The Daily Market Report

Gold Firms, but Upside Limited by Taper Expectations

Gold has firmed modestly, underpinned by a softer dollar following the latest indication of still tepid inflationary pressures. Silver remains well bid near eight-week highs.

U.S. PPI for July came in unchanged, below expectations of +0.3%. That brought the annual figure down to 2.1% y/y, versus 2.5% y/y in June. Core PPI also missed expectations, resulting in a 1.2% y/y print, down from 1.7% y/y in June.

Atlanta Fed President Dennis Lockhart expressed some concern yesterday about tapering, saying he wants to make sure disinflation pressures are not building. St. Louis Fed President James Bullard has also been troubled of late by below target inflation. Today’s PPI data won’t do anything to ameliorate those worries.

In a Bloomberg article today, Adrian Day of Adrian Day Asset Management targets gold back to $1600 by year end. Day makes a point that we’ve made many times since the tape- talk first commenced: “All the Federal Reserve is talking about is cutting back on the additional stimulus put in place,” Day said. “No one is talking of tightening or reducing the Fed’s balance sheet.”

The yield on the U.S. 10-year note back on the rise and threatening the recent two-year highs ahead. With Congress girding for a contentious debate on the federal budget and the need to raise the debt ceiling yet again, I remain skeptical that the central bank will throw gas on the fire by starting to remove accommodations.

If they do, it would likely be a small symbolic gesture, a little dose of tough love directed at our fiscal policymakers. The message being: The Fed has been doing all the heavy lifting for the past several years with little to show for it, beyond re-inflation of a couple asset bubbles. It’s time for Congress to make some much needed changes on the fiscal side of the equation. The chances our sharply divided Congress can reconcile their differences and agree to any meaningful changes, remain dubious at best.



Bear in mind that this all corresponds with the likely nomination process for a new Fed President. If Bernanke is indeed on his way out the door at year-end, he is unlikely to risk his legacy as the savior of the U.S. and global economies this late in the game with a bold move.