GOLD THOUGHTS: Imagine you are on a cruise ship sitting at the Captain's table for dinner one night. Other passengers are quizzing Captain on the ship, the newest of the line. The Captain is explaining all the new safety features as well as the fuel efficiency of the new engines. You have always thought that steering one of these liners had to be a difficult and challenging task. So, you ask the Captain about how the ship is steered. The Captain replies that the ship, being the newest of the line, has a revolutionary guidance system. No connection exists between the helm, the steering wheel, and the rudders of the ship. The pilot simply thinks about where the ship should go, spins the wheel, and the ship hopefully goes where intended.
This miraculous guidance system for the ship is similar to that used by the Federal Open Market Committee to set monetary policy. Chairman Benanke has some commitment to what is being billed as an innovation in monetary policy, inflation targeting. In this reborn attempt at discretionary monetary policy, a range is established for the future inflation rate. However, no meaningful connection between the money supply and prices is assumed to exist. By some unexplained means, the FOMC will guide interest rates in such a way that inflation will be controlled. Such monetary alchemy may fool the academic community, but it does not fool global financial markets.
Globally, investors understand their choices of money are Gold, the Euro, the U.S. dollar, the Chinese renminbi, and all the others. The U.S. dollar is losing leadership as Bernanke's monetary alchemy lacks any limitation on the creation of dollar. Without a constraint on supply, the price of the dollar will fall, as is the case with any commodity or good. Any hint by the FOMC that lower U.S. interest rates are a possibility in the short-term will accelerate the shift, pushing down the value of the dollar and moving $Gold's price up.
Gold became over bought last week as the US$650 resistance level was penetrating. $Gold has resting in order to correct that over bought condition. Price weakness is actually welcomed at present as it will move $Gold toward over sold. That condition will create the fuel for the next rally. Weakness should be used to add to positions in Gold and related stocks.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive a trial subscription send a note to Ned at email@example.com.