Gold traded up to another six month high early Wednesday morning. A ruling by the German Constitutional Court that gave the green light for the country to ratify the euro zone’s new rescue fund and budget pact may have influenced this move.
WHAT IT MEANS
This announcement is seen as another step in the right direction to preserve the euro and aid peripheral nations such as Spain and Italy using bond purchases, to lower their borrowing costs. Bond purchases by central banks are most likely seen as inflationary and have coincided with a seven percent rise in the Euro since July, after the ECB pledged to do whatever it takes to preserve the currency.
WAITING ON THE FED
Now investors and gold bugs alike turn their attention to the FOMC meeting and announcement on Thursday. It has been widely anticipated that the central bank will announce another stimulus program to kick start, among other issues, a lack of general job growth in the United States.
IT’S THE JOBS DATA
These expectations were heightened due to last Friday’s anemic jobs report that disappointed many in the market. I am looking for the Fed to come in with a smaller version of stimulus in maybe a six to nine month period, and possibly a smaller amount of bond purchases than we have seen from the previous two stimulus packages.
A LITTLE, BUT NOT A LOT
It is my opinion that the Fed will not be as aggressive as they could be, as they may want to leave a few bullets in the chamber in case of U.S. politicians not being able to compromise on debt reduction along with extensions of the Bush tax cuts.
BETWEEN A ROCK AND A HARD PLACE
The Fed is in tough position here. If they come in with more stimulus, they potentially raise the chance of creating a more inflationary economy with the possible rise of grain, energies, and metal prices, while pushing the U.S. dollar lower. If the Fed stands put, I believe recent rises we have seen across the board, most notably in the stock market, will more than likely correct as we inch closer to the election.
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