In essence, Operation Twist is ending while its unsanitary half – monetization of long-term T bonds – continues. This in addition to MBS monetization, ZIRP and whatever else they cook up over the coming months and years spells inflation. Period. They are inflating. $85 billion per month in money printing and bond purchases.
Of course, gold and silver are getting hammered this morning and the game continues. But after grinding gears for many months now, I find the clarity of having the Fed’s cards on the table to be settling.
We will have to deal with Fiscal Cliff drama (and resulting noise) for a while longer, but the path is set; inflationary policy without pretense (i.e., more honest inflationary policy I have written about until blue in the face) is indicated. The FOMC does not care for the currently subdued levels of inflation’s cost effects.
That is because unwelcome declines in inflation (effects) can tend toward liquidating an exponentially leveraged system if the decline goes too far. “It’s inflation all the way, baby” and asset prices need to be propped. Gold should eventually reflect this (with some catching up to do) but there is also the reality that we probably do not even know all the ways that the monetary barometer can be worked over in the short run.
So where does that bring us to functionally? Let’s start with the HUI-Gold Ratio.
For precious metals players this ratio remains a key. With the Fed in line, an out performance by the gold stock sector vs. gold – even as both potentially continue to chop and grind in the micro term – would be a backbone firmer whirring along beneath the surface of events. We will continue to keep the HGR in view. MACD indicates it is trying to make a bottom and if that is the case I am going to go out on limb and call the 3rd time a charm. The start of the 3rd phase of the rally would be on if this signal holds and that means no more bottom testing.
Nominal HUI still has this mission: Get over the 460 area resistance, including the former neckline to the 2011 topping pattern (purple dashed line), lateral shelf (red shaded) and the moving averages.
As for gold and silver, we have noted their support levels. While one could use one’s intellect to call up all the reasons gold cannot go to 1625, a raw technical view (weekly chart) says that it is possible and the support zone there is epic [edit: Assuming of course, it holds. There are no sure things in this racket. So I should have written 'potentially epic']. Meanwhile, the 1690 area remains a key to the short-term. Silver has support roughly at 32.50, 31 and 28.
I believe it is time to put those shopping lists to good use, whether that means tax loss sales bargains on the more speculative end or buying value on the quality end. The money supply is due to increase in 2013 and now seems to be a good time to be patiently stalking favored items before the dynamics in play under the surface get the ‘me too!’ crowd revved up.
If you believe like I do that inflation is being promoted and will one day be reflected in the things like money supply (first) and cost effects (finally, when it will be nearing time to be selling as the herd becomes concerned about inflation) then it is time to be thinking about using any upcoming chop, grind or turmoil to the advantage of taking favored (in my case, quality) positions for a potentially intermediate-term trade.
As for the broad market, we’ll get that updated in NFTRH this weekend. Bernanke frets in his press conference about not being able to counter the Fiscal Cliff and the market sells off. These are our markets unfortunately; enthralled with one man and his jawbone. It’s a casino mentality and a really emotional one at that.
But balance, patience and a view of what is in play on the macro should suit us just fine. They are making the inflation attempt, now at an unsanitized $85 billion per month.