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Gold Falls on Heightened Risk Aversion

by Peter A. Grant

Oct 22, AM
(from USAGOLD.com) --

Gold has come under intensified pressure, dropping to new seven-week lows near $1700. The yellow metal has been hit by heightened risk aversion on several fronts.

Spain recorded its fifth consecutive quarterly GDP contraction, as PM Rajoy continues to waffle on an official bailout request. This comes on the heels of yesterday's downgrade by Moody’s on Monday of five Spanish regions. Nothing has been resolved in Spain, or Greece and the eurozone as a whole for that matter. At best the troika has cobbled together a series of short-term fixes. The euro has fallen back below 1.30 today, and the corresponding dollar gains are weighing on gold.

Stocks are also taking a beating as a result of the stronger dollar, on top of earnings disappointments. Sharp drops in equities can sometimes prompt investors to liquidate even profitable gold positions to cover margin calls in other markets.

Finally, there is heightened speculation that Ben Bernanke's days as Fed chairman are numbered, regardless of who wins the Presidential election in two-weeks. Republican candidate Mitt Romney has said he would seek to replace Bernanke if he becomes President. However, the New York Times is reporting that Bernanke has told close friends that he is not interested in a third term, presumably even if President Obama wins reelection.

There are a lot of long positions out there in many markets that are at least partially based on the expansive monetary policies of a Bernanke run Fed. Heightened doubts that Bernanke will get a third-term at the helm of the Fed may well be prompting unwinding of at least some of those positions, as the market generally dislikes uncertainty. Interestingly this escalates on the day the FOMC begins its latest policy setting meeting, amid a broad consensus that the Fed will renew direct Treasury purchases before the end of the year.

What the market seemingly hasn't thought through are who would be likely replacements for Bernanke. If President Obama wins the election on November 6 and Bernanke rejects a third-term, vice chairpman Janet Yellen would be a likely frontrunner. Yellen is arguably more of a dove than Bernanke is. Former Treasury Secretary Larry Summers has also been mentioned. While Summers has expressed some reservations about QE3, he certainly would not be considered a hawk.

Short-listers for appointment to Fed chairman from Romney are thought to be Greg Mankiw and Glenn Hubbard. Neither Mankiw nor Hubbard are considered hawks. In fact, Hubbard has advocated that Romney should reappoint Bernanke. However, Stanford economist John Taylor is also thought to be on the list. Taylor has indeed written about the perils of an "interventionist" Fed, advocating for predictable, rules-based monetary policy with a clear price-stability goal. He has also warned about leaving rates "too low for too long."

It strikes me as more likely than not that the extraordinary measures championed by Bernanke would remain in place for some time to come. I suspect that even if Taylor were confirmed under a Romney Presidency, that any policy shift would probably be gradual. And, as we mentioned yesterday, Romney threatens to complicate the Fed's mission if he significantly escalates tensions with the Chinese by labeling them a currency manipulator on his first day in the Oval Office.

The bottom line here is that no matter who wins the upcoming Presidential election and no matter whom is in charge of the Fed, ZIRP and extraordinary accommodations aren't going away any time soon. I'm sure Japan didn't intend their super-easy monetary policy to be in place for decades either; and yet after ten different Prime Ministers and four BoJ governors since the late-1990s, Japanese rates are still near zero and they continue to expand their quantitative measures.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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Opinions expressed in commentary on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

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Gold Falls on Heightened Risk Aversion