Jackson Hole: Make Or Break For The Markets

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Includes: GLD, IAU, PHYS, SLV, SPY
by: Bob Kirtley

Investors, speculators, traders and fund managers alike will be glued to their flat screens at the end of August, hanging onto every word that Fed Chairman Ben Bernanke utters. They will be looking for some positive action on behalf of the Fed in terms monetary stimulus or Quantitative Easing Part Three. Every angle, inference, real or perceived meaning, will be analyzed to the fullest extent with the view to positioning one's portfolio accordingly.

Ben Bernanke: Will he, won't he?

Positive action will send the S&P500 skywards, as the markets would delight in another boost to the money supply, some of which must surely find its way to the stock exchange. Happy days would indeed be here again, even if only for short while. You will note that in the last month or so, the markets have rallied possibly more in anticipation of what's to come than by any signs of an economic revival. Monetary stimulus would not only boost the stock market, it would also send our two favorite investment vehicles -- gold and silver -- into rally mode, with gold prices hitting all time highs by the end of the year.

On the other hand, the lack of action by the Fed would have an extremely adverse effect on investor sentiment, as they will begin to believe that Ben does not have a big bazooka, or at least he is unwilling to use it. The markets would come under heavy selling pressure and begin to tank. The lack of further stimulus would be perceived as good for inflation, and therefore ,bad for the precious metals sector. Both gold and silver would fall, and the already embattled mining stocks would be sold off by those who are shaken out of their positions. It is not called a bull market for nothing -- holding firm in such times takes a lot of courage and patience. Mining stocks have performed poorly in recent times, and any decline in the price of gold and silver will hit this tiny sector pretty hard.

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Click to enlarge

Of course, these meetings come and go like buses, so if it's not this one, then maybe it could be the next one. So we all wait a little longer. By the way, the next Federal Reserve meeting is scheduled for September 12-13, and there some who are of the opinion that any announcement of significance will be made then.

To stimulate or not will be predicated on the latest economic data, especially the jobs numbers. Figures in excess of 130,000 new jobs each month tend to suggest that the economy is recovering, and therefore, no further action is required, which would have a negative effect on gold. However, if the jobs numbers were to fall short of say, 80,000, then it could be perceived that the economy was heading back into recession, so bring on the stimuli.

So dear reader, we are faced with a dilemma. We can try and second guess the outcome of these gatherings and allocate our hard earned cash to take advantage of what we think will be, or we can wait. We know, waiting is like watching paint dry as our acquisition strategy remains on hold. To make things worse, the beach volleyball has now come to an end and the post Olympic blues are upon us. But in this case, it may be better to miss the beginning of any market move to have a greater level of confidence about which way it is headed. That little bit of certainty could be critical for us, as having to sell in a market that's tanking usually returns a lot less of your money to you.

There is also the possibility that some form of half measure will be introduced, such as buying long-dated Treasuries to push down long-term rates, or cutting interest on bank deposits held at the Fed to drive funds out and into the hands of the borrowers. Some sophisticated embroidery around the edges wrapped in new jargon could keep us occupied for a little while longer. However, we think that the game is up -- it's either stimulate as in an "extend and pretend" policy, or it's face the music now and pay the price, as this long overdue party comes to an end.

For now, we will keep a firm grip on our holdings of physical gold and silver. We will not acquire any more mining stocks, as the risks out weigh the possible returns. We are keeping our powder dry, and when the time comes, we hope to be able to identify the real movers. At that time, we will apply an options strategy with a view to generating returns well above that of the underlying asset and its producing stocks. We may be neutral at the moment, but once things start to roll, we will be in overdrive as we attempt to boost our portfolio with some decent profits.

Formulate your own plan of action now and be ready to implement it with gusto when the opportunity presents itself.


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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.