Although this topic may have the charismatic brilliance of grandmas false teeth, it likely may be the most significant piece of financial news of the past several months to hit news wires. On November 30th 2011, the Federal Reserve, along with the European Central Bank, and the central banks of Canada, Switzerland, Japan and the U.K. all slashed U.S. Dollar swap rates by nearly half (1.08 percent down to 0.58 percent) to borrow U.S. Dollars to ease the European Debt Crisis.
Peter Schiff was adamant that this move is going to be a primary driver for precious metals and the US Dollar. "Today’s unprecedented announcement by the world’s most powerful central banks was a loud and clear bell ringing to buy precious metals...By reducing interest rates paid for dollar swaps, central bankers are in effect increasing the quantity of global dollars in circulation." I could not agree more with Peter and would also add that the EURO is also going to see significant changes in how it is traded in the following months.
Clearly from the following two Charts the EURO and US Dollar have been falling and rising respectively in near perfect inverse patterns. After the coordinated central bank announcement we are now witnessing technical reversals in both of these currencies.
The EURO after a technical double bottom appears poised for a rally and the U.S. Dollar has hit a double top and is now breaking down.
U.S. Dollar Breakdown
Effectively what the Central banks are saying is that the insolvent European financial intuitions will be allowed to continue down their paths of self-destruction at the expense of the U.S Dollars that are now being funneled in to the banks at very cheap rates.
U.S. dollars in Europe have been scarce, and it is possible that a large financial intuition may have been on the verge of collapse prior to this announcement.
Even Forbes.com is speculating this possibility, as this action is similar to what happened following the collapse of Lehman Brothers in 2008; yet the real facts behind this coordinated effort at this time remain hidden from public perception. "It appears that a big European bank got close to failure last night. European banks, especially French banks, rely heavily on funding in the wholesale money markets. It appears that a major bank was having difficulty funding its immediate liquidity needs. The cavalry was called in and has come to the successful rescue."
Precious Metals Breakouts
On the positive side, precious metals investors may finally have something to smile about. After the major metals markets peaked this past May, a long drawn out and seemingly endless multi-month consolidation period has taken place. The central bank action may be seen in the charts as creating breakouts across the board on all precious metals sectors. Palladium is leading the charge, with gold and silver about to breakout.
When new trends take place, it can be difficult to stop them and generally last the same period of time as their consolidation periods. Since tops were hit roughly 7 months ago, and we are about to embark on new rallies, we could expect renewed 7 month rallies should bring us into the third quarter of 2012 making our May highs appear like small cars from a airplane.
GOLD Breakout Chart
SILVER Breakout Chart
PALLADIUM Breakout Chart
Now, this swap agreement could in fact have limited impact and these trends could reverse sooner than expected yet there still remains the unforeseen and expected QE3 which may be around the corner. Societe Generale SA, the second biggest French bank recently released a report which they believe that the worse things get, the stronger the response by global central banks will be. They make the case that QE3 is around the corner and as we all know, QE is basically a currency debasement policy and will seriously devalue the U.S. Dollar and continue precious metals on their upward tear to the moon.
They see a two step process to enter QE3.
1) In January 2012, a major announcement with the Fed promising to keep rates at zero until unemployment falls below 7.5% or inflation moves above 3% on a sustained basis.
2) In March 2012, the announcement of another round of QE. We expect the next round of QE to be concentrated on MBS purchases and be worth about $600bn over six to eight months. This would increase the Fed’s securities portfolio from currently $2.65trn to $3.25trn by the end of 2012.sustained basis.
If you wish to read the 51 page report you do so here: http://www.scribd.com/doc/74069786/Socgen-Patience-Bad-News-Will-Be...
What is the long term precious metals outlook?
In my previous article last week I mentioned that my Precious metals exit strategy is a long ways away. Why? Well one of those reasons is because gold has not yet caught up to all the money that has been produced. You see, gold does a periodic accounting for all of the Fiat money in circulation.
It happened in 1933, in 1980 and in all ct will happen again. Take a look at the chart below and I think you will agree that for gold to catch up to all the base money in existence, we still have a long way to go, and that is if they stop printing today.
My advice, don't miss the train as the precious metal steam engine has fired up and is about to make its way out of the station.
Until next time, Happy Trading.
Matt (at) mattchart.com