Thursday, February 4, 2010

Blood in the Streets

Kitco reports that gold prices have fallen 4 percent today to 1066, nearing the 1030 mark that Jon Nadler mentioned as a near term support several days ago. Morgan Stanley Smith Barney's ticker says that the Dow is down nearly 200 points and the S&P 500 is about 1074, a 23 point drop. These declines are related to a strengthening dollar.

How far will the Fed allow markets to fall before it prints more money? Like an obsese food addict, the Fed reaches into its candy bag at the slightest impulse. Bernanke and his associates like to see gold fall. But the effects of a stronger dollar and weaker gold include bankruptcies and unemployment. More importantly to the Fed, hedge funds' carry trade and the hundreds of billions loaned to Wall Street each week will be threatened by higher interest rates.

Based on my coin flip test, I am betting $950 gold. Unless the Fed decides to change its philosophy, I doubt the S&P will go below 850. But when inflation kicks in, then the Fed will need to tighten. At that point we could see more dramatic stock market declines. Gold would continue to be fueled by speculation for a while, until raising interest rates mutes the price increase trend. Then gold will fall again.

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