Gold benefits from dollar uncertainty of QE2

Good Morning,

More see-sawing was on display in overnight equities and commodities markets as pre-Fed calculations and sentiment extended the ebb and flow of the US dollar’s movements on the index, which, in turn, shaped corresponding gyrations in other assets.

Clearly, the closer we get to the middle of next week, the more the markets and a plethora of economists are reassessing the scale and scope of the Fed’s expected spending move. At the very least, there are now an almost equal number of critics telling the Fed to hold its asset-buying horses, as there are supporters who claim that this policy move is essential.

Whereas just one month ago the certainty levels about a stimulus package of no less than one trillion dollar –and perhaps as much as 2 trillion dollars – were the order of the day when estimates were solicited from Fed watchers. As of last night, even some figures well under $100 billion were being offered, at least as a possible hors d’oeuvre for what might come later – and do so in smallish tranches.

While the half a trillion (and probably more like a trillion) figure still appears to be fully baked into certain asset valuations at the moment, the markets and various dealers are focusing on what the reaction to the Fed’s outlined plan might be, come next week. To make matters more interesting, the Fed itself has now asked (really) bond dealers and investors to tell it what their expectations might be about not only the initial size of the accommodation, but about its lifespan and eventual overall size.

Well, no need to go around asking Bill Gross (PIMCO) what he thinks about all of this. His pre-emptive statement, made on Wednesday, says pretty much where his heart is at: in a really uncomfortable place. Mr. Gross warned that the Fed plan is inflationary, and somewhat of a Ponzi scheme.

He also said that the coming move will spell the end of the now three decade-long bull market in bonds. Mr. Gross sees the next Fed move as the pivotal event that pushes the Fed into a liquidity trap that is as difficult to escape as the gravitational field of a collapsed star (a.k.a. a black hole).

People like the Fed’s Mr. (wonder-if-he’ll-do-it-right) Dudley would argue that these are extraordinary times calling for extraordinary measures. And, thus, the market euphoria about the Fed’s program continues to now run into resistance from some of the very players it is supposed to make happy.

The dollar fell 0.38 on the index this morning (down to 77.69) giving gold an almost unilateral boost on the opening bell. Spot bullion prices gained $9.80 on account of the weaker greenback even as lingering physical selling took $1.40 off the value equation and left the yellow metal with a net opening gain of $8.40, at $1,333.40 per ounce.

Silver prices opened 24 cents higher and were quoted at $23.80 while showing no signs of melting up or down in the wake of the manipulation allegations and (now) lawsuits being leveled at JPMorgan and at HSBC.

Anyone who wants to get a clear understanding of where things stand on this issue at the moment would do very well to spend ten minutes watching this clip from Canada’s BNN. No further comment. No further need to speculate and have visions about things that are not there.

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