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

October 25, 2012 by Leave a Comment

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.

 

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , ,

Is The Gold Correction Over? A Technical Look At Gold, HUI And The U.S. Dollar

October 24, 2012 by Leave a Comment

By Vin Maru

Gold Analysis

Looking at the gold chart below, we can see that gold has been correcting over the last two weeks. When applying some technical analysis to the gold chart, we can clearly see that there would have been overhead resistance at $1800 since most of the year gold has traded between $1550 and $1800. A few weeks ago, we also noticed a big build in the short position on the Comex’s Commitment of Traders report COT by the commercial and bullion banks. The effort to stop gold’s advance at a key resistance level was successful in part because of the huge increase in the short position at that level, which is why we knew to take some profits and that would be an ideal place for a correction to start.

Now that the correction has started and gold is giving back some of its gains from the summer, the question now remains: How much of a retracement will we see on the price of gold? While the shorts are currently in control of driving the price down, support will come from other central banks and buyers of physical gold.

With gold at $1701, it is currently (noon on Tuesday Oct. 24) sitting below the 50 dma at $1720 which is above the 200 dma at $1662. The first line of support for this coming week was at $1720 and if it holds above the 50 dma the correction in gold could be over. If we continue to see weakness in gold over the next week or two, we can expect the correction will continue later this month and going into elections. This is something I suspect could happen if the overall markets continue to remain week.

Looking at the chart we suspect that buying will come in at the new support price range at about $1650 (+ or – $20) if the 50 dma at $1720 doesn’t hold this coming week. One thing to note is that the 50 dma crossed above the 200 dma around the end of September, which is an over good sign. However it needs to remain above the 200 dma for this advance higher in gold to hold before it can go on to make new highs. We remain optimistic that gold will either bounce here at the 50 dma of $1720 or at a retest of the 200 dma of $1662, which would still be bullish over all. If you are looking to add to your physical gold holdings and diversifying them internationally, scaling in now and at the $1650 price range would be a good place to start adding to current or new positions. Keep in mind that the support at the 200 dma may not hold, which means the price of gold can retrace right back to longer term support at $1550 which has been in place all year. However, I give it a small probability that we will correct back to that price range as we are entering a seasonally strong part of the gold cycle in November and December.

While I hate making predictions on what the gold price will do short term, I suspect it could consolidate between $1650 – $1750 for the remainder of the year. While we are entering a stronger part of the gold season and the fundamentals are lined up to suggest higher prices, we have conflicting events such as a huge concentrated short position, the US elections, the US fiscal cliff and tax loss selling to deal with for the remainder of the year. With 2 strong opposing forces acting on one another, the price of the metal may consolidate around $1650 – $1750 for some time until either the bulls or bears clearly take this market in one direction or another. Until then, all we can do is sit around and wait for a clear break outside the trading range that has been established over the last year.

HUI Gold Miners Index Analysis

Just like gold, the HUI index is also correcting since September. Earlier last month, we thought index would trade to 520 before meeting resistance, which we can clearly see it has done and it is now in the process of correcting. It would not be unusual for the index to give back up to 50% of its recent gains from the summer lows. Back in July, it looks like a low of 385 was made on the index and a recent high of 525 was achieved back in September; this is a 140 point gain. So if the market was to give back 50% of this gain or 70 points, we can expect the HUI to retrace back to about 455, which would be the next best time to add to positions.

Currently the HUI is at 495 which is still above the 50 dma at 482 and the 200 dma at 465, which is a positive alignment if the index can hold these gains. One thing to pay attention to from the chart below is the price action on the HUI from April this past year to the end of August, a period called the summer doldrums. During this period support came around 385 and was tested 2 different times, while overhead resistance was at 450 which also was tested a couple of times. Back then 450 was overhead resistance which was finally broken with a strong move higher during September; we suspect this will now become the new support level while 520 will act as resistance.

While we still remain cautiously optimistic that a new uptrend has started longer term, the HUI will most likely correct back to the 460 range ( + or – 10 points) over the coming months and 520 will now act as overhead resistance as a new trading range will be set. In general, support around 465 (the 200 dma) is where we would look to initiate new positions in some of the senior producers and hold them going into the New Year. At some point, I do expect overhead resistance at 520 will be breached to the upside at which point the HUI index could run to 580 and higher, but that would mean gold would have to be on fire and trading above its overhead resistance at $1800 on a holding basis. Until then, the miners will probably trade in a range where the HUI fluctuates between 460 and 520 as long as gold stays above $1650.

US Dollar Analysis

While the US dollar is looking good at the moment and getting a nice little bounce higher lately, this could be very short lived. The up channel that has been in place from August 2011 to August 2012 has been clearly broken and now it has started a new down trend channel this past August.

All we are seeing is a current bounce from oversold levels on the RSI and MACD and it already seem to be stalling out. The US dollar could move slightly higher to test the 50dma of 80.38 or the top of the new down channel at 81, but the rally should stop there. One thing to note is that the 50 dma just crossed below the 200 dma in the last few days, that is not a good sign. Once this relief rally is over, the dollar should continue downward and possibly to the bottom end of this downward channel. This could mean a definitive move below recent support around 78 on the index, if this happens and support is broken, it could lead to a cascading move downwards towards 75 or possibly 73.75 as the next major support level. If the dollar does break down, gold and silver will shoot much higher.

The best hope for the US dollar is for it to sit in a channel between 78 and 81.50 which is where I think it could trade sideways for some time until we clear the elections and get some direction on fiscal policy from the Fed.  If the dollar goes sideways, G and S will also trade in a sideways channel. More than likely we will get some clear direction once the election are done.

 

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Filed Under: Currency debasement, Featured, Gold, Gold Stocks Tagged With: , , , , , , , ,

Is Gold The Only Protection From The Fed’s Monetary Madness?

October 3, 2012 by Leave a Comment

By Axel Merk

Investors are concerned about inflation. But how can investors attempt to inflation-proof their portfolios? Buy TIPS? Short Treasury bonds? Stocks? Real Estate? Commodities? Gold? Currencies? Or should investors regard those warnings about inflation as fear mongering?

Indeed, as the Federal Reserve (Fed) announced its latest round of quantitative easing (“QE3”), gauges of future inflation expectations spiked. In our assessment, the market reacted strongly as it became apparent that the Fed is moving away from its focus on inflation to a focus on employment. We believe the Fed wants to raise the price level so as to bail out millions of homeowners that are ‘under water’, i.e. owe more on their homes than they are worth. Fed Chair Bernanke considers a healthy housing market to be key to healthy consumer spending (see our Merk Insight Don’t worry, be Happy).

Judging from the market reaction to QE3, fears about future inflation are warranted. Having said that, market fears about looming inflation have calmed down a bit since the initial flare up. Could it be this calming of the market is due to the fact that the Fed is intervening in the TIPS market? TIPS are “inflation protected” Treasury securities that are linked to the Consumer Price Index. Investors buying TIPS do so in the hope that their purchasing power might be protected. When the Fed intervenes in the market to buy TIPS (or any other security for that matter), such securities are intentionally over-priced, raising doubt as to whether investors are truly “protected” from inflation. It’s not just investors that now have more limited access to measuring inflation expectations – it’s also the Fed itself. By managing the entire yield curve (short-term through long-term interest rates), we believe the Fed has blindfolded itself, as it has taken away one of the most important gauges about the health of the economy. Aside from the Fed’s intervention in the TIPS market, the government is free to change the inflation adjustment factor employed in TIPS before the securities mature. TIPS payouts are adjusted using the consumer price index (CPI), which has seen methodology changes many times. When the recent debt ceiling impasse was discussed, both Republicans and Democrats talked in favor of changing the CPI definition so that it would nominally live up to inflation linked entitlement promises while clearly eroding the purchasing power of such payouts. Even without such gimmickry, the CPI may not be reflective of the basket of goods and services consumed by investors as they approach retirement given, for example, that healthcare may comprise an ever-increasing part of one’s spending. Alas, much of investing is about trying to preserve purchasing power and, alas, buying TIPS may not provide adequate protection.

If one is negative about the inflation outlook, why not simply short Treasuries, either directly or through ETFs? While we are pessimistic about the long-term outlook of Treasuries, it can be very costly to short them, given that – as a short seller – one has to continuously pay the interest of the securities one shorts. If one buys an ETF shorting Treasuries, the cost of the ETF is to be added. Shorting Treasuries might make sense for investors that are good at market timing. However, calling the top in major bubbles is rather difficult, just reflect on former Fed Chair Alan Greenspan’s “irrational exuberance” speech years ahead of the stock market collapse in 2000; similarly, those that saw the bubble in the housing market coming didn’t necessarily get the timing right.

