US Fed in the spotlight

The US mid-term elections taking place next Tuesday will be overshadowed by the FOMC meeting the next day. However, for the commodity markets, the result of the mid-term elections will have a significant longer-term impact. Especially, it will be crucial for fiscal policy and whether the Obama administration will have a chance to implement a stimulus package to foster GDP growth. In particular, how candidates of the Tea Party will fare, could have a significant impact on US policy. Nevertheless, for the short-term development, the FOMC meeting will be more important.

We have already pointed out in this blog that the only economic policy option to stimulate the US economy is by monetary policy given the changes in the political landscape. Thus, the question is not whether the FOMC will announce a new round of quantitative easing, but how it will be implemented. The focus is on how much money the Fed will pump in the financial system and how quickly they will do it.

As events of the past week show, the risk for commodity markets in general appears to be on the downside. After the Wall Street Journal reported that the volume of QE2 might be less than the market expected, the US Treasury market came under pressure and the US dollar strengthened. Especially copper, the metal which is regarded as most sensitive to economic developments, lost heavily after reaching 8,554$/t the day before the WSJ article was published. Copper lost 281$/t and closed the day near the low at LME Select.

However, the US dollar pared the gains and commodities recovered after the Fed send a questionnaire to the primary dealers in US Treasury paper. This leaves room for interpretation. Either the Fed has no clue what they are going to do or they want to please the Wall Street banks. Both were not suited to increase confidence in the Fed action. It would be understandable, that model results were treated with some caution by the FOMC members. But asking the primary dealers is like asking a bank robber how much money he wants. The answer is always as much as he can get. The primary dealer has only his trading book in mind and not the whole economy. But the more the FOMC fulfills the demands of Wall Street, the more the US dollar is likely to weaken. As a result, the more commodities could profit from US dollar depreciation.

That the Fed would have to act was also underlined by the first estimate of the US GDP growth in Q3. While the annualized growth rate of 2.0% was fully in line with expectations, the core PCE deflator declined further to a mere 0.8%, which underlines the risk of deflation. However, not all metals profited from the GDP data. The precious metals traded higher as the US dollar gave back gains made earlier last Friday. However, copper and other base metals got under further selling pressure. Some economists were disappointed about the contributions to growth of some components. If the overall figure is in-line with expectations, they then argue by the quality of growth. The private consumption rose by 2.6%, which is positive. But some highly overpaid economists were disappointed by housing investment. Given the overhang of unsold houses, it is advantageous that housing investment is not growing strongly, as this would only increase the overhang of unsold houses and increase the pressure on house prices. And increasing house prices are important for private consumption, which has a far bigger share of GDP than housing investments. But for copper prices, the disappointment about the housing sector was negative as it sent copper prices further down despite a weaker US dollar following the release of the GDP figures.

The Fed has to find the right volume for quantitative easing, which is not an easy task. Is the volume to low, the measures might be regarded as insufficient. Is the volume rather high, it could also be interpreted negatively as it could create the impression the Fed would be in a panic. From our point of view, it might be best to announce a starting volume that might be increased in case it would be needed. As we also already explained in this blog that yields on 10yr US Treasury notes of 2.5% are too low compared to the Fed’s inflation target, we agree with PIMCO’s Bill Gross that quantitative easing could be the end of the 30yr lasting bull market in Treasuries. Thus, while a weaker US dollar would be positive for metal prices, a trend reversal in the US Treasury market would be a negative factor. In the medium- to longer-term horizon, the bond market could become the dominating factor for metal prices.

China’s surprising rate hike is not cooling metal markets in medium-term

The People’s Bank of China, the central bank, surprised markets last Wednesday with the first rate hike since 2007. It lifted interest rates for deposits and credits by 25bp each. The one-year benchmark loan rate is now at 5.61%. While the metal markets came under stronger selling pressure on October 19, the industrial metals recovered again. Only gold and silver remained under pressure and reversed their upward trend. However, these two precious metals already showed signs that a consolidation might be looming before the announcement of the PBoC.

