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Monday, October 18, 2010

What goes up may come down …then go up again…

Gold the yellow metal, king of all money, is due for a correction, after all nothing goes straight up forever, but there is no law that says any asset has to correct. The US Dollar is currently stretched to the downside after falling on the order if 11% while the yellow metal rose about 14% over the same period. Neither gold not the Dollar are over extended in the longer term standard deviation context as they are both well off their respective high extremes, however, on a short term basis they are a bit stretched. The markets, stock, bond, currency and commodity are all manic at the moment jumping from one news tidbit to the next. Rest assured dear reader that the long term trend is still intact and really nothing has changed in the outlook for the metal of kings. The 200 day moving average for gold is currently about $1,194.95while the 50 day moving average is currently $1,225.44. Over the past year when there have been corrections, gold has bottomed out at or near the 50 day moving average and I do not think that it is out of the question to see a pull back of this magnitude, which would be both normal and healthy.

The dollar and gold could continue their reversing dance until the elections in November which would also coincide with the FED meeting. The dollar is strengthening because there is a perception that the Republicans will win many seats in the houses of congress leading to a gridlock situation and putting a halt to the Obama agenda. On the one hand the perception will probably prove to be partially correct, the agenda will change but the economy will worsen again and there will be outcry to do something. Moreover, lord knows what will come out of the lame duck session since the election is over and the congress people have nothing to lose at this point so they could enact harmful legislation.

Even if the American populous believes that they have done the right thing by throwing the bums out, which I believe would be a good thing, it does nothing to control the FED. The FED has telegraphed its intention to use QE2 and if you believe that they won’t now that there is a new congress then possibly you might be interested in some swamp land in Arizona as well. The US Dollar is the world’s reserve currency at least for the moment and the result of that is the US gets to do things monetarily that other nations cannot. To explain the situation I suggest you read the article but Financial Times writer Martin Wolf entitled “Why America Will Win The Currency War”. The article explains the technicals of what is happening in the currency markets, but Wolf sums up the outcome in the following two quotes:

“To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.”

“In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.”

The FED is still deathly afraid of deflation and will do whatever it takes to prevent it. The FED is living up to the inflate or die philosophy and as I have discussed before they are ignoring the “capacitors” of inflation laying dormant around the world.

So to sum up I believe that there could be a healthy and short lived correction of 2 – 4 weeks in gold and the Dollar(Gold down dollar up). Gold could reach all the way down to its 50 day moving average although I think it will not go quite that low. The current weakness in gold is going to present a phenomenal buying opportunity in the near future as the overbought condition that I believe is becoming less relevant is relieved.

Even with the replacement of congress the FED is still acting on its own and controls the printing press. Given the FED’s bias for inflation and the fragile economy they will paper over any and all problems by devaluing the Dollar. The FED knows that devaluing will inflate away the country’s debts and fuel inflation. Another consequence over the longer term is that jobs could return to the US the currency gets cheaper against other currencies it becomes more cost effective to manufacture goods here in the US especially once the weak dollar causes fuel prices to escalate. The manufacturing sector will also be able to export since their goods will have a cost advantage priced in dollars. Overall the inflation will lower the standard of living, but at the same time will provide jobs and opportunity.

So while the November 2nd elections are driving short term prices in gold ultimately November 3rd FED meeting will rule the day. The old adage “Don’t fight the FED” should be your credo which also means that you should continue to accumulate gold, silver and commodities on pullbacks. It is very difficult to buy on pullbacks particularly when the mainstream media and Wall Street big mouths will be telling you that gold and tangibles of all kinds are dead and the run is over. You need to filter the short term noise and ask yourself “Has anything really changed to alter the story of the last 10+ years?” Every year it seems the investing community falls for the same script..the tangibles run is over and we are going back to the good old days where green shoots abound and the second half recovery is just around the corner. “Don’t fight the FED “ is good advice but “Don’t fight reality” is better.


roclafamilia said...

Helpful blog, bookmarked the website with hopes to read more!

admin said...

Glad you like the blog..I try and put out helpful information and give a different perspective as I feel Wall Street and the Media do a disservice by constantly painting over the truth and or not thinking outside the box.

GreenGoblin said...

Really nice information, thanks!

mackdaniel said...

this was a really nice post, thanks

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