If TIPS don’t provide enough bang for the buck, and shorting Treasuries can be costly, what about buying stocks? Bernanke appears to use every opportunity possible to praise the benefits QE has on rising stock prices. While we agree that QE has pushed stock prices higher, it may be dangerous for the Fed to praise this link given that it raises expectations of more Fed easing whenever the markets plunge (see Merk Insight: Bernanke Put). For example, how many investors buy Cisco 1 shares because of the great management skills of CEO John Chambers as compared to those who buy because of QE3? We pose this question because stocks are rather volatile; not only are stocks volatile, but the volatility of stocks can be all over the place. Historically, the annualized standard deviation of the S&P 500 index hovers in the mid 20% range, with outbursts into the 40% range in 2008. So why are investors taking on the “noise” of the stock market, when the reason they invest is because of QE? Indeed, our analysis shows that investors appear to be ever more chasing the next perceived intervention by policy makers rather than investing based on fundamentals. That’s not only bad for capital formation (these misallocations are summarily referred to as “bubbles” these days), but also suggests that we might want to look for a more direct way to take a position on what we call the “mania” of policy makers.

Talking about policy makers: you might not agree with them, but if there is one good thing to be said about our policy makers, it is that they may be quite predictable.

What about real estate? In the U.S., depending on where one lives, the real estate market has bottomed out or appears to be bottoming out. With what appears to be the Fed’s razor sharp focus on real estate, it might be foolish to bet against the Fed. Indeed, yours truly bought a property in Palo Alto in late 2009. Unlike other real assets, keep in mind that real estate is often purchased with borrowed money; as such, it is prone to speculative bubbles such as the most recent episode. Investing in REITs might allow one to allocate a smaller share of one’s portfolio to real estate; a downside of REITs is that they tend to be highly correlated with equity markets. As policy makers steer equity prices, everything appears to be ever more highly correlated, investors may want to look for something that offers low correlation to other investments.

That brings us to commodities. In a world where policy makers appear to favor growth at just about any cost, commodity prices have been beneficiaries. As we have seen in recent weeks, it is not a one-way street, as dynamics within the market can be rather complex. The dynamics for commodities within agriculture differ from those in metals or energy. There are special considerations in storing and delivering many commodities, creating challenges for investors. We agree that commodities might do well in the long run, but urge investors to consider all the risks that come with investing in commodities. Notably, commodities can have stretches of low volatility, luring investors to jump in, only to be greeted with a jolt that can be rather hazardous to one’s wealth. As a simple rule of thumb: if you can’t sleep at night with your investment, you own too much of it.

Gold is worth singling out as the one commodity that has arguably the least industrial use. Rather than writing gold off as a barbaric relic, we like gold: its relative simplicity might make it the investment purest in reflecting monetary policy. In the medium term, we believe gold may be a good inflation hedge. But, again, keep in mind that price movements can be rather volatile. Even staunch gold bugs rarely have all their assets in gold.

This leads us to currencies as a potentially attractive way to diversify beyond gold. The Chinese have long diversified their reserves to a basket of currencies, in an effort to mitigate their U.S. dollar exposure. Some say currencies are difficult to understand. We argue that it is far easier to understand the dynamics of ten major currencies, as well as others worth monitoring, than to understand the dynamics of thousands of stocks. Importantly, we believe the currency markets might be an ideal place to take a position on the mania of policy makers. Indeed, as we believe that the Fed might want to debase the U.S. dollar (Please see Fed may want to debase dollar), why not express that view in the currency markets? Unlike their reputation, currencies are far less volatile than equities: if one does not employ leverage, a move in the euro by 1 cent is rather small on a percentage basis. The U.S. dollar index has historically had an annualized standard deviation of returns in the low teens; in 2008, that volatility rose a tad, approaching the mid-teens. For investors looking for predictability on the risks in a portfolio, the currency markets have historically shown a far more consistent risk profile than equities or many other asset classes. A corollary is that during market downturns, unlevered currency strategies may offer some downside protection given the lower risk profile. This clearly doesn’t mean an investment in currencies is safe; but managed currency risk can be seen as an opportunity given the purchasing power risk taken by holding U.S. dollars.

