Twist and Shout

As anticipated, the Fed today announced plans to burn $40 billion a month, with no end in sight:

The Fed said it will buy $40 billion of mortgage-backed securities per month in an attempt to foster a nascent recovery in the real estate market.

The purchases will be open-ended, meaning that they will continue until the Fed is satisfied that economic conditions, primarily in unemployment, improve. …

Enacting the third leg of quantitative easing, or QE3, will take the Fed’s money creation past the $3 trillion level since it began the process in 2008. …

In addition, the Fed said it will continue its program of selling shorter-dated government debt and buying longer-term securities, a mechanism known as Operation Twist. …

The stock market, which had been slightly positive prior to the decision, shortly after 12:30 p.m., surged while bond yields, particularly farther out on the curve, jumped higher. Gold and other metals gained at least 1 percent across the board while the dollar slid against most global currencies.

— Jeff Cox, “Fed Pulls Trigger, to Buy Mortgages in Effort to Lower Rates,” CNBC, 9/13/2012 |

Well, this was rather predictable. I’ll leave forming a mental image of “open ended” to you, but since the Fed is starting QE3 with Operation Twist still playing in the background, I think “Twist and Shout,” gives only a faint prospect we can “work it all out.” You’d think it was an election year or something.

Anyway, gold prices went up as expected. But what’s this tepid statement from CNBC about gold gaining “at least one percent?” It went up almost another $40 per ounce, in a repeat of Friday’s jump! Good grief, I could just about use the chart I used for Friday’s post today, and you’d hardly be able to tell! But here is today’s gold chart, from APMEX:

Gold and silver climbed to six-month high as the Federal Reserve’s announced round of bond buying sparked a retreat in the U.S. dollar and demand for a hedge against potential inflation down the line.

The most actively traded gold contract, for December delivery, rose $38.40, or 2.2%, to settle at $1,772.10 a troy ounce on the Comex division of the New York Mercantile Exchange, the highest settlement since Feb. 28.

Silver rose 4.5% to settle at $34.778 a troy ounce, the highest since March 1. …

The Fed’s action was widely expected after Fed Chairman Ben Bernanke and other officials hinted at the central bank’s willingness to act should economic growth in the U.S. weaken. Gold futures gained 9% between Aug. 2 and Wednesday’s close.

Even after those gains, “I think that you had a lot of people sitting on the sidelines just wanting to make sure there wasn’t a surprise here” on Thursday, said Matt Zeman, head of trading with Kingsview Financial.

Thursday’s gains could spark another leg higher in gold in the weeks ahead, said Adam Klopfenstein, a senior market strategist with Archer Financial Services.

Gold spent much of this summer in sideways trading, as investors worried about the global economy preferred the U.S. dollar at the expense of precious metals. That sparked some talk that gold’s 11-year bull run could be set to stumble, and speculators grew cautious toward the metal.

After the Fed’s announcements, “I think we’re going to see a lot of the [gold] skeptics throwing in the towel,” Mr. Klopfenstein said, adding that some of those traders were closing out bets on lower prices on Thursday. “Gold is having an impressive run.”

— Matt Day and Nicole Friedman, “Gold, Silver Surge on Fed Plans,” Wall Street Journal, 09/13/2012 |

So where do we go from here? It’s pretty early for a consensus from precious metals analysts, but Kitco’s Jim Wycoff had this to say:

Technically, December gold futures prices closed near the session high Thursday, hit another fresh six-month high and scored a big and bullish “outside day” up on the daily bar chart—whereby the high was higher and low was lower than the previous session’s trading range, with a higher close. Bulls gained solid upside technical power Thursday to now suggest a challenge of the 2012 high of $1,800.90, or above.

— Jim Wycoff, “PM Kitco Metals Roundup: Comex Gold Powers to 6-Mo. High on QE3 from U.S. Federal Reserve,” Kitco, 09/13/2012,

That’s probably a conservative position. On Friday, some analysts were suggesting a 2012 high of $2,000 or more, and that was before the “open-ended” characterization was announced. With the Fed burning through $40 billion a month, no US government action in sight on the looming fiscal cliff, and turmoil from US elections and global unrest/terrorism, I’d say gold at $2,000 plus by year’s end is a pretty reasonable bet.

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