So we have Janet Yellen speaking for two days in front of Congress — saying virtually nothing — and what did the markets do?
Well the Dow lost 700 points at its lowest point during the testimony and gold rose almost $90 over the same two days.
The only event over the last two days that moved markets higher was a bogus OPEC-nations announcement that they may agree to meet at some point soon, which prompted a 250 point rally Thursday afternoon.
Now what’s wrong with that?
The oil-producing nations may get together to talk about tightening crude supply and that sends stocks higher, while the Fed chief can only move markets lower.
Large institutional stock buyers believe the economy can only grow if crude prices go higher, because it will take much of the pain out of the junk bond energy sector, which many believe is the next shoe to drop, much like subprime mortgage paper did in 2007-2008.
But let’s also look at what Yellen & Co. was saying on Capitol Hill. A little more than six weeks ago the Fed raised rates after eight years of zero, now the Fed is talking negative interest rates, which Japan and Europe already have.
The Fed is not only telling the markets it goofed, it’s saying it needs extraordinary measures to move the economy forward.
The term “pushing on a string” seems to apply to the Fed. Meaning that the Fed’s tool box does not contain the needed tool to help the economy and the markets.
This means you need to look at your investments in that light. This is why gold prices are up 15% this year.
Central banks and large institutional investors are buying the precious metals, not preppers huddled in basements hording canned food.
The axiom I follow is a 10% gold allocation in my investments. If you have the savvy to run a chart, plot gold vs. the US dollar and you will see the inverse proportion between the two.
The simple formula is this.
Strong Dollar > stocks > gold
Weak dollar < stocks < gold
Gold is a hedge against dollar weakness. So the 10% allocation will cover your losses in stocks should the dollar falls sharply, which if Yellen keeps talking with no solutions that will continue.