Gold futures have fallen below $1,600.
As I write this, we wait with bated breath as the great Fed Chairman Ben Bernanke gathers his papers and readies his announcement.
By early afternoon, we will know what he has up his sleeve.
The market expects him to push interest rates down through some new Operation Twist.
According to the Wall Street Journal:
Analysts at Standard Bank forecast that the Fed will most likely extend Operation Twist, in which the central bank sells short-term bonds and uses the funds to buy long-term securities with the aim of lowering long-term interest rates and encouraging borrowing and investment.
Never mind that interest rates — including mortgage rates — are at historic lows...
Gold has priced in this idea over the past month.
But today nervous Nellies sold the metal down, applying the “buy the rumor, sell the news” trading philosophy.
We are in the middle of our trading range — and the chart is telling us it wants to go higher (green line).
However, the short term depends on today's news...
If Ben prints a lot of money, the price of gold and silver will go higher. If he announces no new policies, the price will sell off to its support line ($149 on the ETF GLD).
That said, if the Fed does nothing today, it's very likely they will act in August.
The action I would most like to see is, in fact, non-action.
If they do nothing, gold and silver will sell off — and I will buy this dip.
Gold Bull Still Young
We are still in the beginning of a bull market in gold.
After the mess in Europe settles down, the dollar will continue to drop and the budget deficit will continue to expand. The gold price will eventually catch up with the expansion in the money supply.
Recent research by Societe Generale has stated if gold was priced to the U.S. Monetary base (MO) in historic levels, the price of gold would be $8,500 an ounce.
This is slightly above the price of the yellow metal in 1980, adjusted for inflation.
According to SocGen:
If gold catches up with the increase in the monetary base since 1920 (as it did in the early 80s), its price would rise to USD $8,500/oz. To close the gap with the monetary base increase since July 2007, gold would have to rise to $1,900/oz, assuming full transmission from the monetary base increase to the gold price.
Regardless of what the Fed does today, there will be a QE3.
If SocGen is correct in that gold should be at $8,500/oz right now, what will another trillion dollars in monetary expansion get us?
If you like gold, silver, and other precious metals as a play on expanding currencies, you should like the miners.
I have recommended Newmont (NEM) before as an undervalued blue chip gold miner...
I like Newmont both for its unhedged gold position and the quality of its management.
Over the past six months, the stock has sold off from highs of $73 to around $50, due to a Peruvian miners' strike. Strikes don't last forever — and this sets up a nice entry point.
I should also mention the company pays a 2.80% dividend.
If you want a little more bang for your buck, my associate and famed gold bug Greg McCoach has some very interesting plays in little-known silver mines. You should check them out.
Have a great day,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.