The “Federal Open Mouth Commitee” at work
After last week’s rapid decline in virtually all asset classes, this week was dominated with soothing words by more Fed governors than I knew existed. Ney York Fed governor Dudley actually came out twice to reassure the markets that cyber money will continue to flow as long/much as necessary. In addition, the Peoples’ Bank Of China injected “liquidity” into their market and ECB governor Draghi expressed solid monetary support in Europe. As a result, the US stock market moved back up to the 50 day moving average and the ten-year yield moved below 2.5% while the dollar firmed slightly. You may wonder why I write so little about sovereign currencies as I am a currency trader. The reality is that the dollar hasn’t moved very much in recent years. Check out the dollar index below:
The one currency that has been moving a lot is gold. This week, the gold price extended its decline and briefly traded below $1200 per ounce. The good news implied is that gold, aka the insurance against financial disaster is getting cheaper and should improve the odds of a rosy economic future. Personally, I am adding on to keep my asset allocation at my set portfolio percentage and to be fully insured for what I expect to come within the next 12-18 months. What is interesting when it comes to gold is that the current price level is now equal the average cost of mining, usually a great entry point in any product that stays in the market. At this point, production will decrease and if the price of gold goes down further, new supply will eventually come to a halt. Naturally, less supply means higher prices in the future. Having said that, there is no reason why the price of gold can’t trade lower as leveraged capital, trend followers and scared investors can push the price anywhere they want to in the short run. In the long run, any product will cost as much or more than production cost or it will go out of style which I don’t see considering its 5000 year history. Frankly, I think we will look back at this period of time in a few years and scratch our heads as to why we didn’t all back up the truck and load up.
If you have further interest in the gold market, please read this outstanding gold report by Incrementum. It is the most comprehensive and professional analysis I have seen on the subject in quite a while.