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Gold Investors Need Unsterilized Milk

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Published : December 12th, 2012
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Category : Gold and Silver





1. The FOMC meeting this week could be the fundamental catalyst that drives gold above $1800, and turns it into a “here to stay” floor.

2. Currently, about half of the bonds bought by the Fed are financed by other bonds it holds.

3. That process is referred to as “sterilized QE”, but the Fed is quickly running out of short term bonds.

4. Ben Bernanke also appears to be well aware that the real unemployment rate is quite a bit higher than 7.7%.

5. As a result, the door is open for him to announce “unsterilized QE”. He could do it on Wednesday, December 12. I would expect it to be called “expanded QE3”. If he’s feeling particularly aggressive, he may give it the label of “QE4”.

6. Regardless of the name he uses, compared to the existing QE3 program, unsterilized QE should be substantially more bullish for gold.

7. Please click here now. You are looking at the daily gold chart. A lot of institutional money managers are willing to buy gold aggressively, if it can trade above $1800, but they are sitting on the sidelines until they see what the Fed does.

8. Note the minor HSR (horizontal support & resistance) near $1730 and $1757. There is also a downtrend line that technicians are watching. I’ve highlighted that in red.

9. A resolution of the fiscal cliff issue could help power gold through that minor HSR, and through the much stronger HSR that sits at $1800. Many influential economists believe that the US government will reduce the total amount of Treasury bonds it issues, to avoid going over the cliff.

10. If that happens, and the Fed engages in unsterilized bond purchases to the tune of about $80 billion a month, it would result in a significant increase in both the Fed’s balance sheet, and the percentage of US Treasury debt held by the Fed.

11. The bottom line is that the Fed could end up buying and holding a gargantuan amount of US Treasury bonds. It’s unknown just how inflationary this would be, but many money managers would probably buy gold, just to hedge against that risk.

12. If Chairman Bernanke decided to play “hawk”, he could theoretically delay the implementation of QE4 until the next FOMC meeting on Jan 29-30, 2013.

13. I don’t think there will be a delay. I think he’ll make the move this week, and I’m a little worried that many investors in the gold community may have thrown in the towel on their gold stocks, just a bit too soon.

14. Patience is one of the greatest wealth-building tools that an investor can use, and the current time period is probably one of the most important times to employ it.

15. I want you to clearly understand the link between the rate of expansion of the Fed’s balance sheet, and the movement in the price of gold, especially since August, 2011.

16. On that note, please click here now. You are looking at the chart of US Treasury debt held by the Fed, courtesy of Business Insider news.

17. Now, please click here now. That’s the weekly spot gold price chart, and you can see that all upwards momentum was lost after August, 2011. Gold has drifted sideways since then, and so has the percentage of Treasury debt held by the Fed.

18. UBS economist Drew Matus says, "QE4 will result in a doubling of the expansion rate of the Fed’s balance sheet."

19. I agree with Mr. Matus, and I’ll add that such a change in the expansion rate could begin as early as tomorrow!

20. Please click here now. That’s the weekly chart for GDX. You are all aware that gold stocks have really gone nowhere since 2009. If gold is driven over $1800 by unsterilized QE4, it’s likely that powerful institutional money managers will embrace gold stocks in a much bigger way than they have in the past.

21. Note the 14,3,3 Stochastics series at the bottom of this chart. It is positioned at a point where enormous gold stock rallies tend to occur. Is this important oscillator anticipating the unveiling of QE4? I think it is!

22. Pension funds, family offices, and other large institutions started to buy gold stocks in 2011, as gold rose towards $1900, but the euro crisis and “Operation Twist” (sterilized QE) gave them cold feet.

23. Unsterilized QE4, and a gold price over $1800, could cause these huge movers of liquidity to believe that $1800, rather than $1500, is the new “here to stay floor” for gold.

24. A flurry of hedge fund buying and short covering could also occur, as these aggressive traders may try to pre-empt the flow of pension & institutional money into gold stocks. My suggestion is to put “Doctor Patience” in your gold stocks corner, for just a little while longer. Milk might be safer to drink when it is sterilized, but when it comes to gold stocks, I strongly suggest that chief physician Dr. Ben Bernanke’s unsterilized “QE4” variety, is what could send them soaring!

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
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