Tuesday, May 03, 2005

The Fed's Double Pump

Today's Fed announcement of a 25 bps increase in the funds rate was met like a nonevent. The Fed has accomplished what they intended, increasing rates without really bothering the markets, effectively losing the element of surprise. They did pull a little fast one at the end of the day by submitting an addendum to their earlier statement.

A short time before the end of trading today, they said they had inadvertently dropped a key sentence from their earlier announcement: "Longer-term inflation expectations remain well contained." This statement had appeared in their March statement as well. If you could go to the Big Charts link at the right and chart the INDU, for the Dow, on a one minute two day chart, you will see the quick burst of activity right at the end of the day. That would be about a 50 point ramp job into the close to bring the Dow back into positive territory for the day, up 5 points. There was some movement after the earlier announcement but not really very much.

I continue to be fascinated with the gold market especially on a day like today when the Fed is raising interest rates to prop up the dollar. This runs against the gold but gold managed an okay day while the mining stocks were up. Looking at the HUI index you can see a positive move all day today. This is the kind of action we are looking for in order to add some of these mining shares to our portfolio. We may be getting pretty close to doing that tonight. Stay tuned.


Anonymous said...

Can you give me an update on Silver and it's current value?

Glenn said...

About 8 o'clock this morning, Thursday, May 5, the price of silver is $7.04.

I usually consider silver to generally follow gold but with a little more volatility. Right now, it appears that the price of silver and metals in general are a bit higher than they should be based on the price of their stocks. Usually the price of the stocks leads the price of the metals and if that's true this time the metals have a fair bit to drop.

There should be a time to buy the metal over the course of the next year. I think that time is after the metals prices come down to meet the mining stock prices.

That said, I think this is a good time to watch the mining stocks as they could be firm with the next drop in the metals. That would be a good opportunity to buy them. This is exactly what the mining stocks are doing now, so we continue to watch them.

For more information and a much more bullish view on the mining stocks, please see the link for The True Contrarian.

Glenn said...

One other thing on silver. Since silver is more volatile than gold, the potential upside is much greater as a percentage. With gold around $430 and silver around $7, if gold doubled to $860, silver could be $35 or a multiple of five. These are good leverage numbers although the same leverage works when these metals drop.