- Published on Friday, 22 June 2012 08:00
- Written by Sara Nunnally, Editor, Macro Trader
- Hits: 1617
Operation Twist went over with a yawn. It didn't impress the markets and didn’t spur gold bugs into action. It means we've been handed another great opportunity.
I'm going to make things short and sweet today... I've got a vet appointment for one of our dogs (such is life on the farm).
But here it is...
Operation Twist continues.
This is the program that swaps out short-term, higher-interest debt for long-term debt with lower interest rates. Before the Fed announcement, the $400 billion program was supposed to end later this month.
Instead, Bernanke announced that Operation Twist would continue to the end of the year, adding another $267 billion to our long-term debt.
This is kind of like refinancing for a lower rate.
It makes the total interest payments a lot lower, but Operation Twist has another angle. It wants to lower interest rates without actually lowering interest rates through policy.
But at this point, not a lot of economists think Twist is going to have much of an impact... especially since Bernanke has hinted at more stimulus (a real QE3 program) if the job situation doesn't improve. Bloomberg reports:
Bernanke, speaking at a Washington press conference, said policy makers are focusing "primarily" on the outlook for jobs in deciding whether to ease further, and more action would be needed without "sustained improvement in the labor market." Payrolls grew at the slowest pace in a year in May, and the jobless rate has been stuck above 8% since February 2009.
"If job growth doesn't pick up from the recent soft readings in the next few months, then the Fed would likely do more and do a full scale asset-purchase program," said Dean Maki, chief U.S. economist at Barclays Plc in New York and a former Fed economist. "They're prepared to take further action."
And something new is happening to the markets.
After this news, markets fell! For the past few times the Fed has stepped in with stimulus, the markets reacted favorably... As in a "Hooray! We're saved!" kind of reaction.
Not so this time.
Could it be that the markets are starting to understand that more stimulus means the economy isn't doing well, and that stimulus programs aren't the answer?
We can hope...
Interestingly, both oil and gold were down yesterday morning.
We know the story with oil.
Aaron and I have given you several articles on that theme. But why would gold fall below $1,600 on the extension of Operation Twist and the promise of more stimulus if the jobs market doesn't improve?
The weight of bearish commodity news -- like lower oil demand -- is dragging gold prices down too.
I'm thinking it's just about time to buy some gold. Take a look at the SPDR Gold Trust (GLD:NYSE).
We have evidence of strong support at $150... and that's where we're likely to get a bounce again.
I'd wait for support to be proven, though. A bounce from $150 to $152 or $153 should do it. From there some call options should help you leverage a move back to $160 or $162.
But I want to draw your attention to the chart I gave you on Monday... Remember this? It's a chart of the S&P 500 showing the Fed's stimulus programs and the paper rally.
Notice how they are kind of mirror images of each other?
The economy is in a pressure cooker, and there's not a lot of tolerance for more bad news... And it looks as though the markets are finally seeing the promise of more stimulus as more bad news.
As painful as it is, this is a good thing.
The ability to call a spade a spade is the first step in making better decisions in the next financial crisis.
There's a little wiggle room in gold prices for a drop to $1,550, but I'd be a strong buyer at that level.