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FOMC and Stochastics: Gold's Friends?

Stewart Thomson
Mar 13, 2012
  1. Today is “FOMC day”. Every six weeks or so, the US central bank’s open market committee meets. They issue their views and policies for both the markets and the economy. The gold community should understand that most fundamentalists view the FOMC report as the single most important report that is issued about the major markets.

  2. When two opposing fundamental forces of size meet in a major market battle, that fight is often ultimately resolved by definitive policy statements that are made by the FOMC. There’s a high likelihood that today is resolution day in the gold market.

  3. Highly leveraged traders will go to the sidelines, rather than risking being on the wrong side of the market, as the FOMC report is released. I would suggest that you should focus on yawning your way through the report.

  4. Think bigger in the gold market. A $100 price move to the downside is a “yawn buy”, and a $300 move to the upside is a “modest profit booking opportunity”.

  5. Two schools of thought have been battling it out quite intensely. First, there is the “quantitative easing crew”. These fundamentalists believe that unsterilized quantitative easing has been delayed but will still occur.

  6. In opposition to team QE3 are the fundamentalists who believe that the economy has improved enough so that quantitative easing is not required. At minimum, they believe it will be put on the Fed’s back burner for a long time.

  7. The US central bank has loaned European central banks dollars, and this can be viewed as “QE from the shadows”, but unless institutional money managers believe substantially more such shadow QE is coming, they won’t engage in gold-friendly liquidity flows. In their minds, most of the shadow QE has already been factored into the gold price.

  8. Another fundamental issue working against those who believe more QE is imminent is the “sterilization factor”. Some commercial bank analysts have suggested that Dr. Bernanke could buy US Treasury bonds and then re-sell them to commercial banks.

  9. That move would sterilize the “inflationary germ”. It would be liquidity flows-neutral or even slightly negative for the gold price. The European central bank is already engaging in sterilized quantitative easing.

  10. Most investors in the gold community, unfortunately, have been fairly sure that unsterilized QE was coming with absolute certainly. Their disappointment is reflected in the failure of the gold price to rise above $1800.

  11. Ben Bernanke has clearly stated that while the recent jobs reports are positive events, the overall jobs situation is nowhere near normal. If you are an investor, then give yourself the gift of being emotionally strong enough to buy gold on every $100 price sale. That’s your financial immunization shot against the QE “desperation analysis plague”. When compared to your ability to buy gold on repeated $100 price sales, the importance of unsterilized quantitative easing is miniscule.

  12. Back in the fall of 2009, I got a lot of emails about natural gas possibly bottoming. I agreed that it was an asset to be accumulated, but warned that it is the world’s most volatile commodity.

  13. I also suggested that it was best accumulated with my pyramid generator in a pgen that extended “all the way to a price of zero”. Accumulating an asset in the “on sale” zone is not the same endeavor as calling a turn on it. I’m not interested in how high an item might go. I’m interested in buying it at the lowest possible price.

  14. Since that initial blast of turn-call excitement, interest in natural gas has waned, while I accelerate my buy program. It’s absolutely critical to carry short positions when engaging in a major accumulation program.

  15. It’s a waste of time predicting the turn date or turn price. The turn could come after your first buy, or it could come at a price that is 99% below your first buy. I limit my total short position to a maximum of 30% of my long position, at all points of time and price.

  16. Click here now to view about 20 years of natural gas trading history. Today might be the “unlucky 13th” date in time, but your “lucky number 7” Stochastics buy signal is in play now on that long term natural gas chart. All of the previous six buy signals have been followed by enormous rallies in the natural gas price.

  17. Note that one of the previous low points came at a price of about $1.25. The current price is about $2.23, which is historically low, but in no way should anyone believe that natural gas can’t fall 50% in price from here, because it certainly can. If it does, I’ll cover more short positions and buy more longs. Do I think the price of natural gas will fall to $1.25? No. Am I prepared for it to do so, both mentally and financially? Yes.

  18. Your greatest “on sale” purchases of the greatest assets will usually occur inside of your “personal surprise zone”, which is the price zone that you believe can never occur, but when it does, you act professionally and accumulate the assets at your very best prices.

  19. Another arguably great asset is the Dow. I realize that great emphasis is being placed on the idea that the Dow must bottom at a ratio price that is about 1 Dow unit to 1 gold unit. That’s happened in the past, but the Dow is less than 200 years old, while gold has been the ultimate asset for thousands of years. I want an asset at prices that are low, rather than at prices that represent any kind of turn call point.

  20. Click here now to view the Dow chart against gold. For all practical intents and purposes, the Dow is trading at a price near 8 ounces a share. That price is not high. It’s low. I really don’t see many people in the gold community getting more gold on sale by watching the dollar price of gold. Quite the opposite is the case. Little declines in the price are met with panic selling.

  21. You may have to force yourself to consider buying the Dow, incrementally, all the way to a price of zero against gold, if you want to get more ounces of gold. If you pay 8 ounces of gold for a Dow share, and it falls to 1, you lose 88%. If you sell it at 40, your gold holdings increase to 40 ounces, which I believe is a 400% return on your investment.

  22. If you buy the Dow at a price of 1 ounce per share, a retracement just to 8 is a 700% return on your investment, and that return can be in the form of physical gold, stacked on your scale! Don’t underestimate the power of the Dow, here and now, to build your gold holdings. Every single price point under “10 ounces per share” on that Dow chart has the potential to put an enormous amount of physical gold bullion onto your scale.

  23. Gold investors looking to build dollars of wealth with your gold are understandably frustrated at this point in time. The 14,7,7 series Stochastics indicator on the daily chart suggested that frustration could happen, back in early February. I run that series on the daily chart and it rarely lets me down. Click here now to view the daily gold chart. Note the position of the 14,7,7 Stochastics indicator now.

  24. After giving a sell signal in early February, and then creating a non-confirmation with the gold price at about $1793, the indicator is now in an area where I’d consider gold to be readying for a blast to the upside against the dollar, and today’s FOMC meeting could be the surprise bull catalyst that makes it happen! 

Mar 13, 2012
Stewart Thomson
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