We expect that the medium-term impacts of the rate hike by the Chinese central bank on precious and industrial metals will be rather small. It is not sufficient to derail the strong growth of the Chinese economy and it will also not prevent the US dollar to weaken further against the major currencies.

The timing of the rate hike has surprised many traders, investors and analysts. This could be seen as another indication that markets are not information efficient as the academic theory pretends. Unlike the hard-drive of a computer, the human brain stores information, but it also automatically removes information to get fresh storage capacity for new information. The computer only sends a disk full message in this case. A glance at the calendar would have been sufficient to expect a measure announced by China to take off some pressure ahead of the G20 summit, which took place at Friday, October 22 in South Korea.

And the old trick worked again. China was praised for the rate hike and the US was blamed for its monetary policy. It is said the thinnest book is the one about German humor, but the country seems to have the most fools and the biggest one appears to be the Minister of economics, Mr. Bruederle (see also article below). The most foolish comments came out of Germany over the weekend.

In its statement on the rate hike, the PBoC does not cite any reason for the move. However, most commentators refer to the increase of the consumer price inflation. In September, the CPI rose 3.6% from the same month one year ago. At a first glance, this might justify a rate hike to keep inflationary pressures under control. However, at a closer inspection, the move by the PBoC was not the most appropriate measure. Inflation in China was driven by surging food prices. The rally in agricultural commodity prices was not caused by expansionary monetary policy, neither in China or other economies. Large speculators held even huge short positions in grains at the beginning of the summer season in the Northern Hemisphere. The drought in many regions, especially in Russia and the Black Sea area, caused a short-fall of grain harvests compared with forecasts. Russia even had to impose an export ban on wheat. Smart central bankers know that they can not fight the weather by interest rate policy. But most German commentators and central bankers prefer to curb domestic demand by tighter monetary policy if rising food prices are the cause of increasing headline inflation rates.

The imbalances of the Chinese economy are well-known. China’s private consumption is too low, its savings rate too high. The rather high contributions to GDP growth by the trade surplus and investments are reflecting the excessive savings rate. Increasing interest rates not only for credits but also for deposits is the wrong measure. It increases the incentives to save even more, which could lead to a further decline of the relationship of private consumption to GDP in China. Instead of reducing the imbalances, the problem could be even aggravated. Again, it is rather foolish to praise the rate hike as the right measure to reduce the imbalance of the Chinese economy.

China’s political leaders resist appreciating the yuan more strongly against the US Dollar. However, this would be an appropriate measure. A stronger yuan would reduce the impact of higher international food prices on the consumer price index in China. It would also help to reduce the imbalance between private consumption and export driven growth. And a 25bp rate hike is likely not sufficient to reduce GDP growth to the extent that falling prices of other goods compensate the impact of rising food prices on CPI inflation. Therefore, also the demand for base metals is likely to expand further in 2011, maybe at a slightly slower pace, but still sufficient strongly that a supply shortage of copper will prevail as the ICSG forecasts. Only a series of stronger rate hikes might have a negative impact on Chinese demand for industrial metals.

Fools never die - they live happily in the German Ministry of Economics

The German minister of economics criticized the US monetary policy unusually harsh after the G20 summit, where he substituted the finance minister, who was in hospital. The creation of more liquidity would be the wrong way, stated Mr. Bruederle. An excessive, permanent creation of money would be an indirect manipulation of a market price, which would not be acceptable. What else is a fixed exchange rate and a hike or cut of interest rates by the ECB, stupid?

All monetary policy intends to have an impact on asset prices and returns, which a central bank can not set directly. But those asset prices and returns on assets have an influence on macroeconomic aggregates, which are relevant for the final target of monetary policy. The transmission mechanism of monetary policy to the real sector of the economy is via changing relative asset prices and returns on assets. This is widely accepted in monetary theory.

