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Are Commodities Tipping the Fed’s Hand?
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: September 13th, 2007 at 8:53 am EST
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Gold has risen sharply over the last several sessions, along with silver. It’s also no coincidence that other metals and commodities have risen right along with the precious metals. What could they be telling us about the future and more importantly, a change in Fed policy?
We usually associate a rise in gold with an impending rise in inflation, potential war (hard assets in uncertain times) and a decline in the dollar. Of course, we are no longer on the gold standard (some have argued that Chairman Greenspan was a noted goldbug…and preferred the gold standard). More recently gold has become more of an asset class of investors….’everyone needs a little gold in their portfolio’, hence the strong demand. Silver has often been a leading indicator of gold…and this time is no exception (silver has not broken out as has gold, but is still up about 15% in two weeks…gold is up 10%). Other commodities have risen, too…including wheat, copper, steel, cotton, oil, cocoa and coffee.
How to explain this sudden surge in commodity prices? The markets are interpreting this as the Fed’s willingness to go ‘all the way’ in their attempt to get economic growth on track. In other words, they will do what it takes to bypass a recession in 2008 (positive but substandard growth is forecast for the final two quarters of 2007), even let inflation rise. So, what does ‘all the way’ mean? It’s probable the Fed will cut 50bp at their September meeting, and continue on a drive to bring the Fed Funds target down to 4%. Fed rate cuts are rarely ‘one and done’.
Fedspeak. We hear and watch all the Fed Governors stand up at the podium and spew their venom to crowds all over the world. How useful or meaningful is their impact? Probably not very. In fact, Fed Governor Poole spoke on or around Aug 14, reiterating his notion that the Fed will not do anything to help the current crisis in credit markets, emphatic that inflation was the main enemy. He went so far as to say the Fed would not cut rates under his watch. Alas, three days later…the Fed cut the discount rate and staved off a potentially tragic credit situation (for the time being). I wonder if Mr. Poole was consulted first or last on this Fed decision? Recently, Fedspeak has been all over the place…with nary a clue as to which way the Fed may go on Sept 18.
One thing is certain…their decision will be impact markets all over the world. Fed Funds Futures currently handicap a strong chance (90% as of this writing) of a 50bp cut on this day…let’s hope they don’t disappoint the crowd.
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Bob Lang, Economics, Gold
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