Bullion is rebounding on news Larry Summers won't be Fed Chief. But is that reason to stock up on gold?
This weekend, former US Treasury Secretary Larry Summers announced he was withdrawing his name as a potential Fed chairperson.
And traders took that as a bullish sign, with the S&P 500 at one point close to its record highs during the trading day. As well, gold went up to $1,335 per ounce on Monday morning. But not everyone believes gold bugs should be excited.
“I’m not sure one wants to get too aggressive on gold out here,” said Gartman on CNBC’s Squawk Box yesterday. “You had a huge rally overnight but it’s already given most of those gains up.”
Indeed, the yellow metal was trading back down below $1,310 per ounce by the end of the New York trading day.
Over the past several years, the Federal Reserve Bank has been buying up US Treasury and mortgage bonds so as to lower interest rates (bond prices move inversely to bond yields) and add dollars into the financial system as a form of stimulus. This policy is known as “quantitative easing” (“QE”) and, as of this past December, involves the Fed buying $85 billion per month in bonds. However, current Fed chief Ben Bernanke hinted to Congress back in May that it would soon taper QE should the jobs situation and other data improve. It is believed they may start tapering this week.
The leading two candidates for Federal Reserve Chairman were Summers and Vice Chair Janet Yellen. Both are considered monetary doves – that is, they seen as more comfortable with the Fed’s policy of “easy money” than others at the Fed. But Yellen is believed to be even more willing to continue the Fed’s “accommodative” policies than Summers.
Why doesn’t Wall Street want someone tight with the Fed’s balance sheet? Because the bond-buying program means higher bond prices and thus lower interest rates. That, in turn, makes borrowing cheaper. And, some of those dollars find their way back into assets including stocks and commodities such as gold.
Does a more accommodative Fed Chair mean bullion is a buy?
To tackle that question, we talk numbers with CNBC contributor Andrew Busch, publisher of The Busch Update on the fundamentals of gold. He says there is some room on the downside for gold. On the charts is Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson. Though he was a recently converted gold bull, he sees recent moves to be significant and calls them “disconcerting”.
With that in mind, what’s next for gold?
Watch the video above to see Busch and Ross analyze the next move in the yellow metal.
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