Tuesday, September 20, 2011

Gold above $1,800 and Builders Building without Much Demand

Looks like today, the Fed's index finger of its market-helping hand was seen; and that gesture brought the Fed back to the front pages. The equity market gave back nearly all of its morning gains and decided to wait for the Fed's rate decision which is expected tomorrow. But as we anticipated, with the Fed in the headlines on the front pages, gold reacted pretty well and got back over $1,800 again. We think it will still remain volatile and might retreat back again (for reasons mentioned before), unless the Fed bluntly states that further monetary easing is coming along. We note that the Fed is the best political org that this country has to offer. In addition, for this latest upturn to gain some momentum, gold will likely have to cross $1,820 - $1,825 first. With regards to GLD, that comparable level would be around 179 - 180.

Regarding economic news, housing starts data were disappointing. 571K for August represented 5% and 5.8% sequential and Y/Y declines, respectively. Building permits were slightly better than expected and up 3.2% and 7.8% sequentially and Y/Y, respectively. We've been asking this for a couple of years - do we really need more homes built? Shouldn't we get rid of all the inventory (incl. foreclosures or shadow inventory) first? Will aggressive buidling put the builders in the same situation it did after 2007? Besides a few areas where the higher income people live, real estate markets have remained very weak. We have not yet seen strong indications of growth in demand. And for this reason, we wonder why the government and the market want to see more construction, from which some jobs may be created but will not last long.

Tomorrow (Wed.), in addition to the Fed's rate decision, we'll get the latest on the MBA Mortgage index and August's exisiting home sales, which might provide some initial color regarding whether or not the increase in building permits was good news or not. The Street expects August home sales to come in at a 4.7MM seasonally-adjusted annual rate.

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