Gold and Silver: Post-FOMC (what were they thinking?)

First, a comment on yesterday's Fed decision: what were they thinking? Ohhh...so this is what they had in mind: a new money pumping machine! Indeed, markets have reversed sharply overnight.

An important debate in recent weeks has been whether gold would correct to $780 or break below $780 to pre-October levels of $740-$760. Similarly, traders debated whether silver would correct to $14 or break below $14 to pre-October levels of $13.25-$13.50. Indeed, the recent volatility in the gold market (silver has been less volatile, surprise) has made it impossible to find a clear direction. Two weeks ago, gold went from $780 to $845, and then back down to $780 in just matter of ten trading days!



Despite all the noise during the past month, gold and silver seem to have slowly consolidated above $780 and $14. I think we will see a rally to re-test November highs.

One caveat would be the the impact of the euro on precious metals, as investors see gold as a hedge against weakening dollar. Both the dollar and the euro are depreciating due to excessive money supply, and the euro/dollar exchange rate has become a function of which central banks inflates the most. So precious metals should eventually decouple from its relationship with euro/dollar, because gold has been, and will continue to, appreciate against all major currencies. For now though, it seems like the recent dollar rally has come to an end (shown below).