FOMC minutes boost dollar, pressure gold

2013-JAN-04

Better than expected ADP jobs numbers combined with hawkish noises from the Federal Reserve have prompted a dollar surge over the last 24 hours, with yields on 10-Year US Treasuries rising to an eight-month high. The Dollar Index is at seven-week highs above 80.50.

The reaction in precious metals has been predictably bearish, with gold down over $25 over the last 24 hours, with silver losing 70 cents and back below $30. Platinum and palladium have lost ground, as have stocks.

According to the minutes from the Federal Open Market Committee’s December meeting, its 12 members are evenly split on whether or not to continue buying assets until the end of this year. The Kremlinologists at the FT (subscription required) attempt a dissection of the Fed language, though given the vagaries involved (sample: “A ‘few’ participants in the meeting wanted to use words to describe the condition for raising interest rates, because they thought that would work just as well as numbers, without the risk of being mistaken for new Fed targets.”) this is a pretty inexact science.

What we can say with certainty – and have been saying until we’re blue in the face – is that the easy money crowd will win. There is simply no other option given the scale of government liabilities and debts across America. To take just one example, the Congressional Budget Office estimates that the new fiscal cliff deal will increase deficits over the next decade by close to $4 trillion. Combine this with what the IMF calls the “topological fragility of the derivatives markets” (hat-tip to JSMineSet.com) and you can be sure that financial disaster would ensue if the Fed did decide to end quantitative easing. QE is here to stay, just as it is in all the other countries that are burdened with the same fiscal problems.

We could see further pressure on gold today if the US nonfarm payrolls come in better than expected. Do not allow these short-term data points to alter your knowledge of the long-term fundamentals.