If investors agree that the Fed: a) may want to have – or at least accept – higher inflation; and b) may not readily see the warning signs of higher inflation, then it appears to us prudent to take the risk of higher inflation into account. Indeed, for those managing money on behalf of others, it might be their fiduciary duty to take that risk into account. Those that ignore the risk of inflation might do so at their own peril. Many investors might feel they can take action once inflation is obvious. “Obvious” is in the eye of the beholder: just as we preferred to be early in warning about the crisis in 2008, it appeared rather challenging to reposition one’s portfolio in October 2008. Gold has gone up by a factor of about 7 since its lows. The dollar has fallen relative to a basket of currencies over the past 10, 30 and 100 years: in our assessment, we simply have the better printing press. Hedging inflation risk isn’t about being right about the future; it’s about the risk of being right.

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

Filed Under: Currency debasement, Featured, Gold Tagged With: , , , , ,

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

September 17, 2012 by Leave a Comment

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.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , ,

Fed’s Open Ended Money Printing Will Destroy The Purchasing Power Of U.S. Dollar

September 14, 2012 by Leave a Comment

By Axel Merk

May we suggest a Twitter version of today’s FOMC statement: “Don’t worry, be happy! ” – No, the economic outlook hasn’t improved. In fact, the Fed may want you to take a valium to stomach the ride ahead. Alternatively, if you don’t get mollified by the Fed’s “communication strategy”, you may want to consider taking action to protect the purchasing power of your hard earned dollars.

Here’s the challenge: the Federal Reserve (Fed) wants to keep interest rates low across the yield curve (from short-term to long-term rates) to aid the economic recovery. But good economic data might send the bond market into a tailspin, i.e. raise long-term rates and thus cause massive headwinds to the economic recovery. We got a taste of how quickly the bond market can sell off earlier this year when the economy appeared to pick up some steam. Higher interest rates would further encourage the major deleveraging that market forces still warrant, not a desirable scenario from our understanding of Fed Chairman Bernanke’s thinking.

Engaging in further rounds of asset purchases (“Quantitative Easing”, “QE3”, “QEn+1”) may alleviate some of those upward pressures on interest rates, but the moment a program is announced, the market prices it in and looks ahead, threatening to mitigate any lasting impact of QEn+1. Picture the Fed as trying to hold a carrot in front of the donkey, well, market, to make us believe another stimulus is coming, without actually giving it. That way, the Fed can print less money to achieve its goals. The Fed calls it communication strategy.

Some have suggested a more open-ended approach to asset purchases. But that would likely come with some sort of guidance as to when to stop it, such as when a certain level of unemployment or nominal growth is reached. Given that everything Bernanke has done has been signaled well ahead of time (the blogosphere is full of the “best kept secret”, the likelihood of more QE), introducing a completely new concept is rather un-Bernanke-ish. You may not agree with Bernanke, but as an investor please don’t act surprised.

In recently released FOMC minutes, the Fed tells us that it might communicate to the market that rates may remain low even as the economy recovers. Bingo! We have long argued that Bernanke considered the early monetary tightening during the Great Depression as a grave mistake, as it undid all the “progress” that had been achieved. But more to the point, the Fed needs to get our attention away from the economy. By keeping the link to the economy, the Fed will always struggle to keep the upper hand on the bond market. So forget about the carrot: we need valium, not carrots. By communicating with the market that rates will remain low independent of how the economy might perform, the bond market just might not be selling off as aggressively as economic growth picks up.

That’s exactly the path we believe the Fed is going to go down. It will be interesting, however, to see what the Fed’s explanation will be. We doubt they will use the valium analogy. Some Fed watchers would like to see a nominal GDP target or something similar, but don’t bet your donkey on Bernanke going that far.

The basic challenge is – and we are interpreting here as we don’t think the Fed or any central banker in office would ever frame it this way: the Fed wants to have inflation, wants to move the price level higher to bail out home owners, wants to push up nominal wages, and wants to push up nominal GDP to make the debt burden more bearable. But the Fed doesn’t want the market to price in inflation, as that would push interest rates up.

