The old saying on Wall Street is that you can’t fight the Fed. So
see whether this is still true we plotted the changes in gold (GLD), the
S&P 500 (SPY), and the monetary base back to 2004 on a logarithmic scale. Here
are a few observations we drew from this chart:
1. The Fed
does not always do exactly what it says. Case in point, in Sept. 2008 the
monetary base breaks trend and jumps upward, implying Fed intervention. However
this was months before the Fed would announce QE1 and a month before TARP. It
appears that by Sept. 2008 the Fed knew the financial sector was near collapse
and proactively began increasing the monetary base. We closely watch the
economic data coming from the Fed to see what they are really doing and when
they are doing it.
2. When a
round of QE ends, the S&P 500 declines. This occurred in March 2010 at the
end of QE1 and June 2011 at the end of QE2. When a new round of QE starts, the
market rallies. We are closing watching Fed data to see when QE3 begins in
earnest and would expect the market to tick up.
3. There
is a 73% correlation between monthly changes in the monetary base and monthly
changes in the price of gold. We trade gold using a model of economic
indicators, of which the monetary base is one of the most important. An
increasing monetary base is bullish for gold, and we will be watching closely
for the impact of the Fed’s first round of QE3 on the monetary base.
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