There appears to be a widespread perception that a possible new round of quantitative easing would only target at manipulating the US dollar exchange rate. This is wrong and could be even counterproductive. The target of the Fed for QE2 would be to strengthen final demand in the US economy. The export sector is rather small compared to other major economies. On the import side, the demand for some goods is rather price inelastic in the short run, especially for crude oil imports. However, weakening the US dollar would have an impact on the price of crude oil. The correlation between the US dollar and crude oil prices is quite high and often the oil price rises more than the US dollar depreciates in percentage terms. Thus, if QE2 would target to weaken the US dollar only, it would be the wrong monetary policy measure. In additions, the CNY/USD exchange rate is immune against any QE by the Fed. The target of QE2 is clearly to strengthen domestic demand.

There seems to be another misunderstanding of QE2. Politicians like Germany’s minister of economics or Brazil’s finance minister Mantega appear to think that dollar weakness would only be created by newly printed dollars. This is a big fallacy. The Fed has not yet decided to implement QE2 and the US dollar already lost 14.2% since the US dollar index (USDX) reached its peak at 88.706 in early June 2010. And when Fed Chairman Bernanke provided the first hint about not exiting easy monetary policy, the USDX even gained slightly in early August. US dollars could be sold out of the stock of money and not only when the stock of money is increasing.

We pointed to the relative returns of assets playing a role for monetary policy above. These relative returns also play a role for investors diversifying portfolios. If financial assets in other countries offer better risk/return perspective, there is an incentive to change the asset allocation of a portfolio. In the case of the US dollar, investors have reduced the holding of dollar denominated assets and bought more assets denominated in foreign currencies. This alone is sufficient to lead to a weaker US dollar. However, this has the impact that some investors then increase the holdings of a particular asset class, which is denominated in US dollars, the commodities and especially industrial and precious metals.

 Without any political stimulus measures, US GDP growth appears to be too modest to prevent the risk of a deflation. But it would also be insufficient to attract investors. The current political landscape makes fiscal stimulus measures almost impossible. Only monetary policy has a chance to improve the US economy. Whether the Fed embarks on QE2 or not, a weaker US dollar appears to be unavoidable. Only in the case the Fed would manage to stimulate US GDP growth, the US dollar might rebound over the medium- to longer-term horizon. Therefore, the US dollar is likely to remain a supportive factor for precious and industrial metals also in 2011. 

Gold at the cross-roads

In the previous article, we have pointed out that there are some warning signals gold might head towards a correction. The decision taken by the Chinese central bank on October 19, to hike interest rates by 25bp had been the trigger that tipped the balance. Gold sold off massively that day as the US dollar strengthened against the other major currencies.


The technical indicators, which we follow, all turned negative. The ADX declined after reaching a peak at 67. This indicates that gold is entering a major correction. Most of the trend following indicators like the MACD as well as oscillators like the stochastics triggered fresh sell signals. However, gold managed to close above the moving average line of the Bollinger band. This line often serves as support. Thus, gold would have to stay above this line in order to remain in an upward trend. In the case gold trades below this line, it would open scope for a further decline to the 38.2% Fibonacci retracement at 1,300$/oz. However, more likely would be a test of the lower Bollinger band coming in at 1,280$/oz and then at the 61.8% Fibonacci level at 1,243$/oz. But gold bulls should get aware that for some time the trend might not be their friend.

Is Ben no longer the gold bull’s man?

The most surprising move in the gold market took place last Friday. Not only the gold market, but also the stock, bond and foreign exchange market awaited the speech of Fed chairman Ben Bernanke at the Boston Fed conference last Friday. While he said that nonconventional policy would have costs and limitations, the also made it clear that everything else equal, there would be a case for further action. This is another indication that the Fed is ready to implement a new round of quantitative easing. However, gold did not rally to a new high as it did the days before. Gold was dragged down by a rebound of the US dollar and rising US Treasury yields.

The core inflation data released earlier last week in the US support the point made by Fed chairman Bernanke and other FOMC members. Prices at the factory gates as well as for consumers rose by a mere 0.1% on the month. This indicates that the core PCE, the favorite inflation indicator of the Fed, is likely to edge down further. While the Fed has not an explicit inflation target, it appears that the FOMC would be comfortable with a rise of the core PCE by 2% yoy. Some gold bulls argued that quantitative easing would eventually lead to hyperinflation and the only protection would be gold. Therefore, it appears surprising that gold declined after the speech of Ben Bernanke.

