What is the New High In Gold Telling Us?

Since the August 25th stock market pivot low the major stock indexes
have rallied higher by 10.0 percent. This is a major point move in less
then four weeks. In the past, the stock market would rarely move 10.0
percent in a year. These days we are seeing these 10.0 percent type of
moves during rallies and corrections. The talking heads in the media are
now getting very bullish pointing to the actions of the Federal Reserve
Bank as one of the catalysts.

If you look at a chart of the SPDR Gold Shares (NYSE:GLD) you will
notice that the popular ETF made a pivot low on July 28th, 2010 at
$113.08. This morning the GLD is trading over $126.00 a share. That is
nearly a 12.0 percent jump in the GLD in just 39 trading days. The point
that I'm trying to make here is that gold is the way to tell when money
is being created or printed. The U.S. Dollar Index topped out on June
7th, 2010 at $88.70. This morning the U.S. Dollar Index is trading
around $79.70. This is nearly a 10.0 percent decline in the dollar since
that June high. We all know by now if you want to get the stock market
higher the dollar must decline.

Simply put when gold increases it is telling us that the Federal Reserve
Bank is continually providing liquidity to the markets. Yesterday the
Federal Reserve Bank kept the fed funds rate at zero percent. This rate
is what the Federal Reserve Bank charges the large major banks such as
J.P. Morgan Chase & Co. (NYSE:JPM), Bank of America Corp.
(NYSE:BAC), and Wells Fargo & Co. (NYSE:WFC) for overnight
borrowing. Therefore, these banks can borrow money for nothing and
simply buy U.S. Treasury notes and make money. When you include the
banks credit card business in which they sometimes charge very high
interest rates they actually have a sweetheart deal. When you think
about it the banks do not have to make any traditional loans in order to
make money.

Now that we know gold is telling us that the money supply is extremely
loose when does this artificial dilution of the U.S. Dollar stop? What
are the repercussions of all this money creation and liquidity? Since
2006, M3 money supply is no longer published or revealed to the public
by the Federal Reserve Bank (US central bank). The Federal Reserve Bank
stated that it was simply not in the budget to keep revealing the M3
money supply data to the public. These are the same people that print
money for a living. How can it not be in the budget? In any case this is
where gold comes in. Gold is now telling us that the printing presses
by the Fed have been running on overtime. At this time the stock markets
seem to love it. However, at some point this flood of liquidity will
become a negative for the stock markets.

Nicholas Santiago
Chief Market Strategist