Gold -- Plop, Plop, Fizz, Fizz, Oh What A Relief It Is!
On Wednesday afternoon, Fed Chief Ben Bernanke expressed a gloomy view of the U.S economy, saying that it was still entrenched in an extended period of slow growth. Considering that slow growth began with the 2007 collapse of the financial market, it could end up being the proverbial "seven year stretch". GDP is being released Friday. he was giving us fair warning to expect an even lowered U.S. growth rate. And for those unemployed, in so many words, he said "don't hold your breath." Bottom line...he was broadcasting that another round of Quantitative Easing (QE) was coming.
Quantitative Easing aka Ben Bernanke -- What Is It?
Under normal economic conditions, Quantitative Easing is where the Feds slightly reduce interest rates to stimulate a lackluster economy by buying back bank-owned assets, such as government bonds, thereby freeing up capital and enabling the banks to lend more to small businesses and individual households. Again, the operative word here is "normal."
Here's the rub. Given our continued lackluster economy, Bernanke lowered interest rates to nearly zero percent. On Wednesday, he proclaimed he would continue this strategy well into 2014. Benanke is well beyond the idea of "slightly" lowering interest rates to increase money flow. Add to this the dilemma of the Dodd/Frank bill, namely, that banks are now required to maintain a specific level of liquidity in order pass their stress tests. So even if Bernanke buys more assets from them, that does not necessarily translate into banks lending more money. They may just continue to hoard the money as they have already done with the Quantitative Easing already in place.
Day traders fully understood this on Wednesday at 12:30pm and what happened over the next few moments was fascinating to watch (and trade). The Dow, which had been down all morning, shot up nearly 200 points. There was a buying frenzy. Traders could not wait to put their money on the table, only to be scooped up by Market Makers as share prices went through the roof. When stocks skyrocket like this, the Financial Futures Market, especially the S&P 500 E-mini Future (ES), tags along and the ES shot up nearly 10 points in minutes.
But not all the day traders mortgaged their first born to invest in the stock market. Why? What did they quickly understand from Bernanke's proclamation about extended lowered interest rates...Ben Bernanke was telling them that he was preparing to print more money.
One of the many drawbacks to quantitative easing is that the Feds literally create the money to pay for assets at the stroke of a pen. In truth, money is not actually printed as in printing press activity. The Feds purchase these bank assets with newly created "electronic money" (changing zeros on balance sheets so to speak), paying for them by crediting the banks' accounts. Real money doesn't actually change hands, its just creative accounting.
So as soon as the Market realized that Bernanke was ready to fire off a new round of QE, several things happened. The US Dollar Index (DX) plummeted. Traders shorted the DX as fast as they could. The Euro/USD currency pair, 6E, went from 1.3000 to close at 1.3110, over 100 ticks higher...not because of anything the Europeans did to improve their own economic conditions, but because the Dollar suddenly weakened. At the same time, Futures traders bought up Treasury Bonds and Notes faster than they could breathe, in a clear flight to safety.
The biggest gainer of all, however, was the Gold contract, GC. This went from 1655 to close at 1700 followed the next day with another 20 point gain. Talk about your flight to safety. When Bernanke prints money, traders buy gold.
While Wednesday was a free gift for Wall Street and Futures traders, Bernanke's move was not without consequences. Running up the stock market is great for those who invest in stocks. Watching gold and the EURO climb with no end in sight...awesome for Futures day traders. But for main street, especially for those who do not have the wherewithall to participate in Wall Street runups, what Bernanke did was a nightmare. Whenever the U.S. Dollar weakens, the price of crude oil spikes, quickly resulting in higher gas prices for all. The U.S. Dollar is the international currency for crude oil. When the Dollar weakens, crude oil market traders run up the price so that oil producers receive at least the same price as before, after the exchange in their currency. Wednesday was no exception. Crude went from $99/barrel to nearly $101.
Thank you Ben Bernanke, once again, and welcome to inflation. In two years, the price of milk has gone up 19% according to the U.S. Bureau of Labor Statistics. Should the price of gasoline continue to go up, children may not be drinking milk much longer, but as they say "let them eat cake".
Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to shadowsupport@shadowtraders.com or call 866-617-2037 today.