 1973 - 1974 bear market, as well as the
subsequent explosion in gold beginning in 1976. The chart below isolates just
the 1976 - 1980 manic move in gold as stocks struggled.
Fitzpatrick continues: “All of this has led us to the conclusion that the equity market could really start to struggle in the September - October time period of this year. It’s quite possible that the ‘put’ factor might be coming out of the equity market. If this is correct and we do get this downside move that we expect in the general stock market, this would be a setup for conditions that would see the gold price trade significantly to the upside.
Circling back to the Fed, I think
that at the end of the day they had an opportunity, they gave a guidance, and
tapering was the right thing to do. It’s our view that not only was it a
mistake to give that level of guidance and then back away from it, but overall I
think it’s going to be shown to be a mistake not to taper.
Increasingly this is delivering a
bad message from the Fed. The Fed told people that after QE1 they were bringing
it to an end, and then they flipped. They told people the same thing after QE2,
and they flipped again. After ‘Operation Twist’ it was the same message, but
they flipped once again.
So the Fed habitually guides toward
the idea of taking back some of the accommodation, the bond market reacts by
plunging, rates go higher, and this has a negative feedback loop in the economy,
and then the Fed chokes and fails to execute what they promised. So the market
reaction has helped to keep the Fed trapped and round and round the circle this
has gone for the past 3 years.
I wouldn’t like to be the one going
on record talking about the Fed losing credibility altogether, but I think
without a shadow of a doubt if you look at the feedback following this latest
decision not to taper, there are a lot of people who believe the Fed lost a lot
of credibility with regard to how they have managed this process.”
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