August 13, 2022

Gold and Stocks Diverge As Central Banks Pledge Unlimited Money Printing

Both the Federal Reserve and the Bank of Japan have gone all in with their attempts to revive weak, debt burdened economies with a pledge of unlimited money printing.

Japan’s incoming Liberal Democratic Party Prime Minister Shinzo Abe, who ran on a platform of unlimited quantitative easing and higher inflation, has quickly forced capitulation by the Bank of Japan to surrender its independence from political influence.

The Bank of Japan pledged Thursday to review its price stability goal, admitting that the move was partly in response to incoming Prime Minister Shinzo Abe’s aggressive calls for the central bank to step up its fight against deflation.

At its two-day policy board meeting, the BOJ decided to expand the size of its asset-purchase program—the main tool of monetary easing with interest rates near zero—and promised to review next month its current inflation goal, something Mr. Abe demanded during Japan’s parliamentary campaign.

Countering speculation that the board’s decision-making process is being driven by politicians, Gov. Masaaki Shirakawa said the bank reviews its price goal every year. But he acknowledged that the policy board had taken Mr. Abe’s request into account.

The Bank of Japan’s quick surrender of monetary policy independence reflected the fact that they had little choice in the matter.  Mr. Abe had previously threatened a  “law revision to take away the BOJ’s independence if it didn’t comply with his demands.  Mr. Abe said the election shows that his views have the support of the people, and, on the night of his victory, he specifically said he expected the BOJ to do something at this week’s meeting.”

The policy of unlimited money printing by Japan came shortly after similar actions were announced by the U.S. Federal Reserve in early December.  Fed Chairman Ben Bernanke, architect of the U.S. “economic recovery” announced that the Fed would purchase $45 billion of US Treasuries every month in addition to the open ended monthly purchase of $40 billion of mortgage backed securities.  The Fed’s expanded “asset purchase programs” will be monetizing over $1 trillion of assets annually, effectively funding a large portion of the U.S. government’s annual deficit with printed money.

The impact of blatantly unlimited money printing by two of the world’s largest economies surprised many gold investors as the price of stocks and gold quickly diverged, with gold selling off and stocks (especially in Japan) gaining.

Why would gold, the only currency with intrinsic value that cannot be debased by governments, sell off as governments pledged to flood the world with freshly printed paper currencies?  Here’s one insight from John Mauldin.

When you reduce the amount of leverage in the system, you’re actually reducing the total money supply. So the Fed can come in and print money, and the money supply – the total amount of credit and leverage and material that’s going through the system – really hasn’t increased.

A lot of monetary economic theories say “the money supply is directly related to inflation.”

It is, but the amount of leverage and credit in the system is also directly related to inflation. It becomes a much more complicated mix. What happens at the end of the debt supercycle, as you’re reducing that leverage, you’re actually in a deflationary world. That is the whole debate between deflation and inflation.

If you read the polls in the United States, we’re just totally dysfunctional. We want to pay less taxes and we want more health care – that doesn’t work. We are going to have to be adults and recognize that problem.

The reason is the Fed is going to do everything they can to fight deflation. The only thing they can do is to print money. They’re going to be able to print more money than any of us can possibly imagine and get away with it without having inflation.

Mr. Mauldin may have a valid point, but a more likely explanation is the suppression of gold prices by governments and central banks as voluminously documented by GATA.

“Those who follow GATA may not be surprised when the monetary metals markets don’t make sense, since they really aren’t markets at all but the targets of constant intervention by governments.”

Gold Becomes The Ultimate Store Of Value As Central Bankers Create Unlimited Fiat Money

By Vin Maru

Lately we have seen many articles about China and many other central banks continuing to buy and increase their holdings of gold as part of their effort to continue diversifying out of foreign paper currencies. Who can blame them? Would you want to hold paper promises to pay off financial obligations from countries that are essentially bankrupt as a part of your currency reserve? China is doing what is the right thing and in the best interest of China, buying more gold to hold as a part of your reserves in order to make your currency more marketable. They want to make the yuan a competing currency to the other major currencies around the world and they will succeed and owning gold is part of their strategy.

