Thursday, August 4, 2011

State Of Markets

This post is being written from overseas and conditions do not allow for proper formatting, editing and addition of relevant charts.

The equity market is being allowed to sell off. This is not yet a buying opportunity. The reason that the selling is being allowed to persist without intervention is that we are in a period of convincing the public not to protest another round of bond purchasing by the federal reserve.

At this time we should address the use of the word "allowed" in the sentence above. The federal reserve, acting through the member banks, has actively purchased equity and index futures in order to influence markets. At this time there is a strategy in place to allow the index futures to fall on regular selling. They are unsupported.

Within the next 4 weeks we predict there will be another bond buying program unveiled. Here is how it works. The treasury issues debt through the federal reserve's primary dealer network. Those dealers buy the debt, add a few basis points to the price and then sell it to the federal reserve. The primary dealers agree to prop up indexes in order to keep the people happy. The congress just paved the way for another few trillion in net issuance. Keep in mind that the bulk of current debt matures in less than 50 months so ongoing issuance adds to that number.

Gold remains the only safe haven for capital in this type of situation. If you are considering adding to a gold position be advised that gold will fully price in the bond purchasing before it begins. We predict $1,800 an ounce as a rough target before the purchasing. There will likely be a violent shake out in gold after the announcement. This will be orchestrated by the powers that be but if you are in it be advised. Gold should not be purchased on margin in this environment.

Gold mining stocks are a much better trade than bullion at this time. Selectively pick producers who's valuation suffer during this sell off. These stocks, if purchased wisely, will yield very strong gains during the catch up rally that happens after the bond purchase program is ushered in.

Best of luck, you need it when these conditions exist.

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