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Fed Sustains Gold's Gains

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Gold loves negative real interest rates, which we already have when looking at the actual rate of inflation.

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Note again today that we're getting a divergence between spot gold and silver, with silver being up a touch while gold is down a touch and finally taking a rest after three straight up days.

It's been my experience that a divergence of this sort that favors silver typically signals a rally in both metals the following day. It's not a sure thing and only very short-term oriented, but it is a pattern I have seen play out time and time again.

That action would fit well with a rally into tomorrow's FOMC, where we will no doubt get another rate cut from Ben and the boys. And if I had to place a bet, that cut is likely to be 50 bps plus a continued bias towards easing. Gold loves negative real interest rates, which we already have when looking at the actual rate of inflation. However, following tomorrow's 50 bp cut, we'll be looking at very close to negative real interest rates even when using the government's flawed inflation data.

The more important data point of the week for gold, however, may be Friday's jobs data. Should we get a surprisingly weak number, expectations for even more aggressive Fed easing (as well as a more prolonged period of low interest rates) could weaken the dollar further and could trigger "something stupid to the upside" in gold. Despite it being fairly obvious that the Fed has chosen to run the printing press and try and inflate away the housing bust (For those that might have forgotten, the Fed has eased every single meeting since August while merely paying lipservice to inflation), people still don't seem to "get it".

The Fed doesn't care about inflation or the dollar, and it is going to continue to "run the printing press" in hopes of reigniting credit growth and trying to bail out the banking system with a steeper yield curve. Other central banks (hint... hint... ECB) will soon be forced to ease as well. It's no coincidence that gold is at all-time highs in all these confetti currencies, because as the entire planet begins to "print", gold is likely to be one of the chief beneficiaries.

So, we'll see how the market responds to Friday's jobs data. Keep in mind though that unlike equity markets, commodity markets tend to make their biggest moves in a vertical-type fashion. So, while gold may appear "overbought" in the short-term, the yellow metal is now at all-time highs in all fiat currencies (an event unseen since the late 1970s). Thus, it's also ripe for something explosive to the upside . We've already seen something like that to some extent in the 13% spike in platinum to new all-time highs over the past week, which began on the 22nd incidentally (when the Fed panicked and cut 75 bps), well before the power outages in South Africa hit late last week.

$1000+ gold is just 9% away, and we're likely going to see that round number even sooner than most realize...


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No positions in stocks mentioned.

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