Uncle Scrooge Refuses to Give More

Fed announces that U.S. economy is slightly improving, so no stimulus needed. Gold plummets through the $1,600 level for the first time in three months.

Gold has experienced the results of quite the domino effect today! A drop in the euro exacerbated the region’s already heavy-laden anxieties and investors ran head first into cash as the safest asset. A few days ago, Patton, on our site blogged about watching the dollar for inverse reactions in gold (rather than only watching Eurozone news) and boy was he right! The dollar is already up $0.28 at the time of this writing and just about everything else is in the red.

Gold fell through the $1,600 level for the first time in 3 months and this sort of breakthrough at a major support level only worsened sentiment, and prices, for the yellow metal. Finally, the fed announced that it would keep U.S. interest rates the same AND that it would not be looking into monetary-stimulus programs when there is a slightly improving economic outlook. Typically, in the last 3 years, whenever the fed announced that it would be looking into monetary-stimulus, we usually saw the dollar sink and the demand for gold rise – well, that effect is still in play and with the opposite news from the fed, a rise in the dollar was expected.

So where DID people run to today? As I said before: into the dollar and, more specifically, money market accounts. Metal and mining analyst, Jeff Wright, over at Global Hunter Securities, says, “It’s the never-ending European debt crisis still playing out, combined with some year-end profit-taking and a weakening of the euro. A number of funds are rotating into money-market funds in the U.S. … It’s safe and they don’t have volatility.”

Also, I believe that investors are FINALLY beginning to see that China’s expansion is indeed slowing down and this deceleration will indeed affect the commodities market. Yesterday, Wall Street Journal / Dow Jones reporter Liam Pleven said, “You want to know where the global commodities markets are heading in the coming years? Then it’s probably best that you remember a single word: China.” Now let’s be honest; many investors, including myself, have for years enjoyed the dreamy viewpoint that China and India would NEVER stop heavily demanding commodities and NEVER stop expanding. Unfortunately, per Pleven, ”The consensus is that China is headed for slower economic growth than it experienced from 2001 to 2010, when its annual rate of expansion ranged from 8.3% to 14.2% and reached double digits on a percentage basis six times, according to the World Bank. If the consensus is right, the question becomes how much China's growth will slow.”

While there is merit in taking stable money-market funds over a volatile commodities market, in seeing both China and India’s demand for gold potentially drop and the Eurozone failing to perform cranial-rectal extraction surgery, I for one am sticking by what I said two days ago – it’s SHOPPING TIME!

I’ve been waiting several months now for another opportunity to lock in a low gold price and the price action that has been occurring this week, while scary to many, has got me drooling. I’m going to watch the rest of this week and the next very closely for any kind of new major support level and once I find that, I may not be ALL IN, but let’s just say that there will be some reallocating of assets from elsewhere to gold in my personal portfolio at least…

- Mitch