Thread: Rickards: Falling Gold Signals Fed's 'Worst Nightmare'

Rickards: Falling Gold Signals Fed's 'Worst Nightmare'

Friday, 28 Jun 2013 08:08 AM
By Michelle Smith

Gold bugs should not be worried about the metal's falling price, but Federal Reserve officials should be very concerned, says Jim Rickards, author of "Currency Wars" and senior managing director of Tangent Capital.

While gold prices have dropped over 20 percent since the beginning of the year and gold is down 30 percent from its peak in August 2011, "the fundamental bull case for gold has not changed at all," Rickards told Yahoo.

Rickards proclaimed that the decline in gold prices is more of problem for the Fed than it is for gold bugs.
If you hold the dollar constant, you see the price of gold is dropping, he explained, and when you reverse that, so gold is the constant factor, you see the dollar is getting a lot stronger.

"In other words, a lower dollar price for gold if gold is the constant means the dollar is getting really strong. That's deflationary. That's the Fed's worst nightmare," he told Yahoo.

Last year, the Fed made a historic move when it set an inflation target of 2 percent, but inflation is currently running below that level.

The Fed has shaken up markets with talk of possibly tapering its stimulus programs, but Reuters said some experts wonder if sub-target inflation will actually force the Fed to take a more aggressive approach.

Rickards believes it will, saying that the strong signs of deflation is one reason the Fed will likely have to back away from Fed Chairman Ben Bernanke's ruminations and either maintain or increase the level of asset purchases.

"If the Fed officials are reading market signals, if they even remember what those are, they should be very concerned about" declining gold prices, Rickards said.

He warned that gold prices are confirmation that the Fed's nightmare is materializing.

"The Fed would like real growth, but if they can't get it they will take nominal growth because debt is nominal," he noted.

"We have nominal debts and we need nominal growth and we're not getting it, or at least we're not getting enough of it," he added.

Not everyone agrees that investors shouldn't be worried about the drop in gold prices.

"You need to re-examine your expectations for the gold market if you're long — you need to stop thinking in terms of crisis and start thinking about where gold was pre-crisis," Tom Kendall, director and head of precious metals research at Credit Suisse, told CNBC.

He points back to the days before unlimited easing, and before rabid fears drove people to believe they needed to seek safety in metals. Back then, gold was trading at $1,100 or $1,150, he noted.

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Ex-Treasury Chief Paulson: Pain in Store as Fed Bows Out

Thursday, 27 Jun 2013 06:46 PM

Phasing out the Federal Reserve’s stimulus and monetary accommodation will cause some market volatility and pain, said former U.S. Treasury Secretary Henry Paulson.

The Fed has been making $85 billion in monthly bond purchases and holding the key interest-rate target near zero to spur job growth and faster U.S. economic expansion. The central bank will probably taper its asset purchases later in 2013 and stop them around mid-2014 as long as the economy performs in line with its projections, Chairman Ben S. Bernanke said June 19.

“When you have a big, ugly problem, there’s never going to be a neat, elegant solution that is totally painless or without a cost,” Paulson said in an interview on CNBC Thursday. “It’s just completely unrealistic to assume that those programs could be phased out without some market volatility and some pain because market participants, some of them are addicted to these abnormally low interest rates.’’

After a slump last week, U.S. stocks rallied for a third day as economic data indicated Fed policy makers can continue to provide additional stimulus to the economy.

“We need to get our economy growing faster than 2 percent. We need to deal with the deficit,” Paulson said. “The only way you’re going to do that is bipartisan compromise.”

Revised data from the Commerce Department Wednesday showed the world’s largest economy grew at a 1.8 percent annualized rate in the first three months of the year as consumer spending climbed at a 2.6 percent pace. Both estimates were lower than previously calculated.

China Economy

Asked about China, Paulson said that country is willing to tolerate slower growth while it fixes its financial system.

China’s stocks have plunged on concern a cash squeeze is hurting economic growth. The Shanghai Composite Index is trading at four-year lows, while the CSI 300 Index entered a bear market on June 24.

“The economy is now so big and so complex, it’s difficult to manage with this combination of administrative means and market means,” Paulson said. Chinese leadership is “committed to moving more toward markets and less toward top-down planning, but there’s a lot they need to do.”

Paulson said the credibility of Chinese economic statistics “has always been an issue.”

‘Growing Fast’

“We know that it’s been growing fast for a long time,” Paulson said. “But the exact numbers, that’s a problem. And the government’s aware of that. They’re doing everything they can to get more accurate numbers.”

Paulson, 67, former chief executive officer of Goldman Sachs Group Inc., served as Treasury secretary from 2006 to 2009, during the worst of the financial crisis.
Since leaving the Treasury, Paulson has served as chairman of the Paulson Institute, a Chicago-based nonpartisan center he founded in 2011 to promote sustainable economic growth and a cleaner environment, which has focused on the U.S. and China.

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