Gold and Silver Hit by Yellen “Misjudgement”

You will have woken this morning to gold and silver both heavily sold off last night in the northern hemisphere.  So what happened?  The head of the US central bank, Janet Yellen of the US Fed, came out with (what was interpreted as) her most hawkish statements in a very long time.

The crux of her message is summarised as quoted: "My colleagues and I may have misjudged... the fundamental forces driving inflation and the strength of the labour market"

Essentially she warned that there was a risk of inflation getting out of control and they were `wary of moving too gradually' when it comes to raising rates.  She said there is a risk inflation expectations are not as well-anchored as they appear.

Bloomberg put it nicely in that “Federal Reserve Chair Janet Yellen has proved to be amazingly adept at giving speeches that are widely open to interpretation, giving everyone a little of what they want to hear without shocking the markets.  At the same time, she has also managed to subtly shift the market toward where she wants it to go.”

The Fed has quite the conundrum.  Raise rates too quickly into a fundamentally weak economy (Goldman’s again downgraded their Q3 GDP estimate to just 1.4% last night off more weak housing data, a trend that has played out all year) and they risk blowing the whole thing up.  Higher rates when the system is so strung out on debt and the economy not actually strong enough to handle it, is not a good outcome.  But on the other hand if they wait too long, they risk losing control of all this pent up inflation currently only in financial and property asset bubbles, further inflation of those same asset bubbles, and the system taking on even more debt whilst it is so cheap and the Fed looks to be there permanently to the rescue.

The other elephant in the room is Yellen’s tenure as chair.  Her term ends at the end of this year and recent reports suggest Trump is not in favour of her returning.  That then leaves the big unknown of what the next Chair will be like.  Yellen has been consistently more dovish (easy monetary policy) than hawkish (tighter monetary policy) which financial markets have loved but leaving the ordinary man behind.

So whilst gold and silver came off last night on the hawkish interpretation of her craftily abstract remarks, history shows this is often a sell the rumour, buy the fact set up.  The odds for a December rate hike went to 100% over night.

More broadly, if indeed they are too slow in tightening and inflation does get out of control (ala that $4.5 trillion they printed starts flowing through Main St not just Wall St) gold and silver traditionally LOVE inflation.

It’s a damned if you do, damned if you don’t scenario for Janet and she may well be hoping Trump doesn’t endorse her so the inevitable ‘great unwinding’ is on someone else’s watch.