$10,000 Gold Possible As Fed Ramps Up Money Printing

September 17, 2012

In the wake of the near death of the financial system in 2008, the Federal Reserve engaged in two rounds of quantitative easing and pumped trillions of dollars into banks and other financial institutions.  Ben Bernanke insists that such drastic actions by the central bank were necessary to prevent a depression, a claim that economists will no doubt be debating for decades.

What may not be open to debate, however, is the wisdom of the Fed's decision to engage in non stop money printing with the announcement of QE3.  A policy tool previously applied to prevent a financial collapse has now become a routine operation in a desperate attempt to ramp up economic growth.  The Federal Reserve seems oblivious to the fact that no nation in history has ever increased its wealth and real economic growth by resorting to the printing presses.

Three most probable outcomes of the Fed's open ended money printing operations:

1. Continued decline in economic growth.

Following the Fed's announcement of another round of permanent QE, Egan-Jones Cuts U.S. Rating.

Egan-Jones Ratings Co. cut its credit rating for the U.S. one level to AA-, citing the potential for the Federal Reserve’s third round of large-scale asset purchases to weaken the dollar and drive up inflation.

U.S. debt to gross-domestic-product has risen to 104 percent from 66 percent in 2006, Egan-Jones said today in a report. The firm lowered the U.S. to AA in April. Yields on 10- year Treasuries have fallen five basis points since the end of that month to 1.86 percent.

The Fed’s latest program will “stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality,” Egan-Jones said. “The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers, thereby reducing consumer purchasing power.”

The Fed yesterday announced its third round of large-scale asset purchases since 2008, saying it will buy $40 billion of mortgage debt a month. The central bank didn’t set any limit on the ultimate amount it would buy or the duration of the program. Policy makers also extended the prospect of near-zero interest rates until mid-2015 and said policy will stay accommodative “for a considerable time” even after the economy strengthens.

2. Continued destruction of the purchasing power of the U.S. dollar. 

Federal Reserve policies have contributed to a dramatic decline in the purchasing power of the U.S. dollar for decades, resulting in a lower standard of living for Americans.  Expanded money printing will accelerate this trend.

3. Continued increase in the price of gold.

Courtesy: Kitco.com

The decade long rally in gold will dramatically accelerate.  A Barron's interview asks Could Fed Miscalculations Lead to $10,000 Gold?

These are times that try an asset manager's soul. The world's economy is a soft-paste porcelain vase set on a wobbly plant stand in the heart of an active earthquake zone. The Middle East is sending out foreshocks of war. The South China Sea is a smoking caldera of tension. Social unrest in the EU threatens tidal waves. And, according to the agitated rats and snakes of the financial press, China is headed into a recession.

Hedging against the most pessimistic case without crippling the upside potential of a better or even miraculous case appears to be as unsolvable as the proverbial Gordian knot. Alexander the Great "solved" the intellectually challenging knot riddle by severing it with his sword. Scott Minerd, chief investment officer of Guggenheim Partners, offers a more reasoned but equally simple solution to the hedging conundrum: gold. In extreme circumstances—like miscalculations regarding inflation by the Federal Reserve—the metal could hit $10,000 per troy ounce, he asserts. Thursday, after the Fed disclosed its latest financial-stimulus scheme, the metal rose about 2% to $1,768.

Minerd frets about the Fed's ability to reduce its swollen $2.9 trillion balance sheet if rates suddenly were to rise. Because the assets have longer-term durations, their market value immediately would tumble. If rates rose 1%, the Fed would have a $150 billion capital deficit, he says. This would have negative ramifications for the dollar. Minerd says the über-wealthy have been migrating toward hard assets like gold, real estate, and art. Every portfolio should be partially composed of such assets, he asserts. Is yours?

Gold and Silver Blog has long argued that gold would eventually advance to at least $5,000.  The latest Fed actions make that price target seem conservative.

Leave a Comment