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Golden Moment of Clarity


Reaction to Fed, quarter-end likely catalysts.

My bet is that we are at or very close to another "moment of clarity" for the marketplace that is much like the one we saw back in August of last year, when the Federal Reserve finally said "uncle" and cut the discount rate.

Back then, the market didn't seem to "get it" that the Fed was going to run the printing presses and inflate rather than watch the financial system seize up and implode. When the Fed finally moved to cut the discount rate rather than sit by and watch the equity market crash, the market said "Ah ha! We see how this is going to work," and the marketplace immediately began to aggressively buy inflation hedges. Likewise, the yield curve steepened dramatically as well.

Similarly, up until today the market seemed to believe that the U.S. economy was going to quickly recover and that the Fed would soon be raising rates and crushing inflation as we all held hands and sang "Goldilocks is back!" together.

That belief should now change in the wake of yesterday's FOMC statement that indicated not only that the Fed was nowhere near being able to tightening but also revealed that the Fed is still holding out "hope" that inflation will magically moderate all by itself.

In my opinion, this should make it clear to even the dullest of mental knives that "Goldilocks" is not coming back and that the Fed is trapped in the box and unable to lift a finger against inflation anytime soon. If anything, the Fed may even be easing again shortly if the financial system begins to run into trouble again.

That realization could (and certainly should) prompt another move into gold just as it did back in August, as investors finally begin to understand that inflation is going to accelerate and become even more embedded in the system as the Fed falls further and further behind the curve.

I, for one, will be very interested to see how gold and its shares do over the next several days as we close in on the end of the quarter, and my expectation is that we're likely to see a fairly sharp rally in both.

My favorite gold miners in the "senior" category continue to be Gold Fields (GFI), Newmont Mining (NEM), and closed end fund ASA (ASA), which still trades at a discount to NAV believe it or not. Among the junior golds, I continue to like Minefinders (MFN), GoldenStar (GSS), Metallica Resources (MRB), New Gold (NGD), Nevsun (NSU), Banro (BAA), Gammon (GRS), and Seabridge (SA).

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Position in GSS, NEM, ASA, NSU, BAA, MFN, gfi, MRB, NGD, NAV, GRS and SA.

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