The massive move in Gold prices yesterday was really the sideshow to the main event of a reversal in U.S. Treasury prices.  The benchmark 10 year yield moved quickly down to 2.7% and traded lower than that for a while after stubbornly refusing to dip below 2.75% for most of the summer.  This is what the Fed wanted to accomplish with yesterday’s announcement.  But, that shock will quickly fade and the reality is that there is a lot of work to do to create a new intermediate uptrend in bond prices.

The key to that is rising inflation expectations as the breakeven rate rose yesterday to 2.2% and the goal here will be to get that back to 2.5% by hook or crook while at the same time keeping the 10 year note below a 2.75% yield, lest the housing data the Fed so cherishes degrades even further.  We saw how important that was in July where in the Japanese bought more than $55 billion in U.S. Treasuries to defend borrowing costs.

That said, the key now is that the Fed has handed Congress the money it needs to get down to serious non-negotiations and posturing over the debt ceiling and the budget.  I expect the status quo to be maintained and political capital to shift from one person to another.  At this point President Obama looks less like a lame duck and more like a flightless dodo.  But, don’t expect the Congressional Republicans to hold the line on the de-funding of Obamacare.  The Democrats’ future depends on that and will not budge.

Right now Gold is precariously placed below $1435 and will need to close above that on a weekly basis to bring the real momentum players back to the market.