There was a post at ZeroHedge.com on 20th November titled “Fed To Hold An “Expedited, Closed” Meeting On Monday“. The title suggests that something strange is afoot, that is, that the Fed is up to something out of the ordinary. Hence the emphasis on the words “Expedited” and “Closed”.

To make sure that its readers get the message, the post goes on to state:

“Given how awesome everything appears to be, judging by stocks and the tidal wave of FedSpeak of the last week confirming that rates are rising in December, we found it at least marginally ‘odd’ that out of the blue, the Fed would announce an ‘expedited, closed’ meeting on Monday…”

Odd? Out of the blue? Really?

The author of the ZeroHedge post forgot to mention that these “expedited, closed” meetings happen with monotonous regularity. The one scheduled for Monday 23rd November will be the third one this month. And there were four in October, three in September, two in August and five in July. You can find the notice for the coming meeting and the records of previous similar meetings at http://www.federalreserve.gov/aboutthefed/boardmeetings/201511.htm.

Even the topic under discussion at the 23rd November meeting will be routine. The purpose of the meeting is: “Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.” A meeting with the same purpose happens every month. For example, there was one on 26th October, one on 15th September, one on 31st August and one on 27th July.

Always be aware of the agenda/bias of the news sources you use.

In a typical commodity market the traders known as “commercials” are usually hedging their exposure to the physical commodity when they buy or sell futures contracts. For example, in the oil market the most important “commercials” include oil producers, who are naturally ‘long’ the physical commodity and often sell futures contracts to hedge this exposure, and manufacturers of oil-based products, who are effectively ‘short’ the physical commodity (by virtue of the fact that oil is one of their biggest costs) and often buy futures contracts to hedge this exposure. However, the gold market is different.

Some of the commercial traders operating in the gold market are traditional hedgers. Mining companies and jewellery manufacturers, for example. But given that the existing aboveground stock of gold dwarfs the annual supply of new gold and that the amount of gold that changes hands for store-of-value, investment and speculative purposes dwarfs the amount of gold bought/sold for more traditional commercial uses such as fashion jewellery and electronics, a reasonable and knowledgeable person would expect that traditional commercial traders would play a relatively small role in the gold market. A reasonable and knowledgeable person would be right.

In the gold market the dominant commercials are not traditional hedgers. They are also not speculators, in that they rarely take positions that rely on the gold price moving in a particular direction. They are spread traders, meaning that they make their profits by trading the differences in price between the physical and futures markets.

For example, if speculative buying of gold futures causes the futures price to rise relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the futures and buy the physical, and if speculative selling of gold futures causes the futures price to fall relative to the spot price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the futures and sell the physical. For another example, if gold buying by hoarders of physical gold causes the cash (physical) price to rise relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to sell the physical and buy the futures, and if the ‘dishoarding’ of physical gold causes the cash (physical) price to fall relative to the futures price by a sufficient amount it will create an essentially risk-free arbitrage opportunity for a commercial to buy the physical and sell the futures. In other words, commercial trading in the gold market is mostly about arbitrage.

The difference between commercial trading in the gold market and commercial trading in all other commodity markets is tied to gold’s long history as money. Strangely, many gold ‘experts’ assert that gold is different due to its dominant monetary and store-of-value roles, but then insist on applying a traditional commodity-style method of supply-demand analysis. Unsurprisingly, the result is a pile of hogwash.

The following charts relate to comments on the gold and silver markets that will be emailed to TSI subscribers later today.

Way back in early-2009 and again in mid-2012 I wrote in TSI commentaries that if the story unfolded as I expected then a lot of future economic commentary would begin with the word “despite”, and that in most cases the commentary would be a lot closer to the truth if “despite” were replaced with “because of”. For example, a comment along the lines of “despite the huge monetary stimulus the economy remains weak” would be closer to the truth if it read “because of the huge monetary stimulus the economy remains weak.”

My 2009 assessment remains applicable in that most commentators still don’t get it and still use “despite” when they should be using “because of”. They still don’t realise that pumping money into the economy falsifies prices (including the price of credit, the most important price of all) in ways that make the economy less, not more, efficient. The reality is that the more the central bank tries to stimulate the economy via ‘loose’ money, the more it will HINDER economic progress.

A sensible way to use the word “despite” is in reference to plans for future stimulus. For example, it could reasonably be said that DESPITE the lack of logical support for creating money out of nothing and the evidence that previous QE programs did not help, it’s a near certainty that the Fed will introduce a new monetisation program if the economy gets much weaker. It could also be said that the US economy’s only hope is that the remnants of capitalism are strong enough to generate sustained improvement DESPITE the price distortions caused by the Fed.