All Eyes on the Fed

The Fed is meeting today and that’s all we’ll hear about on the financial news networks as they hang on every word in the statement fashioned from the get-together. There have been inklings that the Fed is now considering how they’ll siphon liquidity from the system and a lot of analysts will be looking for indications as to how that will happen. Two weeks ago the idea was floated that the Fed would use reverse repos’ to get the job done, but the market was not impressed. What I do know is that recently we’ve seen a drop in the money supply while the velocity of money remains at historical lows. The Fed can’t take rates any lower and it continues to print more and more dollars with each passing month. It’s expanded its balance sheet to the point that it resembles a dead bloated carp floating belly up down the Mississippi. Big numbers based on worthless assets!

When the Dow topped in October 2007 the real issue was debt, mountains of debt as far as the eye could see. Today the real issue remains debt; in fact we have a lot for debt now than in 2007 and absolutely no plan to deal with it. Right now the White House and Congress are haggling over a health care bill that no one wants, and it will add a couple of trillion dollars more to the deficit. The February budget deficit was a staggering US $225 billion and it appears the 2010 deficit will exceed US $2 trillion! It seems just like yesterday when we were talking about millions, and now its trillions. The elimination of so much debt will require tremendous effort on the part of every America, but the willingness is not there. Americans continue to live in denial, a denial based on three decades of false political promises that you can live well today and not pay for it tomorrow. Two complete generations have been conditioned to believe that cash is trash and credit is king. Just about anyone’s great grandfather could tell you the fallacy of that argument as the same thing happened in the 1920’s, and it ended poorly. This time around will be no different, and when the reality sets in it will be too late.

Reality is arriving sooner in some markets than others, and in spite of considerable manipulation I might add. Gold is one of the more manipulated markets, futures trade paper which is easily maneuvered, but the primary and secondary trends for gold are headed firmly higher. The tertiary trend is in a sideways movement caught between good support at 1,090.10 and good resistance at 1,136.70. This has been going on for some time and is highlighted by the two small red and blue lines on the far right of the chart. Note that the upper band is headed lower while the lower band is sloping up. This compresses price, until there is a breakout. Currently spot gold is trading up 15.10 at 1,123.90, that is well above the downward sloping short blue line, and it is a bullish event. Note also that we have two much longer blue and red lines, the former sloping down and the latter headed higher, and an upside breakout here would require a close above 1,137.00, and that ties in nicely with the aforementioned Fibonacci resistance at 1,136.70.

I have been saying for weeks now that 1,136.70 is the key and that is more so the case today than it was in late February when I first brought it to your attention. The reason that gold is holding its own in the face of manipulation, and a rally in the dollar, is directly related to the world’s central banks’ propensity to print. Every major economy in the world is increasing their money supply by 12%/year or more. Just look at how China expanded their money supply in 2009:

This competitive printing has lead to all currencies losing value against an ounce of gold as smart money looks for a store of value that cannot be debased. What is interesting is that to date, and in spite of all the printing, inflation is almost non-existent. In fact the world economy has been deflating, and combined with massive amounts of debt, is cause for major concern within the Fed. I personally fail to see how they could even consider withdrawing liquidity at this time, but we’ll know that soon enough.

Interestingly enough the gold price has rallied and without the dollar.

Yesterday spot gold rallied 4.00 even though the US Dollar Index rallied .43, and today spot gold is up 14.00 as the same US Dollar Index gives back all of yesterday’s gains. With respect to the dollar it is now sixteen days off of the high and that is too long for a second degree reaction. Therefore the odds increase with each passing day that the top is in and the greenback is now headed down to test the all-time low. Now I suppose if the Fed announces that rates will head higher, the process could slow somewhat and we could even see a retest of the 81.32 resistance, but I would be surprised to see such an announcement anytime soon. Therefore gold will find the going easier with each passing week.

Finally the Dow opened higher and has slowly sold off, now trading up 1 point at 2 pm EST. Yesterday the Dow closed up 17 points on the lightest volume of the year. Down volume was 60% of up plus down volume and the breath was poor. In spite of this the Transports made its fifth consecutive non-confirmed closing high yesterday and are trading up 24 points as I type. I can’t recall a similar experience in thirty years of investing. I of course have no idea how the market will close, and I know anything can be manipulated, but the internal components of this market are poor at best and I would be surprised to see the Dow confirm. We should know in a couple of days if I am right or wrong.