Gold and Commodities Respond to QE2

It took a while, but stock traders have decided they like what they saw from the minutes of the Federal Reserve’s September meeting.

After picking apart the opaque document the way Kremlinologists of old picked apart the pronouncements of the Soviet Politburo, they’ve sent the Dow close to 11,100.

We’re not convinced QE2 – the popular euphemism for a second round of quantitative easing – is a given. There’s a lot of talk in the minutes about going ahead with the “money printing” if the economic data the Fed reviews looks weak. But at the same time, their analysis of recent data from around the country appears to have been fairly sanguine.

For all the Fed governors’ public hand-wringing and jawboning about the lack of inflation in the system, they don’t appear to be freaked out enough to go launch what will no doubt be a vastly unpopular program – at least not yet.

The Bank of Japan, on the other hand, made it abundantly clear it’s going to prop up the stock market with its own version of QE2. BoJ Governor Masaaki Shirakawa made some rather unseemly new noises about the Bank’s desire to buy ETFs.

Gold, in response, popped to near Monday’s record at $1,357. Then the dollar weakened a bit, pushing gold up to $1,366. “Unfortunately, it’s a race to the bottom (in the currencies), and we’re winning, in terms of the dollar,” Charles Nedoss of Olympus Futures in Chicago, and one of our recommended brokers in Resource Trader Alert, told Kitco this morning.

$1,366 turns out to be a key technical level, triggering some short-covering, Nedoss explains. Now we’re up to $1,371 – a $21 gain on the day.

Not to be outdone, the CRB index, a broad measure of commodities, broke above 300 on the open this morning. China released customs data for September showing higher imports of commodities in general, and record imports of crude oil in particular.

The last time the CRB saw 300 was on the way down in October 2008 – when every asset class was being sold off to raise cash.

CRB Index Up 15%

The CRB has moved up smartly, more than 15% in just six weeks, a move that “signals no relief for the uncomfortable shorts in the market,” says Resource Trader Alert editor Alan Knuckman.

“What does it take to turn those shorts into buyers?” he asks. ”Unfortunately for them, this failure to get clues from their surroundings and stubbornness is a positive for the markets.

“With little background in biology,” Alan confesses, “I lack the expertise to know whether a frog in the pot of water lacks the intelligence to know when the burner is on. It is said that the gradual increase in temperature is ignored until it reaches a steady boil… For now this means HOT COMMODITIES!!!”

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning