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Gold Is at the Fed’s Mercy


Here's my wildly oversimplified bullish case for gold: Gold is the only real currency. As the Fed's wild money printing devalues the dollar, triggering hyper-inflation, the price of gold on both a nominal and real basis will soar. Every other currency is just paper.

Over the last four years gold bulls have seen stimulus beyond their wildest dreams. Well over a trillion dollars have been created through quantitative easing programs. The Fed is currently spending $85 billion a month manipulating interest rates and buying mortgage-backed securities.

Despite all the money printing, the price of gold stopped going up well over a year ago. Now as nascent signs of economic growth emerge and inflation (as measured) remains muted, gold is starting to fall apart. On Thursday the mere suggestion that some FOMC members would like to see QE removed sooner than expected sent gold nearly 1% lower in an instant. If even a hint at QE coming off can do that type of damage, then bulls are going to have to revisit the thesis.

Bill Baruch, market strategist at iiTrader.com says the technicals are still on the side of the bulls, but just barely. The whipsaw action over the last week has been driven by "Ben and his Merry Men" creating a dollar squeeze, he argues. That's been bearish for gold as an alternative form of money.

"Gold is trading like a currency; dollar up, gold down," is how Baruch explains it. Once the dollar consolidates, the trade is to get long with a tight stop. "If we go below $1,598 that's the level where you're going to see a lot of liquidation," he says.

Should we get that break, losing another $100 and taking out last year's lows wouldn't shock him.

Gold bulls, we want to hear from you. If and when the Fed eases off the gas, does the yellow metal head lower? Comment below or drop me a Tweet @Jeffmacke