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Summer surprise update

 -- Published: Thursday, 10 July 2014 | Print  | Disqus 

By Michael J. Kosares

Gold climbs as Fed says investors are overly complacent
Bloomberg/Debarati Roy/7-9-2014

“Gold rose to a one-week high after several Federal Reserve policy members expressed concern that investors may be growing too complacent on the economic outlook, boosting demand for the metal as a haven. ‘Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,’ the minutes of the last Federal Open Market Committee meeting showed today.”

MK note: Gold is bumping against the $1340 per ounce mark as this is written — up over 11% so far in 2014 and looking strong in the overnight market. Gold is up over 7% since we first warned of a possible summer surprise on June 9th. At the time gold was trading in the $1250 range. (Please see Is a summer surprise in the offing for the gold market?)

Looks like certain members of the Fed Open Market Committee would like to avoid the embarrassment of failing to inform the public that certain markets are not a one-way street to financial nirvana — one of the positive residual effects of the 2008 meltdown and the almost universal mantra “we didn’t see it coming.”

These warnings from inside the Fed itself are an interesting addition to the contemporary financial repertoire, and something that should be elevated above the din. Some time back, we told the tale of Andrew Huszar, the man who ran the Fed’s quantitative easing trading room for a number of years, and I believe it would be relevant in this context to resurrect his story. Huszar, now in the private sector, calls the Fed the biggest hedge fund in the world and owns gold for defensive purposes.

Here’s a repost of the original commentary published in the April edition of USAGOLD’s Review & Commentary (You can sign-up to receive our newsletter here):

Fed now the largest hedge fund in the world
Why the former head of the Federal Reserve’s QE trading room owns gold

Andrew Huszar, formerly a managing director at Morgan Stanley and the man who set up the Fed’s trading room to run the quantitative easing program, now believes that the Federal Reserve has set a dangerous course for America and the world. In this surprising interview at King World News, he reveals the Fed’s deep involvement directly in markets and explains why he now includes gold in his own investment portfolio.

“I think when you see the Fed go from having a balance sheet of $800 billion to $4 trillion in the span of five years, and pump over $4 trillion of cash into Wall Street, you’ve seen a lot of cash liquidity flowing throughout the world. I would argue that the markets have become addicted to the liquidity that the Fed is pumping out there.

So when you pull back any punchbowl this big you are going to see substantial issues. We saw this first last summer when the Fed initially talked about a taper and we saw a $5 trillion global equity market selloff. In January, in anticipation of the second QE cut by the Fed, you saw more volatility in the emerging markets.

I think what you are going to see in 2014 is the unintended consequences of this stimulus hit as the Fed tries to pull it back. … At this point the Fed effectively owns 30% of the US Treasury market, it owns 10% of the housing market, it has become what is effectively the biggest hedge fund in the world.

You have a lot of hawks on the Federal Open Market Committee (FOMC) who are confident they can pull back (on QE). I think the Fed will be surprised again — by what happened in the emerging markets, for example, spreading to the US markets. I believe the idea that the Fed would finish QE by the end of 2014 is unrealistic.

The volatility in the markets will be a rollercoaster ride. If the Fed really sticks to its guns, I think we could see a 20% – 30% selloff in the US (stock) market pretty easily in the course of a few months. … If the market really believed that central banks around the world were going to step away meaningfully, and there was no so-called ‘Greenspan/Bernanke/Yellen put’ in the market, I believe you could see far more dramatic declines.”

Huszar also points out that the Fed is now buying 90% of newly issued mortgages.


This might be a good time to update one of our favorite charts — an overlay of the gold price and the St. Louis Fed’s Monetary Base. As you can see there has been a correlation in the past between the monetary base (the items Huszar is referring to when he mentions the Fed’s balance sheet) and the price of gold. As you can see, the two parted ways in 2013 — a situation that suggests that at current prices gold might be on the bargain table.


Chart courtesy of the St. Louis Federal Reserve (FRED)

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 -- Published: Thursday, 10 July 2014 | E-Mail  | Print  | Source:

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