Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Gold $900 - Fed Failing to Beat Inflation

Commodities / Gold & Silver Jan 13, 2008 - 08:01 AM GMT

By: Joe_Nicholson

Commodities Best Financial Markets Analysis Article“Any perception of the Fed's stinginess might play into a consolidation period for metals and could also start a rally in the dollar that has so far not appeared at the top of the year as some expected. That we've seen any weakness in metals at all lately might simply be the technicals asserting themselves, flattening out the ascent a bit before another run. Consider that oil is trading at all-time inflation adjusted highs, whereas gold's inflation adjusted record is above $2000 per ounce! Breaking through and holding last week's highs will be the first objective of any bullish activity.” ~ Precious Points: Wave 1 Done? January 06, 2008


It became too difficult to resist as the chairman opened his speech on Thursday with an overview of the credit crisis and its causes, this sense that Bernanke is not the power behind the Federal Reserve. He's the historian, the bard of the board, a sharp mind knowledgeable enough to elucidate heretofore arcane economic principles. But the power in the financial sphere once wielded by a very few men now seems invested more broadly in the market as a whole. Perhaps it's progress, perhaps depravity, but it's becoming increasingly clear that, in terms of interest rates at least, what the market wants the market gets, if not immediately, then eventually.

We maybe should have read it into the current Fed chief's earlier rhetoric on the importance of anchoring inflation expectations, but after a speech on Thursday aggressive at least in its attempt to shift the language about the Fed's recent performance if not in its specificity on policy, it's clear not only will the Fed cut by 50 basis points in January and probably further at future meetings, it will justify these decisions by its economic forecasts of anemic growth and more importantly by a view of inflation that overlooks short term measures like next week's PPI and CPI and commodities prices in favor of long bond yields and TIPS spreads.

To a candid world the circularity of the argument is evident. Bond yields are low because of economic uncertainty and because of rate cut expectations and, of course, because they are what the market says they will be. Though the Fed has been rather reactive and accommodating by its own historical standards, its evasions, its half measures, its focus on inflation risks have not satisfied a financial sector that has too long struggled and is now failing from the burden of an, until relatively recently, inverted yield curve. Bernanke's latest speech admits the TAF is not so much an emergency injection of liquidity as much as an attempt by the Fed to retain some measure of control over short term rates. But still the market clamors for lower rates and, with steady assurances from the Fed that all will be given in time, has managed on its own to steepen the yield curve while keeping 30-year bond yields just above the target overnight rate. Who but a banker trying to coerce the Fed thinks that's a smart investment?

Of course, all the while, apologists for the Fed have backed away from commodities prices, particularly gold, as an accurate measure of inflation expectations. But what better news could there be for owners of precious metals? Recalling that upwards of 8000 tons of gold are listed as assets of the Federal Reserve, not counting that held under earmark for international accounts, perhaps the bankers will settle for an appreciation of their metal holdings while they attempt to sort out the lessons of their failure to properly collateralize mortgage debt?

So, against the backdrop of not Fed stinginess as one might have expected even a week ago, but pledges of decisive and preemptive action, even of insurance against a potential recession despite all rational and objective measures of real inflation, precious metals had a record week with gold touching $900 and silver moving through $16. Wave 1, if it can still be considered such, was far from over!

And as the chart above shows, the stock market's difficulties did not begin this past summer, but that in fact has deteriorated for years as gold has seen a protracted run. Even as the markets were hitting record highs nominally, they were exhibiting vastly deteriorated value in terms of the buying power of gold, oil, housing and other tangible commodities. Now that gold is reaching record highs, the S&P 500 to gold ratio threatens to sink below 1.0, where the nominal price of an ounce of gold and a share of the S&P are equal! The chart below shows that 30-year bond yields, too, have faired abysmally as an investment in comparison to gold.

But now that gold has hit $900, the question becomes whether this magnetic price that played on the yellow metal for weeks, calling it ever upward, will act like $100 has for oil, or will gold can break through.  Two factors that tend to indicate gold getting through that resistance level in a matter of weeks if not days, are the difference in the inflation adjusted highs for gold and oil, and the bullishness of the Fed's current rate cutting disposition.

Oil is already trading at or near all-time inflation-adjusted highs, but for gold that level would be over $2000.  Gold doesn't have the same immediate type of demand oil has, but this difference along changes the dynamic between gold and its current resistance level. And, of course, as explained the Fed has come out, at least rhetorically, in a big way for cuts this week. Even if the inflation talk at the end of the Bernanke's speech that probably contributed to stocks' losing the knee-jerk rally that began as news of the speech was leaked in advance, Bernanke was speaking of long term inflation expectations and Fed funds futures nevertheless remain priced for 100% odds of a 50 basis point cut in January. Bernanke does not appear willing to disappoint again.

Clearly last week's article anticipated a wave 2 retracement in gold we have not yet seen.  It's possible we may see something more akin to the December triangle than an all out collapse. Still, as this move begins to be more and more extended, it begins to look like so many other parabolic commodities rallies that ended in sharp selloffs, and that should be a concern.  Trying to short the top tick in gold, however, can be disastrous.  

Furthermore, even a swift move back to 800 wouldn't even begin to dent this strong bull market.  What happens after the January rate cut, or whenever it's no longer perceived the Fed has to cut rates further? How fast can the Fed can really take back their rate cuts, even if the bulk of nonperforming mortgages are identified this year?  Because even if financials can stage a second half turn around this year, that doesn't necessarily mean consumers are relieved of their debts, that the subprime borrowers or first time buyers can any more afford to own a home, or that the economy will follow as robustly as a banking sector reinvigorated by low short term interest rates and a steep yield curve. And if rates do get back up to about 5% a year or so from now, that's still low historically and might be enough to slow gold down, but it's going to be darn near impossible to get the genie back in the bottle.

Finally, a reminder that TTC will be raising its monthly membership fee to $129 on February 1, 2008 . If you join now you can take advantage of the current $89 fee and be grandfathered in when we close our doors to retail investors sometime next year depending on sentiment amongst the membership. Over the past several months TTC has become a haven for institutional investors and in 2008 we're going to make a concerted effort to make the institutional side our primary focus. Only existing retail members will continue to be admitted after the cutoff, so if you've been holding out, the time to join is now

by Joe Nicholson (oroborean)

www.tradingthecharts.com

This update is provided as general information and is not an investment recommendation. TTC accepts no liability whatsoever for any losses resulting from action taken based on the contents of its charts,, commentaries, or price data. Securities and commodities markets involve inherent risk and not all positions are suitable for each individual.  Check with your licensed financial advisor or broker prior to taking any action.

Joe Nicholson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mike London
13 Jan 08, 15:58
Gold $900 - Fed Failing to Beat Inflation

The Fed can't "beat" inflation, it causes it. The creation of the federal reserve in 1913, tied creation of money to interest bearing bonds. So each time the US government OK's creation of new money, which is often, and large amounts, we, the taxpayers are saddled with interest payments. When the bonds reach maturity, the government doesn't pay them off, they are 'rolled forward'. So, we're paying interest on interest on interest...

That the federal reserve "beat" inflation is one of the all time largest hoaxes. Inflation is caused by increase of the money supply. And the problem is compounded by adding interest payments onto the money created, which makes sense only for those who make money from this massive flow of interest, and from fractional reserve lending.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules