Drug/Stimulus-Addicted Market Wants its Fix

Bernanke floats a bit of test balloon yesterday by only extending its Operation Twist program by $267 billion, with no additional bond purchases (QE3) right now.

Well, as anticipated the drug/stimulus addicted market responded with major withdrawal symptoms:

The Dow and S&P 500 have sold off 264 and 32 points, respectively (roughly -2%), since the Fed disappointment, err I mean announcement.

Gold/Silver got smashed today, but with economic conditions clearly worsening and the market heading closer and closer to another Lehman-esque moment, the metals space is near the end of its consolidation cycle.

See below – from March 2008 to November 2008 (9 months), gold consolidated 30% (from 1,000 to 700). This consolidation, of course, followed a nearly 150% move up from 400 to 1000.

This most recent consolidation period is really no different (just a touch longer). From September 2011 to now (10 months), gold has dropped nearly 20% from its highs of 1900, and this consolidation came on the heels of a monstrous 170% jump higher.

From post-Lehman Fed action in late 2008 (i.e. QE1, QE2, Operation Twists, etc.), gold is up roughly 120%. All of those programs have clearly worn off, so gold is just hanging in there until the next major tranche of bailouts and stimulus hits the markets again.

Provided the Fed doesn’t kill the drug-addicted market outright (i.e. patient overdosing) with its next tranche (*possibly coming this August at Jackson Hole a la QE2), I expect gold to resume its upward trading pattern, only this time with an even more impressive move up (perhaps a 190% pop = somewhere around $4,500), followed by less of a pullback (less than 20% consolidation).

*The central banker’s Jackson Hole meeting this August will be pivotal with the economy slipping back into a recession. The current figures are not pretty, and are only getting more dismal:  Europe is imploding (German consumer confidence at it lowest since 1998, Spanish non-performing loans at the highest since 1994 with borrowing costs at Euro-era highs), Chinese consumer loan demand is at the lowest since 2004,  U.S. job openings have dropped by 325K (most since Sept. 2008), U.S. manufacturing grew in June at its slowest pace in 11 months, corporate earnings are beginning to really crack (i.e. Proctor & Gamble), etc.

Will Jackson Hole and the subsequent FOMC meeting at the end of August give asset prices a bit of a lift going into the November election?

 

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