There is some speculation that China is increasing its gold holding to make the yuan a gold-backed currency in an effort to make it a world currency reserve. While it is an interesting concept, it will most likely never happen. In order to back a currency, their gold holdings must increase or decrease alongside the increase or decrease in the number of currency units in the system. A gold backed currency would entail having a fixed rate of convertibility for each ounce of gold to a specific number currency units issued by that country. There is probably no country in the world that will honour convertibility on a fixed basis, it would be financial suicide and is part of the reason why Nixon closed the gold window. Also having a gold backed currency would mean the country would be continually increasing gold purchases to match the inflation of currency units issued. Tracking the amount of gold that is backing currency would also be next to impossible since there is a complete lack of transparency around the amount of currency units being issued by central banks and the amount of gold held by them. Currently currencies can be converted to gold on a floating basis at market price, but going to a gold backed currency would likely never happen.

China is making its currency more readily available for trade, thus bypassing the US dollar and making its currency the payment of choice for its export. Currently the yuan is fixed to the US dollar, but over time it will most likely have to adopt a floating currency like the rest of the world. Until then, expect China to continue adding to its gold reserve in an effort to make the yuan a competing currency for international trade. The US will lose its reserve currency status over time (most likely some time this decade) but it most likely will never go away completely and the yuan will not take over completely. We will most likely just have bi-lateral trade agreements with several national currencies being used for payments. The yuan is just the new kid on the block but there is still the Euro, British pound, Japanese yen, the US$ and probably the IMFs SDR that will also be used. Even the Canadian dollar has been strengthening lately, as the IMF said it’s considering classifying the Canuck buck and the Australian dollar as reserves currencies.

While gold may not be convertible at a fixed rate any time soon, VTB Group is Russia’s first lender to sell perpetual bonds and debt linked to the country’s benchmark equity index and is now selling the nation’s debut notes tied to the price of gold (see Bloomberg article). VTB is offering 1 billion rubles ($32 million) of securities that will be redeemed in December 2013 that will pay a rate on returns based on the gold price up to a limit of 20 percent. Being a pioneer in the Russian market, VTB is the 2nd largest bank and will provide pension funds an alternative to invest in gold without the limits placed on commodity holding by regulators. The article even talks about how even Western financial institutions such as JP Morgan, Barclays, and Credit Suisse are issuing notes tied to gold this month. This is just another example of how gold is becoming an important financial asset. The need to diversify and protect wealth becomes more apparent in an era of currency wars which will destroy the value of fiat money. Financial institutions realize that central banks will continue down the path of printing money, inflation and currency devaluation, there is no other choice. They see the writing on the wall and are now capitalizing on a new markets by providing financial assets tied to the price of gold price.

All these currencies will continue to inflate and I doubt the bankers will allow gold to become a competing currency for everyday transactions. However its role as a store of value will continue to appreciate as long as fiat money continues to exits. So we should be happy that government and central bankers will continue to use and expand fiat currency, it makes their currency worth less and gold will continue to benefit in the long run.

What we are seeing now, with short term fluctuations in the price of gold is just market noise and short term trading opportunities created by the gold market high frequency traders and bullion banks. This will come to pass as the price of gold gets smoothed out and then slowly advances higher with a two steps forward one step back dance along a rising trend. All this talk about gold by mainstream media is just market noise to try and explain very short term movements in price. They have very little understanding of gold and the role it will play in the future as a store of value. Being the good slaves and puppets for the central bankers, MSM is only good at misdirecting the public and they are paid very well for doing so. Once gold finishes this consolidation, the price should continue to advance to all time highs in 2013 and 2014 with a possibility of doubling from the current price to reach a minimum target of $3500 in the next few years.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Regards,

Gold Ready For Explosive Rally Based On Sentiment, Seasonal Factors and Fed Money Printing

Gold has had a volatile year.  From January’s opening price of $1,598, gold quickly moved up by $183 per ounce by the end of February.  An ensuing correction that lasted into July brought the price of gold down by $225 per ounce to $1,556 in mid July, the low of the year.  In August gold started to rally, closing yesterday at $1716.25 per ounce, up $118.25 or 7.4% on the year.

