I haven’t written anything about the markets in a very long time due to the experience in extreme boredom that they have become as of late. The election came and went and now that we are just ahead of the Holiday Season the apathy has hit monumental proportions. More significantly, what was the point of doing anything ahead of today’s Fed meeting? There wasn’t any and so nobody did.
Now that the announcement is out, I think in retrospect today will turn out to be a meaningful turning point. Not so much because of what they said, but because of where certain markets are and because of what they didn’t say. Let’s start with the latter point.
From the statement, we found out that the Fed is set to launch an unsterilized buying program of $85 billion per month ($40 billion in mortgage backed securities and $45 billion in treasuries). This part was widely flagged already. The more interesting part is the language in the text discussing how the Fed will essentially link their low rates to unemployment, with 6.5% being the threshold.
This is all within a text that attempts to portray a very benign and healthy economy, one described as having an improving labor market, a housing recovery and anchored inflation expectations. Sounds pretty good to me; so then why accelerate the aggressiveness of their radical money printing policy?
The answer is that the Fed realizes its policies haven’t worked and are convinced they need to do more and more to prove an academic point that man is indeed more powerful than nature. At first, they said a stock market rally would set a fire under the economy. That hasn’t worked. Then they said a new housing recovery would do it. Once again, nein. So now their answer is just print money like crazy and eventually it will work. Yes, they are insane, but we already knew that didn’t we.
Actions always speak louder than words and their actions demonstrate a deep concern for the real economy and an unspoken understanding that things are not going well underneath the layers of propaganda.
Now onto the second point. I think today will mark an important turning point in the markets not just because of what I wrote above, but because of where things stand.
Precious metals have now been in a major consolidation phase for well over a year, and despite repeated attempts to break them, they have always come back strongly. For gold to make it through 2012 (a hugely important election year) with a 10% gain is a testament to the strength of the market. I anticipate that gold will outperform the broad stock market by at least 25%-30% over the next six months to make up for lost time. Take a look at my favorite chart of the Dow Jones vs. Gold. It is very overbought and I think ready for a major fall.
Dow/Gold Two Year Chart
Remember that election years have been bad for gold even in the context of the great bull market, with the gold price -5% in 2000, +5% in 2004 and +6% in 2008. This in the context of a gold price that went up more that 3x from 1999-2008.
For precious metals bulls, I think the long wait for the next leg higher is over and today’s pathetic statement from the Fed will serve as the catalyst. As always, we shall see.