That’s why we may be heading ever more into the “Land of Make-Believe.” But as investors enjoy their valium, the U.S. dollar is at risk of melting away under their feet. Drugged up, we are too busy laughing at Greece and doling out advice to Europe to notice that our “don’t worry, be happy” approach might lead to rather unhappy purchasing power. If you think you are above the fray, let me just ask whether you have watched the euro in recent months? As of late, that perceived weakling of a currency appears to be giving the greenback a run for its money. We are not suggesting that investors dump their U.S. dollars and exchange them all for euros. However, we would like to encourage investors to consider embracing currency risk, for example through a managed basket of currencies, as a way to manage the risk posed to the purchasing power of the U.S. dollar. Adding currency exposure to a portfolio may have valuable diversification benefits.

Some sympathize with the ever greater complexity of monetary activism around the world. But it’s really rather simple: there’s too much debt in the world. To deal with the debt, countries may deflate, default or inflate. In the US, we have what both Bernanke and his predecessor Greenspan have called the printing press; as such, so their argument goes, the U.S. dollar is safe – in nominal terms at least. Greece is not capable of procuring valium, which creates a different set of challenges. But stop pitying Greece and consider taking action to protect your purchasing power at home.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies. You can also engage with me directly at Twitter.com/AxelMerk where I provide real-time updates on the economy, currencies, and global dynamics..

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

Filed Under: Bullion Sales, Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , , , ,

Why Gold Will Outperform Bonds

September 14, 2012 by 2 Comments

By Vin Maru

This past week was a major catalyst for the precious metals, as they closed the week up strongly based on strong fundamentals for the sector. We have been anticipating the next catalyst for the PM sector to start making a strong advance, and we got it with a coordinated effort from central banks around the world. They will print whatever is necessary to fight off deflation and another financial collapse. Here are a few headlines we saw from the media lately:

“Gold Prices Gain on German Ruling”, “ECB to launch ‘outright monetary transaction’ plan”, and “IMF’s Lagarde backs ECB-bond buying plan”

This afternoon, the FOMC meeting concluded and was followed by a press conference by Ben Bernanke. The precious metals market has been on a strong uptrend over the last month in anticipation of additional bond buying and stimulus (AKA Quantitative Easing).  Over the last month, the fed has hinted that they will stimulate if needed but never actually pulled the trigger. Precious metals still rose in anticipation of coming QE.  Well, he finally did it and the metal prices are up on this news, below is some commentary on what the fed announced. See Reuters article about this QE.

This looks to be stimulus like the original QE 1 and 2 and this is super bullish for gold, like it was back in 2009 and 2010.  This starts off another major uptrend for gold and it will be going to $3500 over the next few years.  Now is the time to be getting invested again, it’s almost an all in moment on any pullback and then its onwards and upwards from here.  We can expect this QE to last indefinitely just like we can expect a low interest rate environment for an extended period of time.  It’s QE to infinity and gold will definitely shine.

ECB Bond Buying Program

With headlines like these, the world markets are proven to be irrational in their approach to dealing with debts; the central banks around the world will print and by up bonds as needed. The West may have saved themselves for the moment, but this really opens up the door for moral hazard and the mindset that debts don’t matter has been rationalized around the world. The Western central planners rationalize their action by stating the bond buying program will be sterilized. The hazard is that other central bankers around the world will also engage in sterilized bond buying and supporting of governments, all of which is backed by nothing except faith. They claim the bond buying is sterilized because the central banks print money to buy bonds of the governments to keep yields low and then make up new bonds to sell to other central banks and all of this financial alchemy is based on buying and selling of foreign currency bonds. To learn more about currency intervention and how the bonds could be sterilized, you can read about it here.

They claim the net effect is there is no increase in the monetary base, but any rational human can see this is pure manipulation and gaming the system. With no new monetary base, the money supply in the system does not increase and it is very similar to Operation Twist. The net effect of the new bond buying program is there will be no direct stimulus to the economy and the governments will continue to be supported by the central banks. The new bonds issued by the government will carry lower interest rates, which will then be supposedly paid back to the CBs over an extended period of time. The old government debt will be rolled over and extended from this bond buying program and only small amounts of additional interest will be paid on these new bonds, which tax payers will eventually have to pay one way or another. The governments will then have to accommodate the additional interest payments on the new debt which could eat into budgets, so they will either tax more or reduce some of their spending. The paper currency Ponzi scheme will be allowed to continue and coup d’état over the financial system has been accomplished by the central bankers. The idea is that bad loans and debts do not matter anymore in an attempt to keep the system afloat, eventually that will fail and precious metals will prosper as a result.

