The “China slowdown” meme dominated the economic news yesterday, leading to a sell-off in commodities and precious metals. The silver price in particular suffered – the metal coming under heavy selling pressure into the close of the Comex trading session in New York, falling below $32 before recovering later. The gold price held up better than silver, but is still only just teetering above support at $1,650.
The mauling in the commodities sector brought an end to a nine-day losing streak for US Treasuries. ZeroHedge comments that during the last 31 years of rising Treasury bond prices, we have never seen 10 consecutive days of yield increases – though June 2006 also saw nine days in a row. Ominously as far as the US housing market is concerned, mortgage rates are back above 4% and have jumped the most in the last week for 16 months.
As Robert Wenzel says at EconomicPolicyJournal, Ben Bernanke and the Federal Reserve are trapped between a rock and a hard place as far as interest rates are concerned. If he starts raising rates – contrary to recent pronouncements that the Fed would keep rates at zero until “late 2014” – then he undermines his repeated assertions that there’s no threat from inflation to the US economy.
Raising rates will also increase the pressure on the housing market and lead to a drop off in consumer spending. It would also force the yields on US Treasuries higher – a not unimportant downside when the US government is running deficits of around $1.5 trillion, and has to roll huge amounts of short-term debt on a regular basis.
On the other hand, keeping rates at zero will mean risking a serious bout of inflation, combined with an acceleration of foreigners’ loss of confidence in the dollar. A tricky situation indeed, and a key reason why demand for physical gold will increase.