Many traders act according to the old market rule of buying the rumor and selling the fact. However, the speech of Bernanke was at best a hint that quantitative easing is high on the agenda, but it was not yet the fact, which should trigger profit taking. However, there might have been some awakening among the bond bulls. In the case the Fed would succeed with quantitative easing to push the yoy-change of the core PCE back to around 2%, and then the real yield on 10year US Treasury notes would be just too low with nominal yields at 2.5%. This appears to be a major risk of quantitative easing. Yields have already fallen strongly this year and purchases by the Fed might drive them even lower. Then nominal yields would be too low compared with the implicit Fed inflation target. Bond investors could take profits and send yields higher again to maintain a sufficient real yield and risk premium. This would also have an impact on the US dollar and therefore, also on gold.

Another surprise came last Friday with the release of the weekly CFTC report on the “commitment of traders”. Large speculators have still added to long positions, which reached a new record high at 304,564 contracts. However, they opened far more new short positions, thus, the net long position declined by 3,746 to 255,874 contracts. Since gold started its rise of around $210 at the end of July, there were also some weeks with a decline of the net long position of the non-commercials. But these declines were smaller, which sends a warning signal that hedge funds might get less bullish on gold.

The gold holdings of the SPDR Gold Trust ETF, showed a similar pattern. After reaching a high at 1,305.7 tons on September 29, inventories declined to 1,285.2 tons on October 13. However, last Thursday, the gold holdings jumped again to 1,304.3 tons. Thus, it might be premature to conclude that large speculators abandon ship. Nevertheless, gold bulls should have an eye on the holdings at the ETFs and the non-commercial net long position.

The decline of gold despite bullish news is a warning signal that gold bulls might have to take a breather. As gold did not reach the high of the preceding day, Thursday’s high marks a pivot high at 1,387$/oz. This alone is not worrisome as long as gold holds above the recent pivot low at 1,325$/oz. While technical indicators are bullish, the ADX, which measures the strength of a trend, sends a warning signal. This indicator is at 67, which signals that the rise might have gone too far. The last time, this indicator showed a higher reading was in November last year. It was followed by a 12.4% decline. But as long as other indicators don’t point to a reversal, we would follow the old market adage that the trend is your friend.

Metals to profit from Currency War

“War, what is it good for? Nothing, absolutely!” Many would agree with this line from the lyrics of a song performed by Edwin Starr, at least for a war like the Gulf War II. However, as Brazil’s finance minister Guido Mantega talked of a currency war, there appears to be more disagreement. The IMF warned of the consequences of a currency war. We take a look at the impact of a currency war on metals.

We don’t think that gold would be the winner of a currency war for the very simple reason that gold is not a currency. Gold might be an instrument for profitable speculation, even for multi-year trends, as has been seen since the beginning of the new millennium. However, it is not even a perfect store of value as those investors, who bought gold in late 1979 and early 1980, have still suffered a loss in real terms. Besides serving as a store of value, a currency has also to be in circulation. Gold also does not fulfill this required function. Sir Thomas Gresham, the founder of the Royal Exchange in London, observed that bad money drives out good. This became known among economists as Gresham’s law. Thus, gold could be horded but the currency in circulation would be still paper money. Nevertheless, gold and other metals could profit from a currency war just as Halliburton was profiting most from Gulf War II.

Since Brazil’s finance minister coined the term currency war, this notion is associated with countries taking measures with the intent to weaken their currencies and to gain a competitive advantage in international trade. The underlying assumption is, like in the Great Depression of the 30^th in the preceding century, countries want to export out of economic difficulties by a beggar the neighbors’ policy. The main culprits in many discussions are the Fed and the Bank of Japan by implementing measures of quantitative easing, in the case of the BoJ also via direct interventions in the FX market. However, from our point of view, this focus is to narrow. It has to include the foreign exchange policy of China, which we regard as the root cause.

