After I spent all week downplaying the likelihood of the Federal Reserve coming out in favor of additional stimulus, the Fed comes out with an announcement of, you guessed it, additional stimulus.
I could point to all the times in the recent past that the Federal Reserve has disappointed stimulus hawks, or the fact they’re not going to announce the details until later this month and a lot can happen in that time, but it is what it is. The talk has now turned from “if” the Fed is going to inject cash into the economy to how much.
Gold and silver went ballistic on the news with gold closing at $1,690.70, up $35.08 and silver was up $1.33 to $31.70 for a closing silver/gold ratio of 53.3.
It should count for something that if you took my advice to buy silver back in early August, when silver was $27 an ounce, you’re probably still happy.
Where we go from here will depend on whether there’s any follow-on to Friday’s rally or if profit taking rules the day. In the U.S. markets are closed tomorrow for the Labor Day holiday.
If we do rally over $1,700, then start thinking about locking in prices on a series of small sales. Small sales for the same reason you make small buys; to have some reserve in case prices keep going up.
There are some longer term headwinds on gold prices that could curb a parabolic rally like we saw back in July and August of 2011. In India a weaker rupee and import tariffs on gold are keeping a damper on retail sales, although it has created a vibrant new market in gold smuggling.
In China a downturn in manufacturing growth has pinched retail gold sales but China is a tougher call because no one outside really knows how much gold they have. We know how much they report, but the actual value could be much higher.
All that is out the window if the Fed comes back with some really blow out numbers for a stimulus package. Also keep an eye on the EC; if they decide to join in the stimulus parade, we could see another parabolic upward arc in gold prices that leaves $2,000 an ounce in the rearview mirror.
On the flipside if the Fed announcement is another anemic round of bond purchases and the ECB stays on the sidelines, then we could see prices retreat to the $1,620 range again.