The recent increase in gold prices suggest investors are increasingly worried the Federal Reserve may soon back off its current policy of quantitative easing in which it has bought billions of dollars of U.S. treasury debt and mortgage backed securities over the past few years.
In an article published Monday, Tyler Durden of ZeroHedge.com noted investors last week covered an enormous number of options contracts going short on gold futures prices, 23,518 futures contracts in total, suggesting a short-squeeze on gold is starting to solidify.
Short positions on gold futures contracts involve bets an investor makes that the price of gold will drop in the future. If the price of gold does not drop as anticipated, the investor owning a short contract must take a loss by purchasing gold at current prices to close out the contract on the expiration date.
When gold prices increase, investors owning gold futures short contracts risk losing money on the bad bet that the price of gold would have declined between the date the contract was purchased and the expiration date of the contract.
Durden noted the covering of gold shorts occurred last week at the fastest pace seen in the past 13 years.
“The last time shorts collapsed at this fast a rate was in the 1999/2000 period which saw a considerable 33 percent squeeze ramp up in gold prices over the space of three weeks in the fall of 1999,” Durden wrote.
“Notably, the gold short position still remains huge compared to historical values – having fallen back only to the previous all-time high levels,” he continued, noting there was still considerable room for a continued gold squeeze should the price continue its recent rise.
Closed 23,518 gold short futures contracts in August. Thirteen-Year Gap Back to 1999-2000 Illustrated. (Source: Commodity Futures Trading Commission, ZeroHedge.com)
On Monday, the price of gold climbed to a two-week high, increasing as much as 1.5 percent to $1,333.31 an ounce early in the trading session, reaching its highest point since July 31, as recent U.S. economic data pointed to continued sluggish growth.
The surge in gold price was reflected by holdings in SPDR Gold Trust, the world’s largest gold exchange-traded fund, growing by 0.2 percent to 911.13 tons on Friday, the first increase since June 10, in what has amounted to an outflow from the fund of more than 14 million ounces, valued at about $19 billion in current prices.
Meanwhile, U.S. gold futures for December gained $14.70, to $1,326.70 an ounce, suggesting short-sellers have not lost hope the recent increase in the price of gold is temporary.
“The move above $1,300 last week has raised the risk of some additional short-covering, but the technical picture is quite neutral and it could only improve if we see gains pushing prices above the $1,350 level,” Saxo Bank senior manager Ole Hansen told the Fox Business Channel.
Will the Fed soon stop buying U.S. debt?
Despite the Commerce Department’s decision in June to revise downward the GDP growth rate for the U.S. economy during the first-quarter of 2013 to an annual rate of 1.8 percent, signals from within the Federal Reserve Board continue to suggest the Fed may soon to back off quantitative easing. The move could further depress U.S. economic growth and send U.S. stock markets into a steep decline.
Last week, Sandra Pianalto, the president of the Federal Reserve Bank of Cleveland, joined those within the Fed suggesting it was time for quantitative easing to come to a halt.
“Employment growth has been stronger than I was expecting, and the unemployment rate today is more than a half a percent lower than I projected it to be last spring,” Pianalto told an audience in Cleveland last Wednesday. “In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.”
Charles Evans, president of the Federal Reserve Bank of Chicago, told a breakfast meeting of reporters last Tuesday that he would not rule out the Fed pulling back on its $85 billion-a-month bond-buying program when the Federal Reserve Board holds its next policy meeting in September.
“I clearly would not rule that out,” Evans responded, when asked if the Fed might ease back on bond purchases at the Federal Reserve Board’s policy meeting scheduled for Sept. 17-18. “Considering the cumulative improvement in economic conditions since September 2012, our asset purchases likely will end with the unemployment rate somewhere in the range of 7 percent.”
The U.S. Bureau of Labor Statistics announced the unemployment rate as measured by the standard U-3 index was 7.4 percent in July, the last month for which federal unemployment data has been reported.
As WND has reported, many economists believe the BLS unemployment numbers are manipulated for political reasons. The government’s headline figure removes the long-term unemployed from the ranks of the labor force to lower the U3 unemployment percentage the BLS reports as the monthly unemployment rate. These skeptical economists have argued that a more accurate measure of unemployment is the U6 seasonally adjusted figure – 14 percent in July 2013 – or a measure that adds to U6 the long-term discouraged workers who have not looked for work in more than a year but still consider themselves to be unemployed, which was 22 percent last month.
Reuters reported last week that the downturn of stock prices observed at the end of last year was largely a result of investor concern that a Fed decision to end or reduce substantially the policy of monthly quantitative easing could remove from the economy a major drive behind the equity rally. The surge has boosted the S&P 500 index by about 18 percent so far this year.
“People are concerned about the extent of the [stock market] rally in the short term, and some people are talking about equities being too expensive relative to the underlying fundamentals,” Stephen Massocca, managing director at Equity Management LLC in San Francisco, told Reuters last week.
The next Fed chairman?
Fed Chairman Ben Bernanke, preparing to retire at the end of this year, compounds uncertainty over the Fed.
The top contender to replace Bernanke is widely considered to be Janet Yellen, the current Fed vice chairman, a proponent of quantitative easing who would be expected to perpetuate Bernanke’s policy as long as concerns remain strong in equity markets that the U.S. economy is too week to sustain strong, long-term growth.
Yellen’s main competitor for Bernanke’s job is former Harvard president Larry Summers, who served as secretary of the treasury from 1999 to 2011 under President Clinton and was director of the White House U.S. National Economic Council from January 2009 to November 2010 under President Obama.
On Wall Street, Summers is widely thought to be hostile to a policy of continued quantitative easing.
“There’s certainly anecdotal evidence of yield chasing by investors who are seeking to earn greater than completely safe rates of return,” Summers explained to a breakfast hosted last month by the Wall Street Journal. “To what extent that reflects desirable increases … and what extent that reflects movement towards bubbles is a judgment that … monetary policy authorities will have to make over time.”
Reporting on the speech, Stephen Gandel, senior editor at Fortune Magazine noted Summers has dismissed concerns brought up by investor Warren Buffett and others that ending quantitative easing could shock stock markets by causing interest rates to take a big jump.
WND has reported Summers may end up being best remembered for having caused Harvard University to lose some $10 billion, approximately 30 percent of its endowment, as a result of misguided instructions during his tenure as president from 2002 to 2006. Summers directed the university’s endowment fund to invest in complicated credit-swap derivative investments that ultimately went sour.