Here’s how the Fed could Shock the Gold Price Tomorrow

Sentiment between holding paper assets and hard assets will be tested shortly, as the FOMC deliberates on the multitude of troubling data from around the globe.

As of 6:37 a.m. EST, September 20, the Dow:Gold ratio stands at 6.37, just below its overhead resistance of 6.50.

For those preferring silver as a potentially much more exciting vehicle for fleeing paper assets, the Gold:Silver ratio trades at 45.26, or just north of its resistance of 45.

As the FOMC begins hashing out its next policy moves, beginning today, it appears traders are mixed on the prospects of a Fed surprise beyond ‘Operation Twist’ (Fed sales of short-term Treasury debt and simultaneous purchase of longer-term maturities) expected as a result of the scheduled two-day meeting.

So if the next big moves in gold and silver (equities and bonds, too) could well be predicated on the Bernanke Fed on Wednesday, what can we expect?  One interesting take on the Fed’s next move comes from David Rosenberg, chief economist at Gluskin Sheff.  He speculates that the Fed may be out to surprise the markets big time on Wednesday in its effort to juice equities markets as its only direct policy move to ignite an already dangerously fragile U.S. economy.

In a note, Rosenberg postulates:

“The consensus view that the Fed is going to stop at ‘Operation Twist’ may be in for a surprise. It may end up doing much, much more.  Look, we are talking about the same man who, on October 2, 2003, delivered a speech titled Monetary Policy and the Stock Market: Some Empirical Results. I kid you not. This is someone who clearly sees the stock market as a transmission mechanism from Fed policy to the rest of the economy. In other words, if Bernanke wants to juice the stock market, then he must do something to surprise the market.”

Since the market is already abuzz with expectations for ‘Operation Twist’, another money-printing scheme above and beyond will be announced, according to Rosenberg, in the Fed’s desperate effort to put some animal spirits back into, what Max Kieser refers to as, the ‘Casino Gulag Economy.

Rosenberg continued:

“’Operation Twist’ is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires (this is exactly what he did on August 9th with the mid-2013 on- hold commitment). It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday.”

But here’s the danger for traders betting on the Bernanke put, he said, and clearly will be on the mind of Bernanke during the two-day central-planning powwow.  What if Bernanke doesn’t come through with the votes for the next step on the road to Weimar’s Hell Hole?  Rosenberg stated, “If he doesn’t, then expect a big sell-off.”

A sell-off in what, you may ask?  Well everything benefiting from the inflation trade, according to Rosenberg, including precious metals.  But if the Fed insists upon keeping the casino doors wide open, the Dow:Gold and the Gold:Silver ratio will most likely drop like a stone once again.

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