The S&P500 slipped almost 0.6%, losing ground for the second consecutive week. This is has not happened since August 2010, not coincidentally when Ben Bernanke announced to the world that the Fed would embark on another round of quantitative easing. QE2 is almost 50% completed, with most of the remaining money printing to be conducted over the next two to three months. The S&P’s volume jumped up, which makes the price drop more important: real selling was behind the price movement. The VIX spiked up for the second week in a row, also confirming the price drop.
Economically, the news was poor to mixed. The Case-Shiller home price index is now all but confirming the double dip in housing. While new home sales were better than expected, the unadjusted figure set a record low for the month of December, and sales were still almost 8% lower than they were in December 2009. Durable goods orders missed badly; instead of rising 1.5%, they fell 2.5%. Initial jobless claims shocked everyone, coming in at 454,000 when the experts had predicted only 405,000. Q4 2010 GDP (first estimate) came in below expectations. Consumer sentiment was slightly stronger than expected.
Technically, the daily charts have not yet confirmed a break in the Fed-induced uptrend that began several months ago. If the S&P falls below 1250, then the uptrend should be broken. The geo-political unrest in Egypt, as bad as it is, may not be able to overcome the similarly powerful forces being unleashed by the Federal Reserve, namely quantitative easing. Until this money printing program ends in a few months, any forces that push the market down will need to overcome the Fed’s massive forces that are fighting to push it up.
Over a year ago, gold was recommended here as a long-term investment opportunity. At that time, gold had run up to well over $1,200 per troy ounce, and the investment idea was to buy it, but only after it fell back down in price. Soon after, gold fell down to about $1,050 and after that, it began its year long march up beyond $1,400.
Over the last couple of months, something interesting has happened. Gold has formed a major topping pattern, and has fallen about 8% from its recent peak. If this drop continues to say $1,275 and certainly to $1,150, then we would have another major opportunity to buy gold at an attractive price.
GATA, or the Gold Anti-Trust Action Committee, summarizes the reasons why every serious investor should consider owning some gold.
First, per GATA “true value relative to currencies is vastly greater than its nominal price today, since much of the gold that investors think they own doesn’t exist. The actual disposition of Western central bank gold reserves is a secret more closely guarded than the blueprints for the manufacture of nuclear weapons. For gold is a deadly weapon against unlimited government.”
Second, “the intervention against gold is failing because of overuse, exposure, exhaustion of Western central bank gold reserves from gold sales and leasing, and the resentment of the developing world, which is starting to figure out how it has been expropriated by the dollar system.”
To sum up, gold’s price has been severely suppressed, in dollar terms, for many years. And as the US Federal Reserve keeps on printing (electronically) trillions of dollars, then owning gold is not only a good investment, it’s also an important hedge against the possibility that the Fed’s printing-gone-wild scheme will fail miserably.
Also, unlike a traditional hedge, such as buying term life insurance or put options, the advantage of owning gold is that your “premium” paid never expires worthless. In other words, if the Fed’s policies do not end in failure, then you can still sell your gold (although at possibly a reduced price) and recover some, if not all, of your initial outlay.
But judging by the way the Fed is trapped (if it continues printing, the US dollar could collapse; if it stops printing, the US fiscal hole could lead to an immediate funding crisis), the odds of losing on a gold investment are low.
Borrowing from the words of the financial economist and money manager, be your own central bank. Buy and hold gold.