All eyes this week were on Jackson Hole, awaiting the words of Ben Bernanke. While the usual overblown expectations of an announcement of QE3 were in place, the markets would still likely find satisfaction in the assertion that accomodative policy might be implemented sometime in the near future. There was no announcement of QE3, but Bernanke's words did indeed leave the door open for more use of Fed policy.
As you may recall, the last release of the Fed minutes help juice the markets as Fed governors sounded a far more accomodative tone in the meeting. The head scratcher was that the next morning, Chicago Fed Governor Charles Evans came on CNBC and seemed to downplay the euphoria. The Fed minutes are released weeks after the meeting takes place, and as such, there is always the potential that a shift in data post-meeting would make the minutes themselves a bit misleading. Between the time of the meeting and Mr. Evans' interview, there had been positive economic data releases, which in all likelihood would hurt the case for more easing. So hearing Evans' more reserved tone post-minutes release, created some skepticism in the market. Today however, those same dovish sentiments were reitterated, keeping markets happy.....but it didn't look like that at first glance.
The markets first reaction was to sell off. Gold, which was trading near 1660 pre release, dropped 15 dollars in a matter of minutes. I immediately became confused. As I listened to the reading of Bernanke's speech, it seemed that everything I was hearing was bullish for gold. While I understood that QE was not announced, the dovish tone should have sent gold higher. Give it a few minutes, and that is exactly what happened. Gold reversed off of its low of 45.1 and as I write is trading nearly 50 dollars higher! So what happened?
Bob Pisani gave an explanation that is just so telling of the way markets work today. He explained that there are algorithms that look through documents perusing for buzz words that likely tell the gist of the document. In this case, it seems that those algos correctly saw that there was no QE3, but were unable to account for the general accomadative tone of the letter. So, as people began to hear what I was hearing, and process it, bids came back and the market reversed. This is a classic example of the distortions that can happen in the marketplace when computers act in place of humans. Gold ripped up, recapturing 25 dollars to the upside to about 1670-72, following the human "intervention", before beginning a steady climb to the day's highs.
There is one thing I want to hone in on as to why today's rally only adds to my bullishness. Before the Bernanke release gold was hovering around 1660 and the Euro/USD was trading above 1.26. As I have mentioned in these writings, the trend seems to be that gold tracks the Euro. Macro thoughts aside, it makes sense that gold would track Eur/USD, because a stronger Euro/Dollar cross, means a weaker dollar, which means for gold to maintain equivalent value in dollars, its price must go higher. But here we sit, trading 35 dollars higher in gold and where is the Euro? Lower. To me this means that gold is performing well independently of the currency in which it is priced. I received confirmation on this notion when Dennis Gartman came on TV and said that gold was indeed accelerating in all currency terms.
For those who read this blog with less interest in all of my musings about what is happening and what it might mean, and more interest in "is it too late to get back in" I would say this. It is not too late to get back in. If you believe that gold is a good investment, then the fact that it is about 10% off of the lows should not be discouraging you to buy. The "I want to wait for a pullback" argument is overdone. if there is to be a pullback, there should be significant support down to the 1630 level, 60 dollars lower than here. That is less than 4%. With the way we are seeing real and sustained buying in this market, I would argue your chance of missing that pullback is high. Don't be a penny pincher. If you believe in the gold story, recognize that as it goes up, the bullish outlook only becomes greater. It is not too late to get back in.
Have a great and safe Labor Day weekend
Ben
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