Gold now appears ready to mount an explosive rally that could easily push prices past $2,000 based on sentiment, seasonal factors and rampant money printing by the Federal Reserve.

Gold Traders Bullish

According to Bloomberg, gold traders are the “most bullish in 10 weeks…the highest level since August 24.  Gold rallied strongly from August 24th, adding $124 per ounce by October 4th.

Gold traders are the most bullish in 10 weeks and investors are hoarding a record amount of bullion as central banks pledge to do more to spur economic growth.

Eighteen of 27 analysts surveyed by Bloomberg expect prices to rise next week and five were bearish. A further four were neutral, making the proportion of bulls the highest since Aug. 24. Holdings in gold-backed exchange-traded products gained the past three months, the best run since August 2011, data compiled by Bloomberg show. They reached a record 2,588.4 metric tons yesterday, the data show.

The Bank of Japan (8301) expanded its asset-purchase program on Oct. 30 for the second time in two months, increasing it by 11 trillion yen ($137 billion). The Federal Reserve said last week it plans to continue buying bonds and central banks from Europe to China have pledged more action to boost economies. Gold rose 70 percent as the Fed bought $2.3 trillion of debt in two rounds of quantitative easing from December 2008 through June 2011.

“Central banks are all very concerned about a depression, so they’re keeping monetary policies as loose as possible,” said Mark O’Byrne, the executive director of Dublin-based GoldCore Ltd., a brokerage that sells and stores everything from quarter-ounce British Sovereigns to 400-ounce bars. “People are buying gold as a store of value to protect against currency depreciation.”

Seasonal Factors

Gold has a pronounced seasonal tendency to rally strongly in the last quarter of the year.  The chart below from GoldCore shows the seasonal strength of gold over the past 30 years.

Courtesy goldcore.com

Rampant Money Printing By The Federal Reserve

Central Banks worldwide have gone on a money printing rampage to save governments that are unable to control spending or raise sufficient tax revenues.  David Einhorn, President of Greenlight Capital, who has a brilliant investment track record, is rampantly bullish on gold and raises the question of what type of truly desperate measures central banks will take if the world economy enters another recession or suffers an exogenous shock.

“It seems as if nothing will stop the money printing, and Chairman Bernanke in fact assures us that it will continue even after the economic recovery strengthens.  Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we’re not going to rush to begin to tighten policy.  Apparently, anything less than a $40 billion per month subscription order for MBS is now considered ‘tightening’.  He’s letting us know that what once looked like a purchasing spree of unimaginable proportions is now just the monthly budget.”

“If Chairman Bernanke is setting distant and hard-to-achieve benchmarks for when he would reverse course, it is possibly because he understands that it may never come to that.  Sooner or later, we will enter another recession.  It could come from normal cyclicality, or it could come from an exogenous shock.  Either way, when it comes,  it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot.  What tools will the Fed and the Congress have at that point? If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then?  We don’t know, but a large allocation to gold still seems like a very good idea.”

Weak Dollar Policies Could Result In Trade Wars and Higher Consumer Prices

By Axel Merk

Our leaders want a weaker dollar and a stronger Chinese renminbi (RMB). That’s our assessment based on recent comments by President Obama, presidential hopeful Romney and Federal Reserve (Fed) Chair Bernanke. If you join them in that call, OK, just be careful what you wish for, or at least consider taking action to protect your portfolio.

In the past few weeks, Bernanke has become ever more vocal in encouraging emerging market countries to allow their currencies to appreciate against the dollar; and Obama and Romney have both been advocating for a weaker dollar versus specifically the Chinese RMB. In the recent presidential debates Romney continued his call for declaring China a currency manipulator, and Obama proudly stated that the RMB had appreciated 11% against the dollar since he took office. It has actually been about 9% according to the data we look at; nevertheless, the point that both were clearly trying to make is that a weaker U.S. dollar is in our economic best interests. Likewise, in an IMF speech Bernanke essentially admitted that accommodative monetary policy in the U.S. causes upward pressure on foreign exchange rates between emerging market currencies and the dollar, and suggested that foreign central banks allow that dollar depreciation to take hold, rather than intervene to prevent it.

