Up and down on Ben

Precious metals remain in a consolidation. Most precious metals managed to end the week slightly higher compared with the preceding weekly close, only palladium ended lower. But they could not defend the gains made at the beginning of the week and pared most of the earlier advance.

The major event for the precious metal markets had been a speech given by Fed chairman Bernanke at the National Association of Business Economists on “Recent Developments in the Labor Markets”. The main message of this speech is that the Fed chairman is not sure whether the improvement of economic growth is already self-sustainable. Therefore, he favors that the Fed will maintain its current course of expansionary monetary policy.

The initial reaction at the stock markets was positive as hopes for QE3 were revived. However, over the course of the week, the doubts of Bernanke turned into a burden for stock markets. We pointed out here that if economists are too pessimistic and economic data comes in better than expected for some time, then economists get more bullish and overestimate the economic figures. The data for the US economy released last week was mixed. However, after the Bernanke speech, the market focused only on the negative surprises. The best example is the durable goods orders data. While the new orders for core capital goods came in better than the consensus of Wall Street economists predicted, the overall new order figure was below consensus. The new orders for core capital goods provides a better picture of the underlying trend as it is not distorted by large ticket orders. Nevertheless, the financial markets focused on the overall figure and got concerned again about global growth.

Bernanke’s speech also gave the euro a lift against the US dollar, which rose again above 1.335. The US dollar index declined again towards 90.0. However unlike the stock markets, the euro and other major currencies defended the gains versus the US dollar and traded sideways. This gave the precious metals some support, but it was not sufficient to compensate the negative impact of stock markets paring gains.

The crucial question remains, what does the Bernanke speech imply for monetary policy? Expecting that the Fed would embark on implementing QE3 would be far too optimistic. As we already pointed out some weeks ago, the best one might expect is that the FOMC will extend “Operation Twist” beyond the scheduled deadline at the end of June. However, operation twist is not quantitative easing in the usual sense of extending the balance sheet of the Fed. With operation twist, the balance sheet of the Fed remains unchanged as short-term Treasuries are sold and longer-term Treasury notes and bonds are bought. Operation twist aims at flattening the yield curve and reducing the level of yields at the medium- to long-term part of the yield curve. After terminating operation twist, the risk is that yields on longer dated US Treasury notes and bonds increase again. Thus, the Fed might decide to extend operation twist with the intention to keep yields on Treasuries fairly stable and thus, that also yields on corporate and mortgage bonds remain stable.

Therefore, from our point of view, financial markets got too excited about US monetary policy getting more expansionary. A significant extension of the Fed balance sheet would require a slow-down of US GDP growth and slower creation of new jobs. However, in this case, also stock markets would head lower. But this scenario would also be negative for the precious metals.