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Fed Stimulus and BDI crash and USD and gold

Chris Laird
Posted Feb 4, 2012

The commodity complex and especially stocks worldwide reacted to the central bank stimulus announcements in Dec 2011, led by the US Fed. We estimate that the central banks have thrown an additional $2 trillion of direct support to markets in the US and Europe, buying bonds and other such. This worked into a world stock rally that also supported commodities and gold rallied as well from its flirtations with the $1500 range. Gold of course would benefit from both central bank stimulus plus any basic commodity benefit from supposed economic rallying due to stocks rising. But the BDI (Baltic Dry Shipping Index) has also crashed again and that suggests things are not quite as they seem, especially regarding China and their crashing property markets.

This chart of the DJW (Dow Jones World Stock Index) shows a direct correlation with the US Fed announcements in Dec 2011 where the Fed would 1. Purchase close to $1 trillion of US housing bonds/securities in 2012 and 2. also the same period announced that they would also support the EU banks and ECB with USD swaps at .5 pct. The US lent more than a half $trillion to the EU banking system to support them after June 2011. This total net in our view adds to near $2 trillion of Fed stimulus announced in Dec 2011 and resulted in a large world stock rally. The USD also rallied in tandem due to fears of the EU situation. Both US stocks and the USD rallied on and off together. There is flight to safety in US assets supporting the USD.

There is risk that the US stock rally in the Dow is peaking and that this stimulus is already petering out in light of a continuing China slowdown and tepid US economy with good and bad numbers appearing simultaneously. The above chart is the Dow Jones World stock index. If world stocks start to peak again it is likely that the general commodity complex will also weaken. Gold is in between being pulled up with central bank stimulus and also down by potential stock peaks. The energy complex is also showing some weakness due to increasing inventories, and the slowing China economy is not helping that either.

There is more to say and we at PrudentSquirrel track gold, currencies and commodities with a generally weekly in depth newsletter and you can stop by and have a look at


Chris Laird
Editor in Chief

Disclaimer: Chris Laird is not an investment advisor/professional. This article, the PrudentSquirrel newsletter and alerts are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it’s important.

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