The fed left interest rates unchanged today, since there isn’t any room to move them lower, and they can’t raise them in this economic environment (although they probably should). But in the statement it was said that the fed will purchase over a trillion dollars in notes and mortgage-backed securities. The stock market instantly rallied on this news. Prior to that announcement, it looked like the stock indexes were running out of steam from the large impulse move of the last several sessions. Trends were down, volume declining on the advance, and momentum very overbought. All conditions were ripe for at least a retracement. But within seconds that scenario was obliterated, and the uptrend resumed. The fed seems completely unconcerned about the longer term negative implications of creating a situation that will ultimately destroy the integrity of the dollar, or at least what little integrity it had left. I suppose the fed thinks it is smart enough to reverse course just before the inevitable inflation hits. Meddling with the laws of economics always has a disastrous end result, and this will be no exception.
If the fed did not pursue this course there would probably be deflation for some time. There is evidence that deflation is already showing up in some areas. So turning up the printing presses and creating over a trillion dollar out of thin air may create enough of an inflationary offset to keep things in balance for a while, at the same time letting the fundamental economy sink into the abyss. The feds action reminds me of a joke comedian Stephan Wright once told. He suggested putting a humidifier and a de-humidifier in the same room, shut the door, and let them fight it out. Mr. Wright is not an economist, but it seems that comedians are running the show right now (and there might be one more if Al Franken prevails), so maybe Mr. Wright’s joke has become economic policy, which of course is also a joke.
Gold looked like it was about to enter a more serious downtrend at the start of the session today. It was selling off right from the open, and was down nearly $30 mid-morning. Within seconds of the fed announcement, gold abruptly turned around and was up sharply on the session. The trend is unclear to me after the big reversal today. The weekly chart, which I have on a few of the previous posts, looks more constructive to the upside, but the daily chart was in the beginning of a downtrend with momentum rolling over from the overbought area. With the reversal today, price is sitting right on the previous swing point, with trend moving averages still down and momentum still overbought. I always like to see testing of key swing points, with much backing and filling to create some price structure. A one day pop, especially in gold, can be misleading. It seems too obvious that gold should now go to two thousands dollars an ounce or higher with this latest fed move. What seems too obvious usually doesn’t happen. If it does happen there will be many cycles along the way that should allow entries on pullbacks.