A Market Timing Report based on the 2-21-2014 Close published Sunday February 23, 2014
Gold and interest rates got stuck this past week. Watch which way this pair moves from here. Rising rates were thought to represent a good sign for the economy. The idea is that the Fed can back off their QE buying program if the jobs situation is improving AND inflation is contained. The move up in commodities suggests that there is pricing pressure rising in the economy and if the Fed is too slow to withdraw stimulus because it’s focused on jobs, inflation will get out of hand. The Fed has almost always acted too late to make the changes that needed to be made. They are horrible at predicting where the economy is going except over very short time frames.
So whereas the market was previously seeing higher rates as a POSITIVE sign, it now could find it to be a negative. Rates may be going up because the bond market believes the Fed will be too dovish and allow inflation to get out of hand. In that case, we could see rates up along with gold and silver, and stocks could sell off. Even if stocks rise slowly, they may end up losing investors money due to inflation. In other words, the after inflation returns on stocks could be negative. We are not there yet, however as inflation remains contained despite the fact that it is rising toward the Fed target.
The bottom line? We will follow the charts, not the theories. It will work out best simply to trade the next move. You can see that there are complex crosswinds developing in the economy between the Fed, foreign currency interventions, inflation and concerns about unemployment particularly in the U.S. where that is a 50% driver of monetary policy.
Here’s the GLD chart:
Gold rally is intact but could be pressured by rates/the US dollar.
Ten Year Treasury Note Chart (TNX):
Rates are at a decision point.
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