Tuesday, September 21, 2010

Emini Futures Trading / Gold Rallies on FOMC

(QQQQ)(DIA)(SPY)(GLD)($SPX)
Tuesday September 21, 2010
Clearly the FOMC Interest rate announcement did not provide the volatility spike we've come to expect over the past years. To call today's move anemic would be akin to calling Richard Simmons cheerful. The range of the spike was a mere 13 points. Spike low 1130.75 / spike high 1144. Once the confetti settled price was just about back where it started. Today's close on the December S&P 500 Emini contract was 1134.75. The open this morning was 1138.25. If we weed out the noise the true range on the day was 3.5 points. I'm tempted to use the term "snooze fest" but I will refrain as that would make the second time in 2 weeks and that's just financial journalism gone bad. I will say this though, the 1138/1139 Weekly Trading Zone held the uptrend at bay yesterday, and again today on 3 separate occasions, all clearly seen on the 30 min chart posted below. We also have an ascending price channel in place which has held now for the 7th straight trading day. Both yesterday and today we pierced the upper trend line as well as the WTZ, and price was promptly rejected both times. Has this market run out of steam? Perhaps the indices have but today's brilliant performance in the Gold market was both visually stunning as well as fundamentally telling.

Gold - The New Rock Star
The price of gold spiked dramatically right around 2:15 PM ET today, as the Fed mentioned the words "quantitative easing", and left the door open for future asset purchases by the central bank. The result was a rush out of the dollar, and into a myriad of other assets. But gold's move was by far the most dramatic.
FOMC Gold Rally

So what does "quantitative easing" really mean and why should you even care?
The term quantitative easing (QE) describes a monetary policy used by central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

A central bank implements QE by first crediting its own account with money it has created ex nihilo ("out of nothing"). It then purchases financial assets, including government bonds, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus a hopeful stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.
Risks include... (Read more at Wikipedia)

In plain speak it simply means "Fire up the printing press, we need more money". This my friend, is why Gold investors love Bernanke and why it probably won't end well for the U.S. economy.

Our old friend Alan Greenspan had this to say last week as he addressed the Council on Foreign Relations (CFR).
"At this stage of the game,
'Fiat money has no place to go but gold."


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