The Fed’s effective nationalization of the financial markets in the past week has spiked gold prices.  It does appear the first phase of the bear market and bursting of multiple asset bubbles is almost complete.  Phase 1, an initial massive deleveraging, brought gold down 15 percent from its recent high before the big spike over the past two days as the Fed announced it will print “whatever it takes.”

Gold is now our highest conviction trade and fully expect the 1704 recent high to be taken out very soon, clearing the way to take out the September 2011 all-time high at 1920.80, which is only 15.6 percent higher.  A chip shot on the gold yardage card.

What We’re Watching

There are two things we are focused on like a laser.

Bond Auctions

We are watching the Treasury auctions with the 5-year and 7-year note to scheduled to take place in the next two days.  The budget deficit is exploding higher and the Treasury near-term funding requirements are growing exponentially.  How much the markets are willing to finance and how much will the Fed be forced to monetize will determine the slope of gold’s trajectory.

Our back of the envelope estimate with both the decline in tax revenues and increase in spending will put the effective budget deficit well north of $4.5 trillion for the year, which is almost a 25 percent increase in the federal debt held by the public.   We may not see that number due to window dressing, however.

We don’t know but suspect the Fed will have to directly credit the Treasury’s operating cash balances held at the Federal Reserve but not certain if the law allows it, which will then have to be changed.   Risking a series ugly auctions would strike another blow to confidence.

Dollar 

Trouble with the auctions and an accelerated move down in the dollar index below the recent low of 88.23 will fuel gold’s rally and signal a bigger problem.  The dollar index spiked 8.81 percent during the recent collapse and has started to sell off after the Fed’ big announcement earlier in this week.  Watch this space.

MMT is finally about to get its big test.  We are open to be converted and do pray they are right.

Stop losses über alles, folks.   As always, we reserve the right to wrong.

Stay frosty, folks.

Gold

 Dollar Index