Ben Bernanke and the U.S. Federal Reserve surprised a bunch of misinformed investors and analysts Wednesday afternoon when they announced that the Fed will not "taper" its $85 billion a month asset purchases. The Fed pointed toward weak unemployment reports and slow economic growth.
The market was anticipating tapering, but I had a very good feeling that the Fed was full of it and predicted that it wouldn't taper at all. Interest rates have skyrocketed ever since Bernanke first uttered that infamous "T" word back in May; rates on the 10-year bond are currently 2.75 percent, much higher than they were in May at just 1.63 percent. Mortgage rates have also risen to 4.48 percent, up from just 3.3 percent in May.
It seems like Bernanke has really shot himself in the foot here. It will be interesting to see how rates react to this news and if they head back down to May levels, or if it will even matter.
Here's a chart of 30-year mortgage rates below.
Not surprisingly, since rates have shot higher, home sales have gone down, since higher rates means higher interest payments on mortgages, making homes less affordable for new buyers. New home sales plunged 13.4 percent in July. There is also far less home refinancing with higher rates.
Also not surprisingly, Gold (GLD) is up 2.7 percent to $1,342 because of the non-tapering announcement, as the easy money policies are here to stay.
'Gold Is Going to $650!' and More Nonsense From the 'Experts'
In one of the most ridiculous gold calls I've ever seen, one analyst in a Yahoo! Finance interview actually said he thought the price of gold could drop down to $650 an ounce.
I don't know what it should be valued at and I've never known...When the Fed actually does start to wind down this balance sheet, I think gold is going to get crushed.
Though, the analyst doesn't actually say when he thinks this winding down of the balance sheet will happen, and doesn't understand the implications of what this would mean for ALL asset classes, not just gold.
These people readily admit that they have no idea how to value gold and throw out some random, absurd number of $650. I have so many issues with this call that I don't even know where to begin.
Gold at $650 would mean a huge deflationary scenario, and I can't even imagine where the DOW and housing prices would be in that case. One thing is for sure - prices for everything would be much, much, lower, not just gold!
What I'm saying is, I think it's far more important for investors to value gold based on what it can buy you, not what the price is in terms of U.S. dollars. For example, gold could be $650, sure. Technically, if you bought here and it went down to $650, you would lose money. But the DOW could be 3,000 points at the same time, with the Gold:Dow ratio just 4.6. You would have gained in purchasing power relative to stocks.
You can follow the price of gold relative to other assets on the website StockCharts.com. For example, to compare gold to the Dow Jones, you simply enter $indu:$gold. Here is the chart below:
(click to enlarge)
I absolutely believe that the Dow:Gold ratio peaked in June, just when gold bottomed. I am expecting the ratio to go below 9 before the end of 2013. In the long term, I am expecting the ratio to go under 4.
Who you listen to is so important, so I urge you to follow the right analysts. You obviously shouldn't listen to people who have been wrong on gold all along.
The Bottom in Gold is Absolutely In
I believe there is now a 90-95 percent chance that the June lows of $1180 were the absolute bottom in gold. You'll see in the below chart that gold was smashed in June, which also happens to be a historically weak month for the yellow metal.
Gold has regained technical strength as the price now sits right above the 50-day moving average. As I said in a previous Seeking Alpha article, I believe there is a good chance gold will break out above the 200-day moving average of $1,484 sometime this month or next month.
On a monthly basis, November is the strongest month for gold on average. This month also conincides with Indian wedding season where gold is the single largest component of the Indian wedding market.The Debt is Staring Us Right in the Face - But We are Not Looking
There is another potential catalyst for gold right before our eyes as the United States is expected to hit the debt ceiling, yet again, this time in mid-October to early November. Could this be the next big catalyst that sends gold to $1,500?
The independent Congressional Budget Office said the following Tuesday:
With Congressional Republicans and the White House girding for yet another battle over borrowing to finance the deficit, CBO director Douglas Elmendorf said the government could be forced into sudden cuts or defaulting on its debt as early as six weeks from now.
Based on what happened during the 2011 debt crisis and based on recent comments from Republicans, there is very little reason to believe that this situation will be worked out in a timely manner. In my opinion, the stage is set for another big crisis.
A Priceless Lesson for Investors
I've been following the mainstream financial press over the past few months, ever since the announcement of a potential tapering came out. All we've heard is that the Fed will taper.
This should be a lesson for all of us, to not follow the mainstream nonsense thrown at us every day by CNBC, Yahoo! Finance and other media outlets. These are the same clowns who didn't see the housing crisis of 2008, the tech bubble, etc. Even so-called "professional economists" expected the Fed to reduce its asset purchases by about $15 billion a month, according to a recent CNBC poll.
I have no degree in business or economics, no PhD or fancy degree. Yet I was able to predict the actions of the Federal Reserve (see previous article) because I listen and learn from people who have been right time and time again, and because I follow the facts and block out the noise (shut off CNBC!). Follow people who have common sense and who have no ulterior motives. Most importantly, follow the facts and what they tell you.
Additional disclosure: Various gold equities