Effectiveness of a central bank can be measured several ways. For investors, that assessment is by return provided by equity capital in a nation and value of the nation's money. This week's chart shows that Federal Reserve deserves a failing grade. Back line is total return, including dividends, of S&P 500 over past ten years. That return has been a little more than 3% per year for ten years, and essentially zero for past eight. More important is the purchasing power on an investment in a nation's equity market. Red line is purchasing power of an investment in U.S. paper equities deflated by value of dollar, measured using value of Gold. Global purchasing power of U.S. equities has fallen by almost 60% over past ten years, a truly dismal result. Now again, Federal Reserve is embarked on lowering interest  rates and perhaps monetizing mortgages of doubtful value. It seems to loves to serve at feet of Wall Street bankers. Federal Reserve's failing grade on managing U.S. economy is likely to persist.

Since last we visited, $Gold has entered the correction that had been due for some time. $Gold has fallen about US$100 from the trading high. Having reached a short-term over sold condition last week, some period of rest is likely. Over sold condition will be remedied, and another bout of short-term pessimism should develop. That process will be repeated until final intermediate over sold condition is reached. Most corrections have at least three phases, a down leg, an up leg, and a third wave down. That pattern is likely to be a fair guess as what is to come. Rush from paper assets to commodities lasted more than six months. Such a run is not likely to be corrected in a matter of weeks. Corrections have price, time, and emotion dimensions. All three will have to play out. Investors should build cash in order to buy $Gold when correction is completed. And the good news? This consolidation may set the stage for US$1,500, and perhaps higher.

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.