With keeping interest rates low, bonds have virtually no upside from here since interest rates can’t go much lower from here.  Savers will be forced to speculate in order to create yield and precious metals will benefit over the next few years from a negative yield interest rate environment.  Business with tons of cash on the sidelines will be forced put that money to work in search of economic returns and banks with tons of cheap cash on hand will be loaning out more money to qualified people and businesses. Deflation and collapse is no longer an option, the system will be supported and soon the market will be talking about expansion and growth again. Money will be put to work even though the western economies may stagnate over the next decade. The market will soon look beyond the Euro and US mess and move forward in search of yield.  It may continue looking at emerging markets for growth and opportunities, but it definitely look to precious metals for safety from the depreciation of paper currencies.

Once we start seeing this money turning over in the system, the velocity of money will increase significantly which will then lead to higher inflation, this is when we can expect gold to really shine.  While the upside for bonds will be limited in a low interest rate environment, the upside for gold is unlimited from endless printing of fiat currencies and bonds by all central bankers and governments around the world.  The upside for the price of bonds is limited to interest rates going to zero and they can be printed to infinity.  The amount of gold available in the world is fixed to current inventory plus expected additional supply.  Because supply is limited, gold’s price could go to infinity to equally match the unlimited printing of bonds and currency units which are used to purchase them. So in the end, bond prices are limited on the upside while supply is infinite, while gold supply is limited and it’s price is limitless in a world based on fiat currencies—which would you rather own?

Gold Update

In the last 2 weeks, gold has made a great break out move above $1620 and then $1660-$1680. The price is now holding strong above $1720 as central bankers are planning on bond buying programs and additional stimulus in a coordinated effort to avoid a deflationary spiral. This opens up the door to QE to infinity, they will print since there is no other option and precious metals will benefit from this. Gold and silver are going much higher in the years to come, but it won’t be in a straight line. Expect volatile moves to the upside and swift corrections, but the general trend for the next few years is towards higher prices. Keep with the trend and buy the dips and sell into major strength if you plan on trading the paper markets. If you purchased the physical metals during this past summer, you may want to consider holding on to them, we may not see these prices again, ever.

The RSI is rising and starting to move above 80, which could be getting into overbought territory, however the MACD is in a slow steady trend higher over the last couple of months. Look for new support to be around $1680 (which would be a good opportunity to add to positions) and short term overhead resistance to be at $1780-1800 (sell trading positions currently open) which has been overhead resistance back in November and February, at which time we could see a significant correction. If the gold market clears $1800 and holds on a closing weekly basis, we could retest the previous highs and go on to make new highs .

The HUI Gold Miners Index

The HUI clearly broke the downtrend line by gapping up above it late last week. The RSI is still rising and so is the MACD. If gold makes a move to $1800, expect the HUI to rise towards 500 before taking a break and correction. This would be a great time to sell open trading position in the next few weeks, especially after any news from the Fed about stimulus and QE. The fact that gold and the HUI has risen so much in the last month based on expectations for QE and the indicators are getting close to  overbought territory.  We may see an initial jump in price for the HUI index after any announcement, then a minor correction as much of this news could be priced into the metals and the miners.  Watch the reaction of the metals and the HUI later this week and next, but if the advance higher starts stalling out, you may want to consider closing trading positions and book some profits.

More than likely towards the end of this month/early next month, we could start to see a minor correction going into October and November as election approach, the market may take a breather. We may also see some strong year end selling this year, especially coming from the US as their tax laws on capital gains are scheduled to change next year. It would be a good time to start new positions or add to current holdings during that correction.  We can expect the trend to continue higher as the metals go on to make higher highs and higher lows over the next 6 to 9 months.

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.