China had fixed the exchange rate of the yuan versus the US dollar. In combination with the most favored nation status granted under the Clinton administration, the undervaluation of the yuan has led to a rising export surplus of China and an accelerating accumulation of US dollars as foreign reserves. In July 2005, China introduced some flexibility of the exchange rate of the yuan versus the US dollar. Its central bank, the People’s Bank of China was allowed to set the daily exchange rate within a small percentage change in both directions from the previous day’s close. Thus, the yuan appreciated versus the US dollar, but as the range was too small, it could not eliminate the imbalances in the trade balance between the US and China. During the financial crisis in 2008, China fixed the exchange rate again. This year, China allowed again a bit more flexibility, but again it is insufficient to reduce the imbalances.

Even in systems of fixed exchange rates, markets would normally force a country to appreciate its currency by buying the undervalued currency and selling the overvalued one. This would require interventions with an impact on domestic macro-economic aggregates and financial market rates. However, this requires a free flow of capital and a full convertibility, both lacking the yuan. Thus, China is in a position to maintain its competitive advantage against the US.

China is only in a position to fix its exchange rate against the US dollar but not against all other major currencies, as this would create arbitrage opportunities. Thus, there would be a possible scenario that China gains or maintains a competitive advantage against the US by undervaluing the yuan, but could suffer a loss of competitiveness against other currencies. But China also played this card very well. Initially, they got a helping hand from foreign exchange analysts and strategists. They focused on the rising US current account deficit and were worried about the financing of this deficit. However, they overlooked that this deficit was almost self-financing. China did not only deliver the goods, which caused the widening trade deficit, but also the capital imports of the US to purchase the Chinese goods. China became the most important investor in US Treasury bonds and notes. However, the worries of analysts and strategists led to a pronounced weakness of the US dollar, especially against the euro.

During the financial crisis in 2008, the US dollar strengthened against major currencies. This was not in the interest of China as Europe, in particular German exporters, got more competitive. However, China countered this development by questioning the status of the US dollar as a global reserve currency. Investors sold again dollars for euros and thanks to the fixed CNY/USD exchange rate, Europe got less competitive again.

We regard the accusations against the monetary policy of the US as not justified. While we do not expect that the US economy would slip back into a recession, we admit that US GDP growth would probably be too anemic to create more jobs and to reduce unemployment considerably. As laid out in this blog two weeks ago, we have some doubts whether quantitative easing would have the desired results. But to judge a measure fully, one has to compare it with the alternatives. Doing nothing and praying that the supposed self-heeling forces of a free market economy would lead to full employment again appears to be the worst of all options.

Unfortunately, two of the major culprits of the sub-prime crisis are a major obstacle for a stimulus, which might be the most efficient under normal conditions. The rating agencies did not only rate junk as triple A and thus misguided investors in the market for mortgage backed assets. Now they attack the ambulance which came to the rescue of financial markets. The financial crisis, the measures to stabilize the financial systems and to stimulate the economies led to rising budget deficits of many states. Partly, some measures taken only have a one time effect on the budget deficit, but led to a jump in the debt/GDP ratio. The rating agencies have already downgraded some European sovereign debt. The member countries of the eurozone had to come to support Greece and to introduce a fund to assist other member countries in the case of a crisis. However, this support came at a cost of introducing austerity measures and to exit from expansionary fiscal policy. Especially the German chancellor Merkel appears to be obsessed of a pre-mature exit from fiscal stimuli. Bond investors followed again the advice of the rating agencies and sent yields on the weaker eurozone countries to new highs since the introduction of the single currency, which is counter-productive to solving the problems. Bund yields have declined and spreads of even other sound countries over bunds have risen considerably. Fiscal policy to stimulate domestic demand is currently regarded as not being an option by governments and bond investors in the eurozone.

