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What is the New High In Gold Telling Us?



September 22, 2010 – Comments (0)

Since the August 25th stock market pivot low the major stock indexes have rallied higher by 10.0 percent. This is a major point move in less than four weeks. In the past the stock market would rarely move 10.0 percent in a year. These days we are seeing these 10.0 percent type of moves during rallies and corrections. The talking heads in the media are now getting very bullish pointing to the actions of the Federal Reserve Bank as one of the catalysts.

If you look at a chart of the SPDR Gold Shares(NYSE:GLD) you will notice that the popular ETF made a pivot low on July 28th, 2010 at $113.08. This morning the GLD is trading over $126.00 a share. That is nearly a 12.0 percent jump in the GLD in just 39 trading days. The point that I'm trying to make here is that gold is the way to tell when money is being created or printed. The U.S. Dollar Index topped out on June 7th, 2010 at $88.70. this morning the U.S. Dollar Index is trading around $79.70. This is nearly a 10.0 percent decline in the dollar since that June high. We all know by now if you want to get the stock market higher the dollar must decline.

Simply put when gold increases it is telling us that the Federal Reserve Bank is continually providing liquidity to the markets. Yesterday the Federal Reserve Bank kept the fed funds rate at zero percent. This rate is what the Federal Reserve Bank charges the large major banks such as J.P. Morgan Chase & Co.(NYSE:JPM), Bank of America Corp.(NYSE:BAC), and Wells Fargo & Co.(NYSE:WFC) for overnight borrowing. Therefore, these banks can borrow money for nothing and simply buy U.S. Treasury notes and make money. When you include the banks credit card business in which they sometimes charge very high interest rates they actually have a sweetheart deal. When you think about it the banks do not have to make any traditional loans in order to make money.

Now that we know gold is telling us that the money supply is extremely loose when does this artificial dilution of the U.S. Dollar stop? What are the repercussions of all this money creation and liquidity? Since 2006, M3 money supply is no longer published or revealed to the public by the Federal Reserve Bank(US central bank). The Federal Reserve Bank stated that it was simply not in the budget to keep revealing the M3 money supply data to the public. These are the same people that print money for a living. How can it not be in the budget? In any case this is where gold comes in. Gold is now telling us that the printing presses by the Fed have been running on overtime. At this time the stock markets seem to love it. However, at some point this flood of liquidity will become a negative for the stock markets.

Nicholas Santiago
Chief Market Strategist

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