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July 01, 2005

Gold Bulls Rub Hands; Stock Bulls Wonder When It'll End
by Ed Bugos

Below is an extract from a commentary available to subscribers at www.goldenbar.com on 30^th June 2005.

Gold's resilience in the days leading up to the FOMC following on a 30 point three-week rally is as encouraging as it is interesting that such a rally would occur in the first place on the approach of just another tightening.

To be sure, the gold market has been rallying all through the rate hike campaign as you can see in the chart below. At first glance the bear might note that the Fed's rate hikes are finally having an effect.

Similarly, and as a result, the monetarist might suggest that it is time to stop hiking rates because of this effect and what it means - that the economy might be slowing. However, a closer scrutiny of the chart below will reveal that at first, the threat of FOMC action caused bigger consternation in gold prices than it does now.

The market rallied into the last three rate hikes whereas the first three (last year) saw anxiety reflected in the market on the approach (NOTE: the first rate hike was immediately preceded by a rally but I think that could be considered a bounce after the April/May lashing which occurred in the anticipation that the rate hike campaign would be underway soon. In any case it is noticeable no doubt in my articles around that time that I complained in response frequently often that gold bulls should not worry about a rate hike because it had already occurred).

By the summer of 2003 it became obvious that the Fed was ready to contemplate the return to a more "neutral" monetary policy, whatever it thinks that may be. There is a sharply distinguishable bottom in 10-year yields that occurred after the last rate decline in June 2003. The 10 year yield rose from 3.1% to 4.6% in two months - it has traded in a range of between 3.7 and 4.7 percent ever since (currently closer to 4 percent), which basically means that the bond market had by the middle of 2003 already discounted the 200 basis point rate hike that took the Fed another two years (plus) to actually complete. Yet gold kept on charging higher, though at an increasingly slower pace than other commodities. I believe it should have been charging faster in light of the likelihood that the Fed's tightening would be a lagging farce, which it has been by the way. So I take the recent action as especially encouraging given that we're finally looking ready to brush the Fed threat off!

Edmond J. Bugos
GoldenBar.com

Ed Bugos is a former stockbroker, founder of GoldenBar.com, one of the original contributing editors to SafeHaven.com and former editor of the Gold & Options Trader. He continues to publish commentary on market and economic trends; and provides gold, economic and mining research to private clients worldwide.

The editor is not a registered advisory and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

Copyright © 2000-2009 Edmond J. Bugos

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