The Final Curtain Draws Near

Today gold acted the way gold is supposed to act. As the end of this ridiculous Washington drama comes closer, when there was a deal (boding certainty) gold fell and when the extremist wing of the House came forward yet again with some new, unacceptable tweaks, gold rose (uncertainty). 

You have to hand it the right wing of the Republican Party - they certainly know how to make an entire country, and entire world sweat. But apparently, if we can keep with the drama theme here and quote Shakespeare from Macbeth:

It is a tale
Told by an idiot, full of sound and fury
Signifying nothing.

This is in no way to say that cutting the budget and debt is wrong-headed. It needs to be done and there is a modicum of urgency. However, the country won't cease to function if it's done over seven years rather than five. Perversely, because not cutting the deficit might very well increase growth, we might whittle down our overall debt more quickly due to increasing tax revenues.

Leaving our fearless leaders for a moment, it's time to think about what has gone on in the "head" of gold. It has become increasingly a psychological play that has received much negative press because of downward momentum. It's like a sports team. The team does poorly, the fans boo. The booing demoralizes the team and it does worse. Fewer people come to the games or watch on TV so revenues decline and then the team can't afford good players so the team gets worse.

According to David Fabian, a managing partner for FMD, writing for NASDAQ's website:

"Given the fundamental backdrop of unending quantitative easing, rising overseas demand, depreciation in the US dollar, and a finite supply of the precious metal, it would seem that gold prices should be on the rise.  However, the spot price has continued to run afoul of nearly every significant momentum upswing this year."

The answer as to why is, "the herd mentality." The subtext of that answer is "greed." Enough big players have been tut-tutting the need to have gold in a portfolio so that medium players have followed, and small players have followed the mid-size guys. The greed aspect comes in because it seems to the small individual trader as if more money can be made in equities. However, for the small trader, equities provide arithmetic growth - I buy a share of stock for $10 and it increases by $2, I have 20% growth. 

However, I buy a spot gold contract or a portion and my $10 grows exponentially through leverage. 

Fabian echoes what we have been saying for a number of days now:

"Caution is warranted at this stage of the game, but there will be a time when gold prices come back into favor and being on the right side of that trade will lead to healthy profits." 

Although we are assuming that finally the small, extreme wing of the Republican Party will be shunted aside and the legislation crafted by the mainstream will pass, the next event to look forward to is the FOMC meeting on the 29th and 30th. 

You will hear much hubbub about how the Fed MUST curtail or taper QE3 bond purchases. How the country is going to wrack and ruin because of their ledger sheet. You will also watch those dates breeze by without change. You might even count on no change at the December meeting, although we need further economic data to forecast that.

New York Fed president William Dudley spoke in Mexico City today to explain FOMC policy continuity. In a subtle way, he took Congress - and the President - to task over their failures to deal with budgetary and fiscal issues, as he again staked out territory for monetary policy doves:

"Central banks may not be able to achieve their objectives when an inconsistent fiscal regime is in place. If the budget trajectory were clearly unsustainable, then monetary policy may no longer be able to credibly act in a way that keeps inflation expectations in check."

Dudley is saying the instability created by the rogue right wing element in Congress is hurting the economy. He is saying, too, that the budgetary track right now is sustainable in regards to inflationary pressure. 

He did note too, though, that the handling of monetary policy is holding down government debt-service expenses and that such conditions are not permanent. The largest borrower in the world needs to take heed. 

So, let's cut the budget, raise revenue - but let's do it in such a way that it hurts the fewest people and over a long amortization period. Let's not use a machete when a paring knife used consistently will do just as well.

Wishing you as always good trading, 

 Gary S. Wagner - Executive Producer