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Will Gold Respond to the Fed’s Pledge to Keep Printing?

Commodities / Gold and Silver 2011 Jan 27, 2011 - 09:08 AM GMT

By: Chris_Ciovacco

Commodities

Tuesday’s Federal Reserve statement (see below) contained no big surprises. We expected them to reiterate their intention of completing all the bond purchases as outlined originally in the second quantitative easing program (QE2). The Fed’s hope is that rising asset prices will increase confidence, and in turn lead to more spending and more hiring.


For those who were expecting the Fed to water down QE2 as a result of improving economic data, you may be underestimating the role of asset prices in the Fed’s decision making process. As we explained on October 29, 2010 in Quantitative Easing and Asset Price Inflation:

QE attempts to flood the global financial markets with fresh cash in an attempt to reinflate asset prices. When the stock market goes up, people and businesses feel more wealthy, and are thus more apt to spend, invest, and take risks (in theory). Rising asset prices can improve the asset side of impaired global balance sheets, which the Fed hopes can rekindle the wealth effect.

When we made the comments above the S&P 500 was trading at 1,183. Today, the stock market stands 9.55% higher despite commentary from many that QE2 would have little effect on the markets. The important portion of the Fed’s January 26, 2011 statement is below:

Information received since the Federal Open Market Committee met in December confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household spending picked up late last year, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, while investment in nonresidential structures is still weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

Gold responded to the Fed by jumping 1.0% on Wednesday. For now, gold remains in a short-term downtrend shown via the orange lines below. The recent break of the upward sloping green trendline means what “once was support may now act as resistance” (see green arrow).

From a bullish perspective, we would like to see the black MACD line (see top) cross above the red MACD line. A move above the zero line in the Rate of Change indicator (ROC shown at bottom), especially with a steep slope, would also hint at the lower orange trendline stemming the recent decline at least for a time. As of Wednesday’s close, we believe a little patience is needed prior to adding to our gold holdings. As mentioned yesterday, we are in the process of updating our asset allocation models.

By Chris Ciovacco
Ciovacco Capital Management

    Copyright (C) 2011 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

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