Gold shines on new stimulus hopes

After being stuck in the doldrums for months, metals are perking up as the Fed and ECB prepare to step in.

By Anthony Mirhaydari Jul 25, 2012 1:34PM

The fog is lifting. For months, stocks and precious metals have been mired in a highly volatile sideways trading range. Investors, based on sentiment surveys, just can't decide what comes next.


Yes, the global economy is clearly slowing, with manufacturing activity and corporate earnings revisions dropping to levels not seen since we were sliding into the abyss in late 2007. And big-time problems loom, such as a possible eurozone breakup and the fiscal cliff of U.S. tax hikes and spending cuts due in early 2013.

 

Yet there's hope that central bankers around the world will swoop in with a globally synchronized stimulus push. Over the past two days, we got indications out of the Federal Reserve and the European Central Bank that, indeed, more help is coming. And that's helping push gold and silver and related mining stocks into what looks like a powerful new uptrend.

 

 

It's worth noting that central bankers have already taken action.

 

The Chinese have started cutting interest rates for the first time since 2008. The British have unveiled new lending support measures and expanded their bond-buying program. The ECB has cut its deposit rate to zero for the first time, forcing excess bank reserves out of its vaults and into the financial system. And last month, the Fed extended its $400 billion Operation Twist -- whereby it sells its short-term Treasury bonds and buys long-term Treasury bonds as it tries to lower long-term interest rates -- by an additional $267 billion.

 

First let's talk Europe. With Spanish bond yields rising into unsustainable territory, Greece looking increasingly unable to meet its debt-reduction targets, and Madrid threatening chaos by moving toward requesting a full formal Eurozone bailout if the ECB doesn't take more aggressive action, there is chatter from ECB officials that it's considering granting a banking license to Europe's new bailout fund, due online in September.

 

This is a big deal. Madrid is looking to show Germany and its allies at the ECB that they are politically isolated and will soon have no choice but to act. Either they watch as Spain drains what's left of Europe's bailout funds and ignite outright financial crisis (indeed, Moody's has cut its credit outlook on both Germany and Europe's existing bailout fund in recent days) or they finally move to support Spain and Italy with a steadfast commitment to cap borrowing costs or find some other strategy.

 

Also contributing is word that European Union officials are considering giving Greece some breathing room by allowing the ECB to take a loss on its Greek bond holdings. That would immediately reduce Greece's debt overhang and help the country regain its footing.

 

Both are essentially complicated ways to get freshly printed euros into the hands of troubled governments. And given the situation we're in, that's a good thing.

 

Here at home, Fed mouthpiece Jon Hilsenrath at The Wall Street Journal published an article noting that officials "impatient with the economy's sluggish growth and high unemployment are moving closer to taking new steps to spur activity and hiring" and could unveil something as soon as the Aug. 1 policy announcement.

 

Options apparently under discussion include a QE3 focused on mortgage securities, extending the Fed's near-zero-interest-rate commitment beyond 2014, or pushing the interest rate it pays banks that park funds at the Fed's vault down to zero (from 0.25% now on some $1.5 trillion in excess reserves), mimicking a recent move by the European Central Bank. 

 

To summarize: More cheap cash is about to hit the global financial system as central banks pump out more money and find new ways to browbeat banks into using it. This is all a positive for growth. And it will push up inflation, to potentially dangerous levels, depending on what happens with food and fuel supplies amid Middle East turmoil and extreme weather.

 
Trading update

Sure, there is plenty to worry about down the road. But for now, silver and gold are moving. And I want in.

 

 

I have already recommended the VelocityShares 3x Silver (USLV) to my newsletter subscribers and am adding it to my Edge Letter Sample Portfolio. I am also adding individual holdings Endeavour Silver (EXK) and First Majestic Silver (AG).

 

I found USLV, EXK, and AG with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

 

Disclosure: Anthony has recommended USLV and AG to his newsletter subscribers. 

 

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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14Comments
Jul 25, 2012 1:53PM
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Stimulus - what a joke - The only thing stimulus will do is increase inflation, reduce the buying power of the consumer and increase unemployment. The big banks will borrow money from the fed at 0% interest and loan it back to the treasury for 1 to 1.5%. They will make money on money they didn't earn.

 

Bernike and Obama's buddies will make money and America will get screwed.

 

Want to increase employment - stop inflation - hold the inflation rate between 1.5 to 1/2% deflation and 0% inflation. If bankers can't make money on treasuries they will have to loan it out to business. Also, the consumer will have more buying power.

Jul 25, 2012 2:20PM
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Stimulus for who?  Certainly not for the bottom 90% or more of us.  Why do wealthy bankers and investors seem to think that their needs are the only needs that matter, or do they seriously expect the rest of us to survive on whatever falls off of the dinner table to which the investment crowd are the only invited guests?  All of us below a $100K in income are struggling to survive, as prices have surged at an out-of-control rate due to multiple rounds of free food for the banker crowd, while wage growth among the bottom 90% of us is an oxymoron. 

