Gold in a (Un)Tapered World

By: Axel G. Merk, Merk Investments / GoldSeek.com

Gold is up, even getting a positive mention in Barron’s. Is it Japan’s election or the tapering of the taper talk that’s driving gold higher of late? Is this a bounce or the beginning of a new major uptrend in gold?

Until just a few weeks ago, pundits fell all over themselves to call an end of the gold bull market. Those that bought gold 10 years ago called the “correction” a blip; those that had bought in recent years required therapy; and those that never bought gold in the first place proudly proclaimed “I told you so.” Most would agree that the selloff in gold was rather vicious. And that may well be where the explanation of the most recent move lies. We have often argued that we like gold because of its “monetary sensitivity,” that is, the sensitivity to the mania of printing presses around the world. We like gold because of its comparatively simple dynamics. However, when gold moves higher twelve years in a row, no matter what our central bankers may be up to, the shiny metal can take on a life on its own.

Relevant to the discussion is that with speculators washed out for now, gold is able to play its more traditional role. And policy makers around the world try their best to instill life yet again to the metal. Most notably, with Federal Reserve Chair Bernanke tapering his taper talk; and, most recently, the party of Japan’s Prime Minister Abe winning the Upper House, paving the way for more expansionary fiscal and monetary policies.

While many in the gold community are glued to every move in the price of gold, we are just as passionate in studying other asset prices; we may be best known for our analysis of the U.S. dollar in the context of other currencies. We closely study morphing correlations: for example, a year ago, after European Central Bank President Draghi gave his “I’ll do whatever it takes” speech, money didn’t flow towards gold and commodity currencies (the Australian and Canadian dollar, to name but two); instead, the euro was the prime beneficiary (for more background predicting this dynamic, please see our August 2012 analysis: Draghi’s genius). What happened was that gold wasn’t cheap; commodity currencies were pricey, but the euro had been held back, possibly for all the right reasons. Even if some didn’t think the euro was cheap, most would agree that the euro became less uncertain after Draghi took away some tail risks. As such, money flowed to the euro more so than elsewhere when investors had expressed an appetite for risky assets. Fast-forward to today, and gold is currently the ugly duckling. And as monetary policy appears on a more accommodative path than a couple of weeks ago when “exit” and “taper” talk was all the rage, it’s the ugly duckling that gets to shine.

What about the longer term prospect for gold? Let’s zoom in on the tapering of the taper talk, most notably two key areas: unemployment and housing.

Bernanke is now quite vocal that unemployment numbers are masking underlying weakness. I’m not sure whether he has been reading Merk Insights, but he points out, amongst others, that we create many part-time jobs, while reducing full-time jobs. Employers won’t need to offer healthcare for part-time employees when Obamacare is fully implemented, thus providing an incentive to move full-time jobs to part-time jobs. The labor participation rate, historically shrugged off by Bernanke as merely being a sign of an aging population, is also getting more attention. Someone must have pointed out to him that the elderly are actually working more; it’s the up to 55 year olds that are not participating in the labor force as much as they should. Simply said, Bernanke is putting more emphasis on the glass being half empty with regard to the employment picture. We agree that unemployment is a bigger problem than the statistics make them appear to be at first sight.

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