It may be superficially plausible that RMB appreciation is the key to alleviating our economic woes, by promoting exports and therefore jobs in the U.S. However, while lowering one’s currency might give a boost to corporate earnings for the next quarter (as foreign earnings are translated into higher U.S. dollar gains), it is difficult to imagine that the U.S. can truly compete on price – the day we export sneakers to Vietnam will hopefully never come. An advanced economy, in our assessment, must compete on value, not price. Without discussing the merits of this argument in more detail, let’s look at the flip side of a stronger RMB, which is a weaker dollar and potentially higher prices for goods imported from China. Notice that there is a lot of table pounding about China stealing manufacturing jobs, but no protest when it comes to the low prices consumers enjoy as a result of China trade. After all, not all Americans are producers of export goods, but certainly all are consumers of goods in general, many of which are imported from China and emerging Asia.

Even if we accept the argument that a weaker dollar may be good for certain sectors and perhaps for the U.S. economy at large, not all will benefit, in particular, not retirees facing diminished purchasing power. Retirees would not see the nominal wage increases that the active labor force could expect to experience, meaning rising costs of living without an offsetting rise in income, which may only be coming from a fixed-income portfolio still earning zero interest as Bernanke has made it clear that “policy accommodation will remain even as the economy picks up.”

We agree with our policy makers to the extent that the dollar may be generally overvalued and many Asian currencies undervalued; and therefore the path of least resistance may lead to Asian currencies grinding higher across the board. The below chart illustrates this trend. China’s appetite for currency appreciation against the dollar may have a good deal to do with its currency’s relative strength or weakness compared to its Asian neighbors, who are export competitors. As these other Asian currencies appreciate they provide the RMB more room to appreciate as well.

Asian Currency Relative to Dollar

While many Asian currencies may rise over the coming years, we think Asian countries like China, that are moving up the value-added chain, are in a better position to handle more rapid currency appreciation than others. As production processes become more complex, it is harder for low-price competitors to easily replicate that output. As such, higher value-added products provide China’s exporters with greater pricing power in the global market, limiting the need and effectiveness of a cheap currency policy. Additionally, over the medium to longer term, as the Chinese economy continues to grow and the middle class becomes wealthier, domestic consumption will play a larger and larger role in their GDP, and that shift away from economic reliance on the American consumer will also diminish the need for an export oriented currency policy. In fact, we believe a stronger RMB will be beneficial for the Chinese consumer and help that transition along.

The gradual shift towards greater domestic consumption is occurring in many other Asian countries that have been following the export growth model and, as Bernanke puts it, that “systematically resist currency appreciation.” As we can see in the above chart many Asian currencies haven’t been resisting appreciation as much as you might think, and this gets to Obama’s point on the RMB appreciation since he took office. From an investment standpoint, 9% in four years isn’t a bad return in this environment; it would take over 78 years to reach that return rolling 3-month T-bills at their current yield of 0.11%.

American consumers (and Chinese exporters) have been subsidized by the artificially weak Chinese currency, to the detriment of Chinese consumers who have faced stunted purchasing power. However, we believe this dynamic will continue to change and suggest that a stronger RMB is very likely not only on Bernanke, Obama, and Romney’s wish list, but increasingly in China’s own interest. That would mean the tables getting turned on the American consumer.

By the way, there is a good reason no President has called China a currency manipulator. Once China is labeled a currency manipulator, it sets in motion a process in which Congress takes up the matter. Without going into detail, our recent Presidents have preferred to seize rather than delegate power: by calling China a currency manipulator, the President would essentially tell Congress to have a stab at the issue; whereas the President has far more flexibility at the executive branch in dealing with China without consulting with Congress. Once Congress gets involved, the threat of a trade war does become more likely. Even if Romney is correct that China may have more to lose in a trade war, our analysis shows that the currency of a country with a trade deficit may be under more strain in a trade war. That may well be what Romney wants to achieve, but again, be careful what you wish for.