The rating agencies have not yet downgraded other Western countries like the US and the UK, which also run a high budget deficit. But they threaded that the top rating would not be for granted. In the UK, the new government is following an austerity policy and is determined to bring down the budget deficit. In the US, the mid-term election makes it impossible to implement a new fiscal stimulus package. Thus, fiscal policy is at best neutral but in many countries it is contributing to a slower growth or extended recession. Therefore, it should not come as a surprise that the Fed and the Bank of England consider a new round of quantitative easing to stimulate domestic demand.

The Bank of Japan is in a very uncomfortable situation. The economy is already in a deflation and GDP growth fell back to almost zero. Weakness of the US dollar leads to a strengthening of the yen and there is no hope that carry trades would trigger a reversal of yen appreciation. While some central banks valued an appreciation of their currencies because it made their job easier to keep inflation close to the target, the BoJ could not be happy with a stronger yen. The falling USD/JPY exchange rate implies that the deflationary pressure is increasing. One instrument to apply is a quantitative easing by intervening in the foreign exchange market without sterilization. Of course these interventions also have a positive impact on exporters. However, outright deflation lead to a wait-and-see position not only by consumers, but also companies would delays purchases. Thus, taking measures against deflation is an absolute necessity from domestic economic policy reasons for Japan.

The thread of rating agencies to downgrade the rating of sovereign debt as well as the risk aversion of bond investors, which only buy the safe haven government bonds, are a major reason that monetary policy has to stay or even to become more expansionary in some countries. The key to avoid a currency war is primarily the stance of China towards a more flexible exchange rate policy and an appreciation of CNY/USD. As long as China is resisting making any concessions, which could have an impact on its export sector, quantitative easing by the Fed appears to be unavoidable and is likely to led to dollar weakness against the major currencies. This remains a positive factor for investors demand for precious as well as base metals. But a stronger CNY/USD does not need to be negative for metal markets if China were taking corresponding measures to reduce domestic saving and to increase domestic demand. Thus, we expect that base and precious metals will profit from tensions in foreign exchange markets.

Bernanke is not heading the central bank of Zimbabwe

All precious metals and most of the base metals, the only exception were lead and zinc, closed last week higher. While base metals also got some support from the Chinese manufacturing PMI, which rose stronger than expected from 51.7 to 53.8, the major driver was a weaker US dollar. Some of the economic data released in the US were also better than the consensus of Wall Street economists predicted, the markets are still convinced that the FOMC would implement a large scale quantitative easing after its November meeting. Even a report in the Wall Street Journal warning that the magnitude of a possible program to buy US Treasury paper would be smaller than the market discounts had no major impact. The outlook for quantitative easing drove the US dollar weaker against the major currencies and this stimulated demand for metals.

 After the announcement of the FOMC it might implement a new round of quantitative easing, the media spends again a lot of attention to so-called investment gurus like Jim Rogers or Mark Faber. Jim Rogers stated in an interview with a German business daily that somebody who prints fresh money would ruin his country. Mark Faber called quantitative easing as monetary policy according to the Zimbabwe school of economics and likened Ben Bernanke as head of the central bank of Zimbabwe. They argue that quantitative easing would lead to a collapse of the trust in paper money and to accelerating inflation. From our point of view, both gurus are totally wrong.

First, quantitative easing had been implemented by the Bank of Japan after hesitating far too long and the Japanese economy was already heading towards deflation. While the BoJ pursues quantitative easing for now around 10 years, the inflation rate in Japan was -1.0% in August. The BoJ would be happy to lift the inflation rate above the zero mark. According to Messrs Rogers and Faber this is not supposed to happen, Japanese inflation should already been sky-high. Also the demand for the yen is contrary to their theory. There are more zeros printed on a yen bill with the smallest denomination than on comparable US dollar bill, nevertheless, the yen is strengthening against the US dollar. Thus, people still trust in paper money despite quantitative easing in Japan.