And now you fat cat bankers are hungry again?  Why not try a form of stimulus where us little guys get some of our debt forgiven and see if the trickle-up theory doesn't gradually improve the bottom line at the top instead, which would certainly be a whole lot fairer for all of us.

Jul 25, 2012 6:27PM
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Gold Shines on Inflation Hopes. That would be a honest title for this article. The 99% will eat their lunch as wages will have less buying power. Stimulus money with the inflation it creates does a lot of damage to the economy and the people of the USA.  Printing up money without earning it is a brainless answer that makes a few rich while the majority suffer. This should be a crime against democracy of the USA.

Jul 25, 2012 6:52PM
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The United Corporations Of America,

    The 'fix' has been in for more then thirty years, only now the greed and the avarice has become so ubiquitous and blatant that it borders upon the obscene. The upcoming election is nothing more than a battle between Fortune 500 corporations, their profit imperatives and their agendas for getting there. The two parties are simply a tool to enable the process.

    Almost all of our 100 'esteemed' Senators and 435 Congressmen have been bought and paid for by corporations who use the the 32,000 registered lobbyists, (bagmen), inside the DC beltway to insure that the Congressional crooks do their bidding. With all the money, Capitol Hill should be spelled 'Capital Hill. "The average American has no voice because he has no green to buy the power that is necessary to make constructive change. This country is now nothing but a collection of big corporations whose only agenda is profit for the Wall Street 'casino boys', the uber-rich investors and the 'too big to fail' financial institutions.... and the public be damned. Everyone is equal in this nation? ... I don't think so, not by a long shot. The United States is already swirling around in the toilet...and the corporatons have their hand on the lever.

Peace to all

Jul 25, 2012 4:38PM
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Let's make a change in November.  Obama obviously cannot run this country.  And how about some term limits in congress??  Let's eliminate lifetime politicians, so they vote for what's best for the country  and not what gets them re-elected.
Jul 25, 2012 2:37PM
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  Please King Ben, though the US's and the world's economies are tanking, give the greed machine "HOPE."  God, I wish that I was King Ben, he is the master puppeteer.

We need to attack the homes of Pelosi and Boehner and drag them out into the streets!  Yup, make our politicians feel uneasy walking the streets.  Then they may do something for we the people instead of the greed machine....

Jul 25, 2012 5:00PM
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one day doesn't make a market but------load up on gold silver and any other commodity you can get your hands on---our politicians and financial experts are leading us toward the fiscal cliff at high speed---remember thelma and louise---hold on it is a long way down but at least it does not take long to get there.......
Jul 25, 2012 6:08PM
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Since when does a Community organizer know how to run ANYTHING ! We wanted Change and We The People Got it !  But for the worse ! Chicago Politics at its best !  The Commrades in Moscow must be laughing their collective rear ends off at what this Guy is doing to ruin the Economy ! Get out some more K-Y and bend over, if this Idiot gets re-elected you can kiss this Country GOOD BYE !  I worked and started my own business BY MYSELF with out any Politicians Help! Only their greazy fingers in my wallet at every turn ! FORWARD is this Idiot's new slogan, RIGHT OVER THE CLIFF !  REVOLT,  BUY AMERICAN MADE ONLY AND BUY WITH C A S H !!!!

 

Jul 26, 2012 1:31AM
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How many times in the last three years or so have we anticipated a rally in gold due to QE I, II, or now III only to get a quick pop followed by a quicker letdown?

Wall Street's version of administrations road to recovery summer.

More hype on the road to further stagnation.

Gold will pop when inflation kicks in, not because of the Fed's increasingly futile measures, but when reality sets in.

In the meantime, eveyone promises we get more candy.

 

Jul 27, 2012 1:55AM
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I do not understand why the average Joe can go to jail for a long, LONG time if he starts a rumor on a single stock in order to manipulate the price action, but these "central bankers" are allowed to strategically time their speeches and press leaks to manipulate multi-trillion dollar MARKETS of stocks to trade in whatever direction they please. 

 I could understand if they actually did their jobs and the market traded as a result, but they are intentionally (even by their own secret admissions) using their words to manipulate the markets.  Why aren't all these people in jail, and why have THE PEOPLE not risen to their feet to get them there??  

If that weren't reason enough for them to be convicted, their actions of destroying currency values and transferring indirectly wealth from the middle class (what little remains) to the very wealthy should be!
Jul 25, 2012 8:38PM
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To:  Gregory Hunter

 

I'm not an Obama fan, but Romney is a miserable alternative. Like it or not, our economic system follows the doctrines of Keynesianism and that means austerity is NOT what we need right now--unless you've learned nothing from watching the Greek tragedy unforld. Obama and Congress need to spend, spend, SPEND more money that we (admittedly) don't have. Once they create some friggin jobs and this country gets back to work you pay down your debt... oh, and please put some legislation in action that prevents bankers and Wall Street gamblers from jeopardizing this country in the future, otherwise, all this effort will be for not!

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