The US dodged a bullet and the Vancouver Subscriber Investment Summit had
a great turn out on the same day. Coincidence? I think not.
Seriously; thanks from Keith, Lawrence and I for the great turnout. I'd
like to thank the companies that presented as they make these days possible.
Last but definitely not least I congratulate Nichola Vermiere and Katy Severs
for organizing a great event and doing all the hard work to make sure it
was well attended and went off without a hitch. People thanked me for a great
show but It's Nichola and Katy that do the heavy lifting. I just show up
and try not to trip over the microphone wire.
We made it through another US budget drama. Gold ended it better than I
feared. It's too soon to know if that is just a "buy on news" knee-jerk reaction
but I suspect not. Fed accommodation should continue for a while and physical
buying has picked up again. It seems improbable Washington would put us through
another shutdown in three months but the losers are already sounding belligerent.
You can't discount another sideshow at the start of 2014.
A short period of something like normality hopefully means the small subset
of juniors delivering real results will get a hearing and positive reaction
to good news. That would be a nice change.
Washington continues its pantomime, dominating the newswires with one internal
deadline after another. The markets have been taking the process pretty calmly,
almost enthusiastically. Wall St. essentially ignored the whole process. Yes,
the volatility was high but at the end of the day the NY market hit a new record
which tells you how unconcerned most traders are.
The episode was driven by Republicans and it seems like Wall St, which is
not a small contributor to the GOP, was comfortable the party would not do
the stupid thing when it came down to the wire. It does make one wonder what
the more radical elements of that party will do for an encore.
Many in the corporate world are already making noises about voting with their
feet and with their wallets. I'm not sure how much Tea Party funding comes
from corporate types but it sounds like some of that funding is about to evaporate.
For all the sound and fury in the past three months we're left pretty much
where we were at the start. We have another set of deadlines three months in
the future and promises everyone will play nice and formulate some kind of
budget deal. It might actually happen this time.
No one objective views this side show as anything but a political disaster
for the Republicans. They tried to make Obama blink first and, unlike 2011,
he didn't. It seems even less likely he will blink first in January. I think
that is Wall St's read. Budget impasses are the "new abnormal" and traders
are going to largely ignore them unless there is a firm reason to think there
is default risk.
I don't think traders care about things like sequestration either. Something
is happening that appears to be shrinking deficits; they're uninterested in
the details. As long as they don't read headlines implying the government is
going to take more money out of their pocket they will tune out the process.
So where does that leave us? The shutdown had some economic impact though
will take time to gauge how much. It's assumed by most macroeconomists that
this episode knocked about 0.3-0.5% of Q4 GDP. That isn't a huge deal if its
accurate. It would take the projected growth rate for Q4 down to 2%, a pretty
lackluster amount.
In the midst of the shutdown weekly employment claims were coming in higher
but the data was noisy and pretty much useless. The shutdown didn't last long
enough to generate layoffs anywhere and government employees are going to get
back pay for time missed.
All in all it shouldn't be that damaging but its coming on the back of mediocre
payroll numbers. The September nonfarm payroll number will now be released
on October 22nd and the October one will come out a week late. Its hard to
say whether either number, especially the October one, will have much impact
since its sure to be heavily revised later.
For the gold market, the shutdown is mainly important for its impact on the
Fed's QE program. The September Fed meeting minutes indicate FOMC members expected
a start to tapering before year end. The shutdown will have changed that. There
may be more lasting effects on the $US as well.
The Fed has always insisted its QE program and the taper that ends it are
data driven. Recent comments from Fed committee members--including a couple
of monetary hawks--show concern that data quality is going to be poor for a
while.
It will take a couple of months before the impact of the shutdown on the wider
economy is measured. The political grandstanding hasn't helped consumer confidence.
Several private surveys show confidence at nine month to two year lows.
I've never found these surveys to be great predictors but they could still
give the Fed pause. The US is about to head into the shopping season that makes
or breaks the retail sector for the year. I don't think the Fed wants to rain
on that parade.
As I expected, Janet Yellen has been nominated as the new Fed chair. She is
a monetary dove, more dovish than Bernanke in fact. She isn't blind about it;
she was simply right that this would be a weak expansion. She's also on record
in the past being dubious about how trustworthy the unemployment rate is as
a measure of US financial health. She's right about that too. Anyone who can
do the math can see much of the reduction in the unemployment rate comes from
workers giving up, not from workers getting jobs.
While I agree that physical demand should ultimately price gold many other
factors are short term drivers. "Taper talk" has been a big negative for most
of the year. That should work in gold's favor for the next few months as traders
assume the taper will be pushed back.
Impact of the $US on gold and other commodity prices is variable but there
are periods this year where it had a large impact (or other factors had big
impacts on both gold and the greenback). We saw that the day after the US shutdown
ended. Gold rose $40 and the $US got hammered. This was partially a "risk on" trade
plus an acknowledgement that the Fed would extend QE. Gold didn't follow through
the next trading day but held most of its gains and other commodities gained.
The $US is at a nine month low--any sort of negative economic news could drive
it below support at 79 which would be supportive of commodity prices.
While the US was busy with political theatre China clocked a 7.8% growth rate
in Q3, reversing two months of slowing. That should help support base metals
and bulk material prices like coal and iron ore. Europe has also been showing
more signs of life. It's going to be a long hard road back for the EU but at
least it looks the economic nadir has been crossed.
In addition to support from a weaker Dollar physical demand picked up when
gold dropped below $1300. ETF outflows (i.e.--the move from West to East) continued.
Those sellers were no doubt surprised that gold gained after the vote in Washington.
Others like them might be rethinking exiting the space.
The initial reaction to the end of the shutdown is encouraging but it will
take a couple of weeks at least to know whether we have established an uptrend.
Though I would consider the next month of US economic data highly suspect
in terms of quality, a batch of weak readings could help the gold price and
generally better economic readings elsewhere could help base metals. The S&P
looks stretched but the Fed stimulus trade is back on so it probably gets a
victory lap too, unless/until we see weak job/retail numbers.
All this should add up to a better tone for juniors but there is little time
to stage a rally. Tax loss selling is again a factor, though I think there
has been a bunch of that already. Gold needs to gain at least another $50/oz
to start calming traders. If that happens we may see a bit of strength going
into year-end once tax loss sellers have finished.
That is hardly a ringing endorsement but it's better than I feared even a
couple of days ago. A small minority of active, well managed companies still
have to carry the day and that was never going to be easy.