If part of what investors consume is produced in another region, then holding some local currency or local currency denominated assets may be prudent. American consumers should ultimately not be concerned with the number of dollars in the bank, but rather with what those dollars can buy in terms of real goods and services. We suggest that Bernanke may be the currency manipulator to be more afraid of, and moreover, that our de-facto weak dollar policy may be reason to take the purchasing power risk of the dollar into account.

Please register for our Webinar on Thursday, November 8th, 2012, where we will dive into implications of US policies on China and Asian currencies in more detail. Also sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments

Big Money Is Bullish On Gold

Big money managers are bullish on gold according to the pros interviewed in Barron’s latest fall survey.  A resounding 69% of big money managers are bullish on gold and 22% forecast that precious metals will be the best performing asset class over the next six to twelve months.

Courtesy Barron’s

The big money is bearish on Federal Reserve strategy with over 60% of poll respondents disapproving of the Fed’s current interest rate policy.  Reinforcing their low opinion of Fed strategy, an overwhelming 78% of the pros believe that additional Fed easing policies will be counter productive.  Summing up the general opinion on Ben Bernanke’s money printing schemes, one money pro said “The Fed is well past the point of interest-rate policy having any meaningful impact on the economy.  Bernanke & Co. now risk damage to both the dollar and the Fed’s own balance sheet.  This is the biggest misallocation of capital in the history of mankind.”

Not surprisingly, the overwhelming consensus (89%) of the big money pros think that treasuries are severely overvalued.  Although the pros don’t see interest rates rising significantly in the next six months, Barron’s notes that even a small increase in interest rates would result in losses to bondholders.  The Fed has manipulated interest rates to such a low level, that few money pros see any value in treasuries.  One money pro noted that without massive security purchases by the Fed, the 10 year bond would currently yield 5%, representing a real yield of 2% plus 3% for inflation.   Absent Fed efforts to suppress free market yields on treasuries, bondholders would be faced with shocking losses as interest rates rose.

The big money bearish sentiment on Bernanke and bullish forecast for gold tells us that the pros don’t expect implementation of sound monetary policy by the Fed any time soon.

Federal Reserve Policies Have Put The Nation On The Road To Economic Chaos

By Axel Merk

The FOMC has crossed the Rubicon: our analysis suggests that the Federal Open Market Committee is deliberately ignoring data on both growth and inflation. At best, the FOMC’s intention might have been to not rock the markets two weeks before the election. At worst, the FOMC has given up on market transparency in an effort to actively manage the yield curve (short-term to long-term interest rates):

  • On growth, economic data, including the unemployment report, have clearly come in better than expected since the most recent FOMC meeting. FOMC practice dictates that progress in economic growth is acknowledged in the statement. Instead, the assessment of the economic environment is verbatim. Had the FOMC given credit to the improved reality, the market might have priced in earlier tightening. The FOMC chose to ignore reality, possibly afraid of an unwanted reaction in the bond market.
  • On inflation, the FOMC correctly points out that inflation has recently picked up “somewhat.” However, it may be misleading to blame the increase on higher energy prices, and then claim that “longer-term inflation expectations have remained stable.” Not so, suggests an important inflation indicator monitored by the Fed and economists alike: 5-year forward, 5-year inflation expectations broke out when the Fed announced “QE3”, its third round of quantitative easing where the emphasis shifted from a focus on inflation to a focus on employment. This gauge of inflation measures the market’s expectation of annualized inflation over a five year period starting five years out, ignoring the near term as it may be influenced by short-term factors:
Inflation Expectations

The chart shows that we have broken out of a 2 standard deviation band and that the breakout occurred at the time of the QE3 announcement. In our assessment, the market disagrees with the FOMC’s assertion that longer-term inflation expectations have remained stable. At best, the FOMC ignores this development because they also look at different metrics (keep in mind that the Fed’s quantitative easing programs manipulate the very rates we are trying to gauge here) or has a different notion of what it considers longer-term stable inflation expectations. At worst, however, the FOMC is afraid of admitting to the market that QE3 is perceived as inflationary.

