I've been watching the latest correction in gold with intense interest, not only because I'm long GLD but also because I didn't quite understand what the logic was behind it. There were a number of plausible reasons but I couldn't be sure of the order of importance for each of the reasons. Wednesday's market action helped me gain some clarity.
Right after the FOMC statement, gold started taking off, interest rate futures started tanking. Expectations of interest rate hikes by year end went down in a matter of minutes. So with the help of hindsight, here's what happened.
With the new, supposed Tea Party Congress, Ron Paul, and supposedly more hawkish FOMC in 2011, the market began to price in a higher chance of an interest rate hike sooner. But the new statement was unanimous in maintaining the QE2 course with virtually no change in the language regarding economic outlook, as the excuse/justification. Especially pathetic is the fact that Fed continues the willful ignorance of focusing on "core CPI", using it as the excuse for continuing the expansionary monetary policy. So the market is once again convinced that Fed will be too late in combating inflation.
Why am I not surprised? I think I'll get a heart attack from not being surprised.
-- Iago, Aladdin
I know, I quoted the obnoxious parrot before. Chances are I will be quoting him again, and again, and again. Don't be surprised and don't you die on me from not being surprised, either.
I took some profit at the end of last year, but kept some chips in the game exactly because I've been convinced about what the market is convinced again as of yesterday. I went through some pain in the past few weeks because of it. I'm saying this not to brag about my prescience, of which I claim none. I'm saying this to mark yet another footnote for myself that you can be right on a one-time basis and yet lose money on another. I'm afraid I'll keep relearning this lesson till I die because every time it'll be different.
If gold continues the rebound today, it'd be a strong affirmation of my reading above. And it could rebound with a vengeance.
If it pulls back without making a lower low, I'd welcome the opportunity.
If it pulls back hard with a lower low, I'd write another article about it some time later.
Disclosure: I am long GLD.