Gold Shines When Fed “Talk” Fails

Gold Shines When Fed “Talk” Fails
Very few coin collectors would disagree that all else being equal, rising precious metals prices are a positive influence on the general health of numismatics. Granted there are some rare coins that seldom come to market so infrequently, that precious metals prices have little or no effect on the price realized at auction.

Otherwise, the general mood for the coin market is greatly influenced by precious metals prices. Few could argue that the psychological effect of falling precious metals prices has had a humbling effect on coin prices, even on those coins that contain no precious metal content.

Of course there are exceptions to any rule. The crazed speculation in high-grade certified coins in 1989 was set against precious metal prices that were stable. The crash in coin prices the following year also had little connection to metal prices. With that particular anomaly aside, the health of the coin market is more heavily influenced by collector’s perceptions of the bullion market.

The bullion market is more counter-cyclical to the economy as a whole. This is especially true when compared to the financial services industry, where every product they sell is predicated on a sound and stable currency, reflected by a stable or falling gold price. For obvious reasons, the value of the dollar is something the banking gurus like to manage to suit their own delusions of control.

The Federal Reserve has had a disputed success rate in managing the value of the dollar, even if it is becoming worthless over time. Almost everyone would agree that the rally in precious metals over the past decade has been the direct result of the monetary expansion of the dollar. The consensus seems to be that after more than a decade of annual price gains, the precious metals have lost some of their luster.

If you look back over the monetary policy of the past 12 years, you can’t help but notice that nothing has really changed. None of the big investors in gold look at the fundamentals. Instead they tend to rely more on the market sentiment. Of course there is a fair amount of direct manipulation in the markets. You couldn’t find a better example than the use of the Federal Reserve’s use of the “taper” rumor.

While the Fed will never admit it, they too watch metals prices closely as a proxy to how successfully they are managing the currency. Over the past 15 months, every rally in the precious metals sector has been met with the same response from the Fed. Their standard response is to roll-out the rumor about an imminent “taper” or reduction in the amount of monthly bond purchases.

Like the fable of the boy who cried “wolf” too many times, this trick is going to cease to work sometime in the future. Eventually the Fed will make another taper threat without following through on it, and instead of a drop in gold prices, there will be a grand rally as everyone comes to the same conclusion at once.

The Fed does not have the option to taper even if they wanted to. Bond prices would collapse if they actually did taper off their purchases. Nobody knows what effect that would have on the economy.

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