Gold and US Treasuries: The Bulls and Bears of Fed Policy

As we might have forecast, the government didn’t shut down. Gaddafi in Libya wants a ceasefire. And while another earthquake has hit northeast Japan, it doesn’t appear to have wrecked anything that wasn’t already destroyed.

And yet, silver has pushed to another post-1980 high. At last check, it’s $41.27. Spot gold hit an intraday record in overnight trading at $1,476.

Something more than the crisis du jour is driving these metals higher.

In relative terms, “gold is cheaper today than it was in 1999, when it was $252,” offers Vancouver veteran Marc Faber, by way of helping us get a grip on things.

“If gold were a bubble a lot of people would have gold,” he says. “The whole world would be trading gold 24 hours a day. But I don’t think it’s really a bubble.” Not when at a recent conference of investment professionals he asked if any of them had more than 5% of their assets in gold…and no one raised their hand.

Federal Reserve policy is more likely contributing to strength in the metals market.

And if those policies are bullish for gold, they’re bearish for the US Treasuries – or at least that’s how Bill Gross is betting.

Recall Mr. Gross cleaned out Pimco’s Total Return Fund of all Treasury holdings last month. Now, according to the newest numbers deconstructed by Zero Hedge, he’s added to the sell side (of our Trade of the Decade) and placed a $7 billion short bet against Treasuries.

Likewise, the dollar index clings by its fingernails to 75. It’s hovered around that psychologically potent number since Friday after falling last week to a 15-month low.

Long term, the outlook is increasingly bearish. Even CNBC is hearing buzz on the trading floor that “central banks from the Middle East may force their Asian rivals to more aggressively drive the dollar down.”

That is, Middle Eastern nations are taking the dollars they collect selling oil and converting them to euros.

“Extreme moves in any market are hard to maintain,” advises our currency trading expert Abe Cofnas, who sees a dollar bounce this week. “Winners take profits, and the market pauses for new information and energy to move forward. It looks like that will be the case in some currencies this week.”

This morning Abe advised readers of his Strategic Currency Trader newsletter to lay on a bet the dollar will bounce this week against the Swiss franc (CHF).

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning