Gold Intermediate Buy Signal Triggered

By: Ned_W_Schmidt

Perhaps we should establish an official day of mourning for the loss of independent thinking now so widespread among today’s journalists. In the U.S., independent journalism has died. Most of the reporting media has now become the official apparatchik of the Obama Regime. With one national network  moving into the White House for daily supervision, all pretense of independence has been lost. We can probably, given access to the internet, learn to survive the death of journalism as a profession. However, our wealth may not survive the loss of an independent central bank. Since Federal Reserve actions are somewhat greater than a butterfly in Africa flapping its wings, the rest of the world may need to worry about yet to come financial chaos.

To explore the loss of independence at the Federal Reserve, let us consider the first chart above. In it can be found a blue line that uses the left axis. That line represents the cumulative monetization of U.S. government debt by the Federal Reserve since the beginning of the time period included in the graph. For most of that chart, the Federal Reserve monetized very little U.S. government debt.  Then, in January of 2009 it began to monetize debt at an explosive rate. Did something change at that time?

Since then, the Federal Reserve has monetized on the order of $700 billion. Now while percentages are more important than absolute numbers, that value is more than the combined GDP of Poland and  Ireland. It is about 2/3 the size of the Canadian economy. The change that arrived in January was that the Federal Reserve was to create more money in a shorter period of time than has ever been done in history. Certainly one change that arrived in January was the total loss of independence at the Federal Reserve.

That blue line has some important meaning for Gold investors. With the Obama Regime likely to run deficits of $2-3 trillion for the next few years, that blue line will continue to rise. The Federal Reserve is now the “printing press” for an out of control Peronist-like government. That blue path of debt monetization puts a long term floor under the price of $Gold. If ever an argument existed for long term ownership of $Gold, it now certainly exists with the end of independence at the Federal Reserve.

The red bars, using the right axis, also have meaning for investors. They represent the amount of U.S. debt monetization being done by the Federal Reserve on a trailing 9-week basis. Think of these red bars as representing the liquidity pedal, as in a gas pedal, for the U.S. financial system. When those bars are rising, the gas pedal is being pushed to the floor. The monetary carburetor is flooding the financial engine with liquidity. That burst of liquidity pushed financial markets higher. That flood of liquidity is what sent the stock and Gold markets higher, providing hope and optimism for all.

With those red bars now starting to fall, for whatever reason, the consequences are like taking one’s food of the gas pedal. The monetary carburetor is not sending as much liquidity into the financial system. The engine, or financial markets, then starts to slow. Such is what has been happening to both the stock and Gold markets. They are sputtering on a lower level of liquidity injection. 

Last Summer in addition to the normal seasonal liquidity decline banks and hedge funds moved toward near collapse. As all that happened together, a massive draining of  liquidity occurred. That development sent the markets for stocks and precious metals lower. A similar, though not as severe, situation seems to be unfolding this Summer. As the chart above shows, three buy signals built on over sold conditions were required last Summer for $Gold to find its final bottom.

Thus far, one intermediate buy signal has developed. As these over sold conditions develop this Summer, as a consequence of the loss of liquidity, investors should be adding to their Gold holdings. While this Summer’s low should not be as deep as that of last year, it should have true importance for investors.  A longer term perspective, both historical and future, suggests that $Gold will make $1,000 the new floor this coming Fall. The agony of Summer may be the last chance for investors to buy $Gold for less than $1,000.

By Ned W Schmidt CFA, CEBS

Copyright © 2009 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_GETVVGR.html

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