Why is ambiguous US Central Banker speech the norm instead of the exception? As I stated yesterday, “I believe that this current correction in gold and silver stocks will provide a window for a few more days to weeks to get on board at a good price for the first half of 2017.” Yesterday, gold and silver stocks corrected further as I believed they would, but they also sold off an inordinate amount considering the slight pullback in the underlying metals themselves, with gold only correcting less than $5 an ounce and silver down less than half a percent. These minimal pullbacks in spot gold and spot silver prices shouldn’t have triggered the much larger percent sell-offs in gold and silver mining stocks that occurred in yesterday’s markets, so are the larger price sell-offs in the PM stocks predicting imminent future sell-offs in spot gold and spot silver prices?
I believe several factors are at work here. Number one, the big banks were heavily short in gold futures going into the end of this month and were unable to take spot gold prices down, so they lost a considerable amount of money in their short positions. To balance this mistake, they could have shorted the gold and silver mining stocks and initiated the sell-off yesterday to recoup some of their losses in the PM derivative markets this month. Regarding the mechanism by which they could have taken down the stocks, I’ve written plenty of articles describing the very plausible mechanism by which bankers can execute such schemes with the aid of HFT algorithms, so I’m not going to rehash that explanation here.
In addition, there are a couple of very important geopolitical/economic events happening next month that could cause bullishness in gold and silver asset prices. We know from history, that it is extremely rare for bankers to allow gold and silver price rises to go unopposed. Consequently, the desire of Central Bankers to offset any bullishness in gold and silver asset prices that may materialize next month likely has contributed much to the probability of a mid-March US Central Bank fed funds interest rate hike soaring from a mere insignificant 13% just two weeks ago to 34% one week ago to the present 51% as of today. Besides US Central Bankers talking up a good game and threatening to raise hikes, which they always do as part of their regular Central Banker speech, whether or not they really are sincere about the execution part of the equation, the probability of a US fed funds interest rate hike next month has soared from 13% to 51% in just two weeks due to trader psychology as much as any other factor. I believe that US Central Bankers understand the possibility of bullish geopolitical/economic events happening in mid-March.
Consequently, US Central Bankers feel that it is necessary to counter this possibility with a barrage of hawkish comments about interest rate hikes in publicly delivered Central Banker speech to influence trader psychology. For example, Dallas Fed President Rob Kaplan recently publicly stated that an interest rate hike could come “sooner rather than later.” Though I believe that Kaplan deliberately delivered an ambiguous comment, he followed up his statement by later “clarifying” his “sooner rather than later” comment by comically explaining that “sooner rather than later” meant in “the near future”. I would like a linguistics expert to explain to me how “the near future” provides more clarity regarding a timeline for execution than the “sooner rather than later” phrase. However, despite my opinion that there has been no further clarification from US Central Bankers if they plan on raising interest rates next month since the release of their minutes on 22 February 2017, this comical game obviously succeeded in swaying traders into believing this hawkish threat is real, despite no further clarification being provided.
I believe Central Banker speech strategy is just to repeat hawkish threats, if they don’t at first impact gold and silver asset prices negatively, multiple times through multiple different bankers, until their desired effect is accomplished. It’s a very sophomoric, but surprisingly effective tactic of “if at first you don’t succeed, then try again, and again and again” or “fake it until you make it”(in this case, produce the desired outcome). The deliberately vague language choice of “sooner rather than later” and “the near future” is not any different than the deliberately vague language revealed in minutes of the US Federal Reserve released earlier this month, in which it was revealed that “many participants” [Central Bankers] wanted to raise interest rates “fairly soon.”
Since the deliberately ambiguous “fairly soon” Central Banker speech failed to cause a significant sell-down in gold and silver mining stocks and spot gold and spot silver prices, US Central Bankers merely reiterated the same language again just a few days later to signal to traders that they better take their threat seriously, despite my belief that their true intent has never changed. In fact, Central Bankers and politicians have used this tactic before, in threatening to sell, or suggesting a sale of a considerable portion of their gold reserves to pay down national debt, to create a downward spike in spot gold prices, only to never do so after their desired outcome of lower spot gold prices was achieved.
So the question remains if US Central Bankers will actually follow through on their threats to manifest a rare occasion of congruence between their actions and words. Even though traders now place the probability of an interest rate hike at over 50% now next month, I’m not buying the hype for the sole reason that I believe US Central Bankers are not yet ready to trigger a US stock market sell-off. I believe they will be ready to trigger a sell-off at some point in the second half of this year. When a US stock market sell-off materializes, I expect the sell-off to be fast and furious, much more furious than expected by the public. For now, I believe Central Bankers will give their commercial banking CEOs a little bit more time to quietly exit the market and keep selling their buy narrative to the public, and for this reason, I don’t believe they can risk the possibility of triggering a deep sell-off in US stock markets by raising interest rates as early as next month.
If my assessment of this situation is correct, then Central Bankers will seek to control market pricing behavior by words only for now, and not by actually following-through with any actions that meet their words. Based on historical probabilities alone, we shouldn’t expect Central Bankers to follow through on their words. However, in the coming days to weeks, if further actions point to a stronger possibility of a surprise instance of follow-through on actions, which I don’t believe exist at the present time, then as we did at the end of last year, we will assume hedges to deal with the continued resultant volatility in gold and silver asset prices.