Filed Under: Currency debasement, Featured, Gold, Gold Stocks, US Debt Crisis Tagged With: , , , , , , , , , ,

Government Brazenly Confiscates 1933 Gold Double Eagles – Bury Your Gold Deep

September 6, 2012 by 6 Comments

Nothing seems to obsess the U.S. government more than gold.  Could this be due to the fact that gold represents an alternative currency to the failing U.S. dollar, despite the assertions of Fed Chairman Bernanke that “gold is not money?”

The case of the government’s effort to seize 10 1933 Double Eagle gold coins from the heirs of a private coin collector highlight the unlimited time, effort and expense the government is willing to expend in their war against gold.  The heirs of coin dealer Israel Swift discovered the Double Eagles in a safe deposit box.  After voluntarily showing them to the U.S. Treasury, the government promptly confiscated the coins, claiming that the coins had never been officially released by the U.S. Mint due to President Roosevelt’s executive order on April 5, 1933, ordering all private citizens to turn over their gold to the government.

An in depth article by Coin Week examines the case of the 1933 Double Eagles and details substantial evidence against the validity of the government’s right to confiscate the coins.  The article also wonders what implications this case will have on future seizures of rare coins from private citizens and comments on the government’s decades old zeal in pursuing the 1933 Double Eagles.

“It is unbelievable to me how much the government has spent on this,” exclaims Dr. Steven Duckor. “It is ludicrous for the government to be spending this much time, effort and money in the 1940s, from 1996 to 2002, and now in the Langbord case. The government should spend money on more important priorities,” in Duckor’s view. “It would be okay to make a deal like they did last time. I would not mind some type of deal.” Dr. Duckor is an expert in Saint Gaudens Double Eagles. Among living collectors who reveal their names, he is probably the most sophisticated and widely respected.

After the government seized the Double Eagles in 2004, the Swift family heirs sued the government for their return.  Last July, after the conclusion of a civil trial, a jury concluded that the government had the right to seize the coins.  The case remained on hold while a federal judge considered subsequent legal motions filed in the case.  On August 29th, the federal judge ruled that the gold coins “remain the property of the United States” and that “Given the evidence, a reasonable jury could find that the ’33 Double Eagles were knowingly stolen or embezzled from the Mint.”   What a shocker – a federal judge ruling in favor of the government!

The case of the Double Eagle seizure is not an isolated incident and the federal government has become increasingly brazen about suspending or ignoring rules of law to settle matters in its own favor.  In a Bloomberg interview, Professor David Skeel says blatant violations of long established law principles by the government is starting to have a profoundly negative impact on the nation’s economy.

Will government gold seizures and other actions that violate principles of law continue to escalate?   We don’t even want to think about how bad things will get.  GATA reports today that in an interview with King World News , Marc Faber fears that “gold will rise so fast that governments will feel compelled to try to confiscate it from investors.”

The very thought that gold investors need to live in fear of their own government is a chilling thought.  Bury your gold deep!

Filed Under: Featured, Gold Tagged With: , , , , , , , ,

India’s Attempt To Curb Gold Purchases Will Ultimately Fail

September 5, 2012 by Leave a Comment

India may increase the import tax on gold for the third time this year in an attempt to shore up the weak rupee.  Purchases of gold and silver account for a huge 12.5% of all Indian imports and are contributing to a record current-account deficit according to Bloomberg.

“The government may look at increasing the duty to 7.5 percent,” Prithviraj Kothari, president of the Bombay Bullion Association, said in a phone interview. D.S. Malik, a finance ministry spokesman in New Delhi, declined to comment.

The tax on bars and coins was doubled to 4 percent in March after imports jumped to a record 969 metric tons in 2011. A further increase may deter jewelry buyers and investors during India’s festival season, which starts this month, as a decline in the rupee against the dollar boosts domestic gold prices to an all-time high. Imports plunged 42 percent to 340 tons in the first half, according to the producer-funded World Gold Council.

Curbing shipments of gold will help the country to narrow the current-account deficit as the drop in rupee boosts the cost of crude-oil purchases, according to the finance ministry. The shortfall widened to a record 4.2 percent of the gross domestic product in the year ended March from 2.7 percent in 2010-2011.

The rise in the deficit, the broadest measure of trade, was due to slower exports and so-called relatively inelastic imports of petroleum products, gold and silver amid a rally in global prices, Finance Minister P. Chidambaram said on Aug. 23.

