The Fed has spoken. There was no QE3 announcement, no increase nor decrease in rates, only a reassurance that the rates will most likely stay at the current low levels at least for the next 2 years. The statement (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm) didn't address the recent downgrade at all. Actually, if the Fed would have announced QE3, it would have confirmed S&P's points that lead to the downgrade in the first place, ironic to say the least. By not mentioning it, the Fed sent a message to the markets that it thinks this is not overly important and it seems that the markets bought it, both directly and as a metaphor.

Here's the best quote from the statement:

"The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further."

In our view, with gold moving about $100 in the last 2 days, the above looks like a bad joke.

It means that if inflation numbers increase, then the Fed will likely let the real interest rates decrease further. It seems to us that the Fed is physically standing between precious metals investors and US bondholders and it currently bows before the former...

The Fed is giving a green light to precious metals for the coming two years - this is yet another bullish fundamental factor.

As we've mentioned before, there was no QE3 announcement yet. Our interpretation of this fact is that the markets haven't fallen enough. This does not mean that they will fall immediately lower - it means that if/when they do, then the Fed will likely use the QE3 to put them into bull mode once again.

The short-term picture looks bullish right now. The situation was very unclear during yesterday's session and everything turned upside-down in the final hour. Stocks were heavily oversold on a short-term basis, but without a reversal sign there was simply too big a probability of the continuation of the decline to consider moving back to the bullish camp. The reversal sign came in the form of yesterday's rally among heavily oversold indicators such as RSI and after stock indices reached several important support levels. If you were betting on lower values of stocks in the recent weeks then it seems this might be a good time to exit your position and realize your profits.

All in all, the medium-term direction for stocks is unclear, bullish (in nominal terms) in the long term and also bullish in the short run.

It seems that the market's recent volatility made our previous projections materialize earlier. Namely, that investors have already realized that an AA+ rating is not the end of the world and corrective moves (up in stocks, down in gold) will be seen very soon.

Does it mean that gold is likely to decline from here? Not necessarily, but it seems probable. We've seen a bearish "shooting star" candlestick in the GLD ETF yesterday that was accompanied by huge volume, which makes it even more bearish. The $1,800 target for gold was not reached, but price moved quite close ($1,782.50) to it and since most of gold's recent rally could be attributed to fear resulting from plunging stocks, a decline may be seen along with a rally in stocks.

Also gold is making headlines right now and it may be one of those situations that all who were inclined to buy gold, have already done so and there's nothing left for the price to do except fall.

Consequently, we believe that the speculative long position in gold should now be closed and profits should be realized. This could be a good shorting opportunity, but we prefer to wait for a confirmation that the markets will in fact move lower before suggesting opening a short position.

Meanwhile, there was another interesting event in the past few days (including yesterday) that didn't get as much attention as it should. Namely, gold was more expensive than platinum. This happened only a few times during the previous 20 years and each time after that platinum moved substantially higher relative to gold. Naturally, this is no proof that this will happen again, but it is likely.

Platinum is much more of an industrial metal than gold is and in fact since 2008 it followed the main stock indices. You may read more about platinum in the following essay:

http://www.sunshineprofits.com/research/articles/big-gains-are-to-be-made-in-platinum-and-palladium/

Now, what's particularly important is that in the past the platinum:gold ratio used to bottom at one of the local bottoms during a decline in stocks without waiting for the final bottom in stocks. For instance, back in 2008-2009 time frame, platinum:gold ratio bottomed in late 2008 while stocks continued their decline and bottomed in early 2009. We are not certain whether this is the final bottom for this decline for the general stock market, but it's most likely at least a local one. In the case of the gold:platinum ratio, that's all the information we need - so, in a way, this ratio allows us to take advantage of the bottom without knowing for sure if it's the final one or not.

Based on previous moves in the ratio, we expect platinum to become 10%-50% more expensive than gold in the following months or years.

In other words, we believe that it's a good idea to move half of your long-term gold investments into platinum. While we don't recommend using ETFs for long-term holdings, if that's a way that like to proceed, you could use the PPLT ETF.

As always, we'll keep you updated if anything changes.

Thank you.

Sincerely,

Przemyslaw Radomski