In our assessment, inflation expectations have clearly become elevated. Ignoring reality by ignoring growth and inflation may not be helpful to the long-term credibility of the Fed. Fed credibility is important, as monetary policy becomes much more expensive when words alone don’t move markets anymore.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds

“How To Buy Gold and Silver Bullion Without Getting Ripped Off” – Free Kindle Book For Gold and Silver Blog Readers

Here’s a really great book on how to buy gold and silver that came to my attention.  I would recommend this book (“Stack Silver Get Gold”) to both long time gold and silver investors as well as those considering their first purchase.  Best of all, the price is right.  Author Hunter Riley has offered readers of the goldandsilverblog.com a free copy anytime between this Saturday, October 27th and Wednesday, October 31, 2012, offered through Amazon Kindle.  After October 31st, the purchase price of the book will be $9.99.

If you have a computer, you do not need a kindle to read the book. You can download Amazon.com’s free kindle reader here.
In addition, the author of the book, Hunter Riley, has added a contest where anyone who downloads the book during the Oct27-Oct31st free promotional period gets entered to win some American Eagle silver bullion.
Here’s the introduction to the book which I found compelling

 

The short book covers the following essential topics:

– How to avoid dealers and con artists who will rip you off

– Coins, rounds, bars, numismatic coins and junk silver – what premium you pay for each form of metal, and the advantages of each type
– What is premium and spot price?
– What type of silver and gold should you buy?
– What forms of gold and silver investments should you avoid?
– What are the dangers of ETF’s?

– Fraudulent dealers selling gold and silver that they don’t possess!
– Gold and silver mining stocks – good or bad investments?
– Gold and silver pools and leveraged accounts
– Phone dealers, TV ads and commemorative coins
– Where should you store your silver and gold?
– What type of home safe should you invest in?
– Wan you ad physical gold or silver investments to your IRA?
– Which is better as an investment? Gold or Silver?

– How to profit as the dollar collapses.
– What are the best gold and silver investing newsletters?
– Where can you buy gold and silver online?

– Which are the most reputable companies to deal with?

Note:  The Gold and Silver Blog receives no compensation for promoting this book.  It is done solely to educate investors on investing in gold and silver.

Would A Romney Victory Cause Gold To Collapse?

By Axel Merk & Yuan Fang

Monetary Cliff?

As the presidential election is rapidly approaching, little attention seems to be getting paid to the question that may affect voters the most: what will happen to the “easy money” policy? Federal Reserve (Fed) Chairman Bernanke’s current term will expire in January 2014 and Republican candidate Mitt Romney has vowed that if elected, he would replace Bernanke. Given the tremendous amount of money the Fed has “printed” and the commitment to keep interest rates low until mid-2015, the election may impact everything from mortgage costs to the cost of financing the U.S. debt. Trillions are at stake, as well as the fate of the U.S. dollar.

Should Obama be re-elected, Bernanke might continue to serve as Fed Chairman; other likely candidates include the Fed’s Vice Chairman Janet Yellen and Obama’s former economic advisor Christina Romer. With any of them, we expect the Fed policy to be continuingly dominated by the dovish camp, and moving – with varying enthusiasm depending on the pick of Fed Chair – towards a formal employment target, further diluting any inflation target. We are not only talking about Bernanke and the other two candidates’ individual policy stances (though all three are known as monetary “doves”, i.e. generally favoring more accommodative monetary policy), but also the composition of voting members of the Federal Open Market Committee (FOMC), as we will discuss below.

If Romney were to be elected, a front-runner for the Fed Chairman post is Glenn Hubbard, Dean of Columbia Business School and a top economic adviser to Romney. Hubbard has expressed his skepticism about the mechanism that Bernanke used to boost the economy. In our analysis, an FOMC led by Hubbard (or another Romney appointee) will be leaning toward mopping up the liquidity sooner. Extending forward guidance to mid-2015 will also be under question. It will no doubt add uncertainty to monetary policy and increase market volatility.

