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MLR - Time to Buy? QE3 and its effect on the general market and gold

Time to Buy?

The general market had what some might consider a buy signal because of a follow through day that came today, August 23, 2011. A follow through day occurs when leading indices are up more than 1.5% on higher volume than the day before on at least the fourth day of an attempted rally off the lows after a downtrend. However, one wants to see robust performance in leading stocks accompanying the follow through day. Further, the general market is in a period of exceptionally high volatility. High volatility means high risk. Follow through days during such periods are highly unreliable, thus go long at a higher level of risk than normal. Shorting into dead cat bounces or remaining in cash are two possible strategies we discuss in detail along with shortable stocks at www.selfishinvesting.com


The Federal Reserve and QE3

Last year's meeting in Jackson Hole, Wyoming had Ben Bernanke signaling for QE2, and the markets were off to the races once again on September 1, 2010, just a few days after the meeting.

Even if Bernanke signals for QE3 at this year's meeting in Jackson Hole which takes place on August 26, the question is whether QE3 will have as strong an effect on the markets as QE2, or whether the troubles underlying the markets are so deep, that QE3 becomes a way for big money to more easily exit stocks, thus keeping a lid on the ability for the general market to rally. Keep in mind QE2 was alive and well through June 2011, yet the general markets could not sustain much of a rally in 2011, but rather traded sideways in a choppy, near trendless manner, making 2011 one of the most challenging years yet.

Whether or not Bernanke signals for QE3, the Market Direction Model at www.selfishinvesting.com will continue to measure buying and selling pressure, and issue its buy, cash, and short sell signals accordingly. It has well outperformed all major indices so far this year.



 Meanwhile, those invested in gold noticed today's volume traded in gold ETF GLD, one of the highest on record for the ETF. While gold has been extremely overbought over the last few days, it has many bullish tailwinds at its back, thus longer term holders of gold can use pullbacks as pyramiding opportunities in the metal. Further, given its huge rise over the last few weeks, it deserves to pull back to some extent. Should GLD pull back to its 50-day moving average, that would be a correction of roughly 10% from today's closing price of 177.67, and a total correction from peak of roughly 13%, before continuing its long term uptrend.

The top 8 reasons why gold should continue much higher: 

1) Global demand for gold is at near-record levels. The two key markets are India and China which together account for 52% of total bar and coin investment and 55% of global jewelry demand. Moreover, Indian and Chinese demand in gold grew 38% and 25% respectively over Q2 2010. After the US debt downgrade, the Chinese complained about US debt, so it is likely the Chinese will continue to buy gold to gradually move away from US treasuries. And India is potentially an even bigger player than China in gold investments.

2) Indian and Chinese demand in gold is likely to continue, due to increasing levels of economic prosperity and high levels of inflation in both countries.

3) The impact of the European sovereign debt crisis, the downgrading of US debt, inflationary pressures, the continuing devaluation of major world currencies via quantitative easing/money printing, and the potential for another recession in debtor nations (U.S., Europe, U.K., etc) are all likely to drive high levels of investment in gold for the foreseeable future.

4) Central banks around the world are likely to remain net purchasers of gold. Purchases of 69.4t during Q2 2011 demonstrated that central banks are continuing to turn to gold to diversify their reserves.

5) Gold is a safe haven when investors get scared, ie, the fear trade.

6) Stagflation (high inflation, low growth) in the U.S. is in the offing. Remember how well precious metals did in the 1970s? Gold is not just a safe haven but also is a hedge against inflation. As more money gets printed, the higher gold will rise.

7) We are witnessing a worldwide secular gold bull market vs. a U.S. centric one back in 1980.

8) Nothing substantial has been done to address the U.S. debt problem.


We remain long term bullish on gold and long term bearish on the dollar. Money printing/quantitative easing could prop up stocks, but we could also be in for a period of stagflation where stocks lay limp, so we will let the Market Direction Model and the action of leading and lagging stocks tell us where to direct our long and short investments.


Best Wishes for Successful Investing,

Dr. Chris Kacher & Gil Morales


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