Silver spot price gains on growing case against December taper

New York (Dec 9)  The spot price of silver has been trading in a tight range so far today, as markets ponder the burning question - when the US Federal Reserve will start to trim stimulus.

On Friday, the precious metal shrugged off a better-than-expected US labour market release as traders, in the view of Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce, “already seemed positioned for a strong employment report prior to the data coming out, due to the upside surprise in the ADP survey earlier in the week”. With the exception of the yen, the greenback weakened against most currencies and commodities.

Back in June, Fed chairman Ben Bernanke said that “when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains”. However, the US jobless rate dropped to 7.0 percent in November and the central bank has yet to move on a reduction in bond-buying.

Michael Gregory, a deputy chief economist at the Bank of Montreal (BMO), observes: “If 7.0 percent was formerly sufficient to stop QE, perhaps 7.0 percent is now sufficient to start tapering.” With 200,000-plus readings for nonfarm payrolls in three of the past four months, the market is increasingly seeing a taper announcement at the close of the last FOMC meeting for 2013, next week on 18 December.

But a December taper is by no means a done deal, argues Gregory, because there are several factors “keeping the odds less than even”. First and foremost, the Fed could be expected to wait until the US fiscal uncertainty abates, especially after a couple of years of living on the brink.

“Second, there will likely be major GDP payback in Q4 for Q3’s 1.7 percent worth of inventory build-up.” A third consideration is that financial market liquidity typically dries up to a large extent heading into a calendar year-end, meaning that the market impact of tapering this month would be unduly magnified. As BMO’s Gregory puts it: “With last spring’s spike in Treasury yields still fresh in memory, we suspect the Fed would prefer to have deeper markets when it comes time to start crimping QE.”   

Finally, Friday’s release of the PCE Price Index showed that inflation in the United States is staying stubbornly low, with the Core reading at 1.1 percent y/y in October. In Gregory’s view, “[g]iven the persistent large output gap and aggressive price discounting this holiday season”, inflation could slip even further below the Fed’s two percent target in the months ahead.

The markets will today tune in to the address of St Louis Fed president James Bullard, scheduled for 18.05 UTC. Bullard has been willing to postpone tapering for months now, given an absence of inflationary tendencies, and he will likely reiterate his cautious stance when he speaks to the Chartered Financial Analysts Society of St Louis today. Bullard is a voting member of the FOMC and a leading exponent of the Fed’s plans to add an inflation floor to its forward guidance.

But any attempt by the US central bank to defend its mandate of price stability by adding an inflation floor to its forward guidance would have a major downwards impact on the US dollar, according to Aurelija Augulyte, a senior FX anayst at Nordea Markets.

Also due to speak today are alternate FOMC voting member and Dallas Fed president Richard Fisher and Jeffrey Lacker, the Richmond Fed president.

The most recent market sentiment survey compiled by CNBC indicates that 53 percent of respondents expect bullion prices to gain this week.

Right now, spot silver is trading around 19.587, up 0.16 percent intraday.