More importantly, however, a “hawkish” Fed Chair, i.e. one that favors monetary tightening, might put to the test Bernanke’s claim that he can raise rates in “15 minutes”. Technically, of course, the Fed can raise rates by paying interest on reserves held at the Fed or sell assets acquired during various rounds of quantitative easing. The challenge, no matter who the Fed Chair is going to be, is the impact any tightening might have on the economy. Bernanke has cautioned many times that rates should not be raised before the recovery is firmly “entrenched.” What he is referring to is that market forces may still warrant further de-leveraging. If the stimulus is removed too early, so Bernanke has argued, the economy might fall back into recession. A more hawkish Fed Chair, such as a Glenn Hubbard, may accept a recession as an acceptable cost to exit monetary largesse; however, because there is so much stimulus in the economy, just a little bit of tightening may well have an amplified effect in slowing down the economy. Keep in mind that European countries are complaining when their cost of borrowing rises to 4%, calling 7% unsustainable. Given that the U.S. budget deficit is higher than that of the Eurozone as a whole, and that our fiscal outlook is rather bleak, it remains to be seen just how much tightening the economy can bear. Our forecast is that with a Republican administration, we are likely to get a rather volatile interest rate environment, as any attempt to tighten may have to be reversed rather quickly. Fasten your seatbelts, as shockwaves may be expressed in the bond market and the “tranquility” investors have fled to by chasing U.S. bonds may well come to an end. Foreigners that have historically been large buyers of U.S. bonds may well reduce their appetite to finance U.S. debt, with potentially negative implications for the U.S. dollar.

Let’s dig a little deeper and look at who actually decides on interest rates: it is the voting members of the FOMC that ultimately make the imminent monetary policy decisions, rather than the noise creating pundits and non-voting members.

Three factors will further boost the dovish camp, which already dominates the FOMC committee:

    • Two previously vacant seats on the Fed’s Board of Governors were recently filled by Jeremy Stein and Jerome Powell this May. Like other board governors, both Stein and Powell appear to be in favor of Bernanke’s dovish policy. Stein was a Harvard economics professor and used to be more ‘hawkish’ before he took office. But in his first keynote speech as a board governor on Oct. 11, Stein openly supported QE3 and called for continuing asset purchases in absence of a substantial improvement in the labor market. Jerome Powell was a lawyer and private equity investor as well as an undersecretary under George H.W. Bush. Powell has also expressed support for more easing, with inflation an afterthought. Their appointments not only fill all voting seats at the Fed for the first time since 2006, but also further increase the board’s dove-hawk ratio from 9-1 to 11-1. The influence will also carry on to the following years, as board governors hold non-rotating voting rights.
    • Additionally, four current voting members will be replaced next year, including Richmond Fed president Jeffrey Lacker, who has dissented in every FOMC meeting this year. Regional Fed Presidents, unlike Governors, vote on a rotating basis. In 2013, Kansas Fed president Esther George is likely to be the only voting member who appears to hold a hawkish stance. George has expressed her opposition to QE3 and the Fed’s balance sheet expansion, echoing her predecessor Thomas Hoenig’s hawkish tone. But given that she is not a Ph.D. economist, her passion and influence is likely to be more on regulatory than monetary issues; we doubt she will be as vocal as Hoenig or Lacker. In our assessment, the FOMC committee may be “über-dovish” in 2013.
    • Finally, Minneapolis Fed President Narayana Kocherlakota, who was known as a monetary policy hawk, has recently shifted to a more dovish stance. He surprised the market with remarks supporting the Fed’s decision to keep rates extraordinarily low until the unemployment rate has fallen below 5.5%, as long as inflation remains below 2.25%. Kocherlakota will be a voting member in 2014, but his shift of stance will weaken the hawkish voice. With fewer dissidents on the board, the Fed may continue to err firmly on the side of inflation and stick to to its mid-2015 low rate pledge.

No matter who wins the election, we will see a policy dilemma for the Fed in the coming years: On the one side, should economic data continue to surprise to the upside, it will be increasingly difficult for the Fed to carry on its dovish policies. On the other side, if the Fed were to abandon its current commitment, we foresee rising market volatility. The U.S. economy is likely to face a “monetary policy cliff” in addition to the “fiscal cliff”. With easy money, inflation risks may well continue to rise, possibly imposing higher bond yields (lower bond prices) and a weaker dollar. With tight money, the Fed may induce a bond selloff. Historically, because foreigners are active buyers of U.S. bonds, the dollar has weakened during early and mid-phases of tightening, as the bond bull market turns into a bear market. It’s only during late phases of tightening that the dollar has historically benefited as the bond market turns yet again into a bull market. We encourage investors to review their portfolios to account for the risk that bonds may be selling off, taking the U.S. dollar along with it.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies. Please also register for our Webinar on Thursday, November 8th, 2012, where we will focus on implications on China and Asian currencies.