Second, the first round of quantitative easing by the Federal Reserve, the ECB and the Bank of England were dictated by the turmoil in financial markets in 2008, especially after the collapse of Lehman Brothers. Most economic commentators fearing inflation as a result of the balance sheet extensions by these central banks overlook an important factor. Contrary to widespread economic theory that markets would always be functioning if the government does not intervene, the money markets in the US, the eurozone and the UK ceased to function properly. A vanishing confidence and rising distrust among banks led to a collapse of interbank lending. Banks with excess liquidity preferred to deposit those funds at the central bank. Commercial banks, which needed liquidity, were not able to borrow in the interbank market and had to rely on the lender of last resort. Central banks increased the liquidity facilities and widened access to the various facilities in order to prevent a collapse of the banking sector. The extensions of central banks’ balance sheets reflect to a major extend the replacement of interbank lending by borrowing from the central bank. The focus of many economists on the balance sheet of the central bank has lead to some false conclusions. A look at the aggregate balance sheet of the banking sector (incl. the central bank) would have provided a far better picture as the interbank relationships cancel each other out. Only the provision of liquidity to other sectors could lead to the risk of increasing inflation.

Third, even with increasing lending to the non-banking sector, higher inflation is not an inevitable result. There was much talk about a possible credit crunch. Corporate treasurers might increase borrowing from banks and depositing the funds on accounts with short term notice. The higher borrowing costs could be viewed as an insurance premium to have funds available once they are needed, for example to redeem maturing loans or outstanding corporate bonds. Furthermore, not only banks, but also the corporate and the private household sector had to deleverage their balance sheets. In such an environment, the risk that quantitative easing would lead to inflation is rather small.

In addition, it is not sufficient to look only at the provision of liquidity. The argument that increasing money supply would lead to inflation is based on Irving Fisher’s quantity of money theory and his famous identity equation. One of the assumptions fully in line with the neo-classical theory is that the economy is operating at full employment and capacity utilization. However, with the US unemployment rate at 9.6% and a capacity utilization of 74.7%, the US economy is far away from a situation that increasing demand for goods would lead to rising above the comfort level of 2%.

We would not deny that snake oil salesman like the two gurus (both have a commercial interest in their biased statements) could mislead some investors. “Animal spirits” of retail investors, as Akerlof and Shiller explain in their superb book, could be sufficiently strong to push demand for gold as a supposed store of value and trigger a price rally. However, are the smart money managers at hedge funds also fooled by the argument that quantitative easing would lead ultimately to accelerating Zimbabwean-style inflation rates in the US?

We have our doubts for two reasons. First, George Soros already called gold the next major bubble at the World Economic Forum earlier this year. Nevertheless, his fund (Mr. Soros is not in the active management) invested heavily in gold ETFs. However, this appears to be more exploiting opportunities in markets according to a statement a former CEO of Citigroup made during the financial crisis that as long as the music plays one had to dance.

The second reason relates to what the UN describes in the “World Economic and Social Survey 2010” on page 114 as externalities of the US monetary policy. The provision of liquidity by the Fed does not only lead to lending to the industrial and private household sector or the government, but also to non-bank financial institutions. Hedge funds are among those non-bank financial entities. Hedge Funds could borrow at low US interest rates and invest outside the US in instruments with higher return perspectives. The US dollar serves as a funding currency in carry trades. In addition, Russia and China questioned the status of the US dollar as a reserve currency. Both, carry trades and the fear China might sell US dollars to diversify its foreign reserve holdings, lead to a weaker US dollar. But the investment driven capital flow is not only directed into emerging markets. A depreciation of the US dollar also triggers fund buying of commodities. And it is the impact of Fed quantitative easing on the US dollar, which is relevant for the demand for metals.

Some time ago, there was a report in the media that a taxi driver in New York stopped his cab on the way from JFK airport to Manhattan and asked Mark Faber to leave. Mr. Faber urged the driver intensively to buy gold. The driver was fed up and replied that he has to pay his bills and taxes in US dollars and not in gold. This taxi driver had more economic wisdom than the investment guru. Retail investors buying gold for its supposed store of value should keep this in mind. And journalists better spend less time interviewing Mark Faber on the prospects of the US dollar as he could provide less added-value compared to his taxi driver.