Wednesday, August 10, 2011

The Fed who cried wolf

As is often the case, mainstream expectations have just been shattered. From my reading/observation of commentary the expectations were:

No QE3 = Market plunge
E3 = Market soars

When something is so certain the market tends to throw a curveball and surprise us.

August 9th FOMC Statement:

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

So no QE3 was announced in the FOMC statement (released during US trade yesterday) as some speculated (although wording points to the Fed being ready to initiate if required); however they did suggest that ZIRP could be extended for the next 2 years. After a quick market selloff we got a huge rally into the end of the day (US markets). The rally is not a surprise and is likely to continue for the short term as the market pulls itself up from this oversold condition.

In my opinion the recent crash has caused significant damage to global markets (technically and confidence levels) and any moves higher from here should be considered bear market rallies.

If Gold can maintain its price (consolidate) after its recent run or even continue higher from here (and the markets in general see a bear market rally in a ‘risk on’ event) then we should see a huge push higher for Gold stocks. Over the last couple of days I have increased my exposure to Gold stocks. They now make up around 50% of my portfolio (up from roughly 20% last week), 35% in physical metals and the remaining 15% in cash. I am ready to rebalance this at any stage where required mind you, recent action in the Gold stocks suggest they aren’t guaranteed to hold up against the force of the general stock market (even if Gold is rising in price).

Eventually the market will get sick of the Fed who cried wolf though (talking up the market with a hint of QE3) and my suspicion is that when QE3 is eventually launched that we will see the market spike up for a short period and then resume it’s downtrend. A sustained rally like we saw during QE2 seems unlikely.


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  1. Nasty swing in AUD/USD from less than 1 back up to 1.033 has put a big dint in AUD gold price. From the penthouse to the outhouse in 24 hours. It's a tough game this, isn't it?

    I've tried playing XAU and XAG against other currencies (USD, JPY and AUD) but found that, with any trade apart from XAU/USD or XAG/USD, you have to make two decisions: an easy one (to go long XAU and XAG) and a tough one (an FX call).

    So, I stick with XAU/USD and XAG/USD, as it's just one decision, which is to be long gold and silver.

    (Given that my personal balance sheet is in AUD, I hedge outstanding P&L, which is in USD, by having an offsetting long AUD/USD position, which has the nice bonus of being a positive carry trade).

    By the way, have you published on here the names of your gold stock holdings? No problem if you don't want to reveal them.

  2. Indeed, it's quite the circus.

    What I find is that Australian Gold stocks tend to follow the lead of US Gold stocks, so even if the AUD price of Gold comes off the boil (as the AUD rises) as long as US Gold and stocks hold up then we should be right for them to rally.

    I don't publish my portfolio in general (as don't always have time to update and would rather not encourage 'copy cats').

    Currently in my personal account I am holding:
    Some are shorter term trades.

    I also hold in my super:

  3. Thanks. As I get nervous about single-stock risk I mostly go for ETFs, such as GDX, GDXJ and SIL.

  4. Oh, and also TRX (US listed). Because it's Jim Sinclair's company. Talk about breaking my own rules: not only does it expose me to single-stock risk, but also key-man risk!

  5. Definitely a safer way of playing it. I spend a lot of time on specific stock research so feel comfortable buying individually. Certainly not the path everyone should take though.

    I will have a post up relating to Gold stocks specifically later today which may be of interest and will look at the HUI index. Keep an eye out ;)

  6. Trader Dan is an excellent analyst. He looked at the HUI a few days ago, FYI:

  7. He is looking at the ratios, very good, it's what I intend on covering. Relatively speaking Gold stocks are the cheapest they've been today since early 2009.

  8. Woops. Think I just accidentally deleted a legitimate post here. Feel free to post again :)