Axel Merk

Axel Merk is President and Chief Investment Officer, Merk Investments

Yuan Fang is a Financial Analyst at Merk Investments and member of the portfolio management group.

The Fed’s Efforts To “Print” New Jobs Is Failing – What Does The Fed Do Next?

In an effort to expand credit and spur job creation, the Federal Reserve has massively expanded its balance sheet with the most aggressive monetary policies in the history of the Federal Reserve.  Since the start of the financial crisis, the Fed instituted two rounds of quantitative easing under which over $2.75 trillion of debt securities were purchased by, in effect, printing money.

The first two phases of quantitative easing resulting in soaring stock and gold prices but did little to reduce the unemployment rate which has remained stubbornly high.  In early September, Fed Chairman Bernanke went all in on his aggressive monetary policies with the announcement of QE3 under which the Fed will conduct open-ended asset purchases.

The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.

“We’re looking for ongoing, sustained improvement in the labor market,” Chairman Ben S. Bernanke said in his press conference today in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”

Stocks jumped, sending benchmark indexes to the highest levels since 2007, and gold climbed as the Fed said it will continue buying assets, undertake additional purchases and employ other policy tools as appropriate “if the outlook for the labor market does not improve substantially.”

Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he called a “grave concern.”

Bernanke said the open-ended purchases would continue until the labor market improved significantly. “We’re not going to rush to begin to tighten policy,” he said. “We’re going to give it some time to make sure that the economy is well established.”

While the U.S. has “enjoyed broad price stability” since the mid-1990s, Bernanke said, “the weak job market should concern every American.”

Although Bernanke’s goal is laudable, many consider his extreme monetary policies ineffective while massively debasing the value of the U.S. currency.  Printing money is not the primary precursor for job creation or increased national wealth, and the latest economic results prove this assertion.  Sales revenues of America’s largest corporations have declined for six consecutive quarters and companies have fired the largest number of employees since 2010.

Courtesy Wall Street Journal

If economic conditions continue to deteriorate, expect Bernanke to implement even more extreme unconventional monetary policies,  all of which would involve money printing on an unimaginable scale.

The ludicrous assertion by Fed Chairman Bernanke that the U.S. has “enjoyed broad price stability” since the 1990’s is revealed as an outright falsehood by the Fed’s own statistics on the loss of purchasing power of the U.S. dollar.  Meanwhile, gold, the only currency with any intrinsic value is reflecting the true extent to which the U.S. dollar has been debased by Fed policies.  As the economy weakens and the Fed expands its monetary madness, the price of gold will continue to soar.

 

Gold Expected To Continue Higher – World Gold Council Releases Q3 2012 Report

The third quarter 2012 Investment Statistics Commentary released today by the World Gold Council summarizes the performance of gold in various currencies and explores reasons why demand for gold should continue to increase.

Highlights of the Q3 2012 Report

During the third quarter, gold had a return of over 11% as central banks expanded measures to stimulate the economy.  The correlation of gold to other assets exhibited similar characteristics as those seen during the previous quarter.

Unconventional expansionary monetary policies were continued during the third quarter and are expected to increase going forward.  The primary goal of central bank policies include lowering borrowing costs and re inflating asset prices.

While financial assets have surged based on central bank monetary measures, gold has exhibited the strongest correlation to quantitative easing.

The World Gold Council expects investment demand for gold will remain strong based on the following four factors:

– Inflation risk
– Medium-term tail-risk from imbalances
– Currency debasement and uncertainty
– Low real rates and emerging market real rate differentials

The full report from the World Gold Council can be viewed at gold.org.

Gold has made what appears to be a triple bottom over the past year in the $1,580 range.  A breakout above last year’s high of $1,900 could wind up signaling the next phase of the gold bull market.

courtesy kitco.com