Although the mainstream media and financial markets on Wednesday were anticipating at least some reduction in the Federal Reserve's bond-buying program (i.e. tapering of QE), Ben Bernanke surprised everyone by serving up none.
He made it clear in his speech that day that the Fed feels the U.S. economy is too fragile and not yet ready for any lightening of current QE policy. This statement shouldn't come as too much of a surprise considering Mr. Bernanke is leaving his position as Federal Reserve chairman at the end of January and would likely not want to see the economy collapse on his watch. The stock market, of course, was elated, and the DOW soared nearly 150 points on the news. (This elation, though, may be akin to a short-term sugar high as the looming debate over the U.S. debt ceiling approaches and threatens the financial world with yet another congressional standoff which could lead to more downgrading of U.S. debt and panic in the financial markets similar to 2011.) We do live in strange economic times when bad news about the state of the economy is greeted with cheers on Wall Street, but this does make sense when you realize that QE is like a drug being given to an addicted financial system. A "shot in the arm" like that delivered by the Fed on Wednesday creates a euphoric feeling that everything is going to be OK, while the economy's ability to stand on its own is further weakened and its general health continues to spiral downwards. All of this should make it clear that the broad stock market is in a precarious state that is not going away soon.
The difficulty here for traders and investors is that even though the stock market is now unstable and susceptible to a severe breakdown, bullish overt manipulation (such as QE) as well as possible covert manipulation (insert conspiracy theories here) could drive a sustained and profitable rally (possibly a "blow off"), so we want to be "cautiously bullish" under such conditions. As it has been for the last two weeks, momentum in the broad stock market is still strongly bullish, and the Fed's announcement on Wednesday pushed the DOW, S&P 500 and NASDAQ indices all to new highs - another bullish sign. This market, however, is still overbought and all three indices are now testing resistance zones. I would like to see some pullback here before considering a long position. Still on the sidelines.
Bernanke's statements on Wednesday also had a strong bullish effect on the price of gold and silver as many investors realized that excessive QE leads to inflation which drives up the price of precious metal. This was a good sign to go long in both gold and silver (which we did) and it reinforced the timing and cycle factors which also pointed to this week as an ideal entry point for buying these metals. Another factor that has recently been pointing to a bullish gold and silver market has been the "crash" of the U.S. Dollar over the last two weeks.
Not surprisingly, the U.S. dollar index plunged severely on Wednesday and momentum in this chart is now 100% bearish. The U.S. Dollar and the price of gold normally move in opposite directions, so this bodes well for our long positions in the precious metals. Holding our long positions in gold and silver.