The Fed, Gold, and Rashomon on the Potomac

On Wednesday, the Federal Reserve will make an announcement on interest rates. Ever since the Fed’s summer retreat at Jackson Hole in late August, investors have alternated between…

A) Worrying that the Fed will hike interest rates, which causes short-term sell-offs…

And B) Feeling sure the Fed won’t hike rates, which causes stocks to rally wildly.

This has made the market – especially the metals market – more psychotic than usual. However, it’s not entirely the fault of traders who focus on fluff while ignoring fundamentals. And there are still opportunities out there. I’ll get to those later.

Truth is, I believe this is a deliberate pattern of contrariness and obfuscation by various members of the Fed.

I call it “Rashomon on the Potomac.”

For those of you who aren’t as old as me (few are or, at least, fewer every year), Rashomon was a brilliant black-and-white film by Japanese director Akira Kurosawa. Set in Japan’s samurai period, Rashomon involves various characters telling alternative, self-serving and contradictory versions of the same incident.

And that’s exactly what the Fed members are doing now.

Here’s a little timeline of confusion for you:

• At Jackson Hole, Fed Chair Yellen left the market with the impression that the Fed would not raise rates in September.
• Three hours later, Fed Vice Chairman Stanley Fischer, in an interview with CNBC, said Yellen’s speech was “consistent” with the possibility of two rate increases this year. That’s right; Fischer contradicted his boss. On live television.
• The next day, Federal Reserve Bank of Atlanta President Dennis Lockhart and St. Louis Fed President James Bullard came out and played down the likelihood of the Fed raising rates in September.
• Later, Bullard “clarified” his previous remarks. He said that he was “agnostic” on when rates would be raised. He did say he wanted to raise rates on good economic news. But the following week, there was a one-two punch of bad economic news. The manufacturing and services sectors released disappointing production numbers. And job creation – while positive – was weak. So the market was left confused.
• In early September, San Francisco Fed President John Williams said he favored gradual rate hikes.
• On September 9, Boston Fed President Eric Rosengren said he thought that low interest rates were starting to increase the risk of the economy “overheating.”
• Finally, on September 12, Lael Brainard, a member of the Fed’s board of governors, said she thought the Fed should hold off on rate hikes, citing a lackluster U.S. labor market and risks to China.

If you’re confused at this point, welcome to the party.

It’s a game that the Fed members have been playing for quite some time. Someone will come out and say we need a rate hike soon. A few days go by, and someone else says, “not so fast.”

This has been driving the market bananas, as you can see in the chart below. It tracks the expectations for a September rate hike from January to the present.

Sure, there were some fundamental changes. But most of this volatility has been due to Fed members, each telling their own version of Rashomon.

And every rumor from the Fed has sent the precious metals on a wild and emotional roller-coaster ride, though in the same tight range. It’s exhausting.

There are two ways to play this.

First, you can simply wait until the Fed makes its announcement and see which way the wind blows. There are such vast sums at stake – rivers of cash flowing around the global financial system – that nimble speculators will be able to ride that wave ahead of the big money.

But if you’re more speculative, I would point out that the Fed’s Rashomon-like misdirection has thoroughly confused the precious metals. We are seeing a correction to the big new bull market that started in January.

And if you’re in a bull market – and there are plenty of reasons to think gold is in one – what’s a correction? A buying opportunity.

Gold and silver could move quite higher off the Fed announcement. And select gold and silver miners could be shiny rocket ships. Many of them are tracked in the VanEck Vectors Gold Miners ETF (NYSE: GDX) and the Global X Silver Miners ETF (NYSE: SIL).

And if you want to ramp up the potential profit (and risk), you could buy the PureFunds ISE Junior Silver ETF (NYSE: SILJ), which I talked about here.

Good investing,

Sean

Energy & Resources Digest

Visit Gold Silver Intel for more.

source http://goldsilverintel.com/fed-gold-rashomon-potomac/