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Talk of 'Exit Strategies' Resurface

by Peter A. Grant

May 13, AM
(from USAGOLD.com) --

Gold is back under pressure within the recent range amid fresh expectations that the Fed may start removing accommodations sometime soon. This springs from an article by The Wall Street Jounal's Jon Hilsenrath that came out late in Friday, although the article makes it quite clear that the timing of any such wind-down remains "unclear."

It seems like just weeks ago the Fed surprised by saying they were prepared to "increase or reduce the pace of its purchases to maintain appropriate policy accommodation." It seems like that, because it was just two-weeks ago on 01-May. That hint at the possibility of an "increase" in asset purchases sparked a rally in U.S. stocks to new record highs and perpetuated the outflows from gold backed ETPs. However, speculators seem a little more timid about shorting gold this time around, knowing now that there is massive pent up demand for physical metal just below the market.

The dollar remains firm, near 10-month highs, as said removal of accommodations would lead to higher yields on U.S. Treasuries. Absent any meaningful fiscal reform, and given the implications of higher yields on the refunding costs of our massive national debt, I remain skeptical.

The temporarily suspended debt ceiling is slated to be reinstated this weekend, but Treasury Secretary Lew said last week that the government would be able to continue operating through the summer. "The debt limit will be reached in just a few days when it expires on May 18 but because of the cash flows we can predict that we will be okay until Labor Day," said Lew.

The Treasury Secretary went on to say, "People shouldn't relax, Congress should deal with this right away. The uncertainty caused by putting this off is not good. The anxiety caused to the U.S. and world economy by putting this off until the last minute is not good." That almost assuredly means that Congress will delay dealing with the debt ceiling until we're on the verge of another crisis.

Bill Gross of bond giant PIMCO tweeted the following this morning:

30-year bond bull market over but bear market begins only with consistent 2-3% real and 4-5% nominal GDP growth. Not there yet. Maybe never.

In the meantime, the Fed will continue to try and manage expectations so the re-inflation of the stock and housing bubbles doesn't become problematic. If growth risks persist, or the stock market corrects, all this talk of "exit strategy" will fade into the background once again.

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Talk of 'Exit Strategies' Resurface