The weak US dollar overnight and today as a result of what was essentially just a more dovish tone from Federal Reserve chairman Ben Bernanke, has shown in some respects that the Federal Open Market Committee operates at the behest of the markets and knows it.
The European Central Bank and Bank of England came to this conclusion last week, proving the theory with the unprecedented forward-guidance announcements.
Today’s US jobless claims showed that Ben Bernanke is right to be concerned about unemployment, after claims rose to 360,000 last week and served to allay tapering fears.
Clearly the threat of inflation is not of immediate concern, with the International Monetary Fund’s Oliver Blanchard stipulating that those who fear a short-term jump in prices are basically erroneous, while at the same time we’ve heard the likes of Harvard economist Martin Feldstein and former Fed chairman Paul Volcker voice concerns about imminent inflationary pressures. Short-term inflation may not be a problem but the jump in oil prices recently would imply that for somewhere like the UK, imported inflation is very real.
QE tapering fears ease
The cooling of tapering talk has had a significant effect on the base and precious metal suite, sending the sector on an upswing as Mr Bernanke sought to put the markets straight.
Yesterday’s relative divergence in price between oil and gold hit its lowest level in four years. Certainly the political upheavals in Egypt are having a perceived impact on oil supplies, but given the fundamental concerns over global growth, one would expect that demand for the fuel would also serve to push lower or help to neutralise supply concerns.
It may also show that gold has hit a pivotal bottom and had essentially been driven down too far, too fast. Gold, a traditional inflation hedge, powered up by $50/oz in the aftermath of Mr Bernanke’s remarks and has since found the air a little thin around the $1300/oz level today. A break through the $1300 level would probably provide a new base, with the $1320-30 levels a barrier to further upside.