Will India’s attempt to restrict import of precious metals be successful and what impact will this have on the price of gold and silver?  Let’s consider the following:

1.  The Indian government should know better.  In 1962, India passed the Gold Control Act which prohibited Indian citizens from owning gold bars and coins.  The result was the instant creation of a huge black market that continued to supply gold and silver throughout India.

The (Gold Act) legislation killed the official gold market and a large unofficial market sprung up dealing in cash only. The gold was smuggled in and sold through the unofficial channel wherein, many jewelers and bullian traders traded in smuggled gold. A huge black market developed for gold.

In 1990, India had a major foreign exchange problems and was on verge of default on external liabilities. The Indian Govt. pledged 40 tons gold from their reserves with the Bank of England and saved the day. Subsequently, India embarked upon the path of economic liberalization. The era of licencing was gradually dissolved. The gold market also benefited because the government abolished the 1962 Gold Control Act in 1992 and liberalized the gold import into India on payment of a duty of Rs.250 per ten grams. The government thought it more prudent to allow free imports and earn the taxes rather than to lose it all to unofficial channel.

2.  India should be more concerned with maintaining a currency that offers their population a stable store of value rather than depriving their citizens of viable alternate currencies such as gold and silver.

3.  The centuries old tradition in India of holding gold and silver as a source of liquidity and for capital preservation is unlikely to change.  The rupee, like most other paper currencies, has been systematically debased.  Inflation in India over the past decade has made holding rupees a losing proposition.

Courtesy: inflation.eu

4.  The reduction in gold demand during the first half of the year by both China and India has been widely touted in the mainstream press as a reason for a continued sell off in the precious metal markets.  Right.  Despite the reduction in gold demand by China and India, gold based out in the $1,600 range before rallying sharply to $1,697.   Gold is now $99 or 6.2%  higher than it was on the first trading day of 2012.

courtesy: stockcharts.com

5.  By attempting to restrict gold purchases, India has simply advertised the rupee’s intrinsic lack of value to their citizens which will ultimately create an even greater demand for gold and silver.

Filed Under: Currency debasement, Featured, Gold, Silver Tagged With: , , , , , , , , , , ,

Ron Paul – “The World Will Abandon The Dollar As The Global Reserve Currency”

September 3, 2012 by 4 Comments

In August Ron Paul accused the U.S. Treasury “guilty of counterfeiting dollars” by virtue of its monopoly power on money in America.  Paul noted that the expanding role of the Federal Reserve in monetizing government debt has resulted in a massive debasement of the purchasing power of the U.S. dollar.

Continued reckless money printing by the Federal Reserve and massive government deficits will ultimately result in the loss of confidence by holders of  U.S. dollars.  Ron Paul sees the U.S. dollar inexorably losing its status as global reserve currency unless the dollar is backed by precious metals or commodities.

Evidence of the horrendous loss of purchasing power by the U.S. dollar is not hard to understand.  The average citizen sees it everyday as higher prices and lower incomes relentlessly lower our standard of living.   The systematic destruction of the U.S. dollar’s purchasing power can be seen in a chart published by the Federal Reserve Bank of St. Louis.

How Long Will the Dollar Remain the World’s Reserve Currency?

By: Congressman Ron Paul

We frequently hear the financial press refer to the U.S. dollar as the “world’s reserve currency,” implying that our dollar will always retain its value in an ever shifting world economy.  But this is a dangerous and mistaken assumption.

Since August 15, 1971, when President Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold, the U.S. dollar has operated as a pure fiat currency.  This means the dollar became an article of faith in the continued stability and might of the U.S. government.

In essence, we declared our insolvency in 1971.   Everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it– not even a pretense of gold convertibility! Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC in the 1970s to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence backed the dollar with oil.

In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite radical Islamic movements among those who resented our influence in the region. The arrangement also gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as the dollar flourished.

In 2003, however, Iran began pricing its oil exports in Euro for Asian and European buyers.  The Iranian government also opened an oil bourse in 2008 on the island of Kish in the Persian Gulf for the express purpose of trading oil in Euro and other currencies. In 2009 Iran completely ceased any oil transactions in U.S. dollars.  These actions by the second largest OPEC oil producer pose a direct threat to the continued status of our dollar as the world’s reserve currency, a threat which partially explains our ongoing hostility toward Tehran.

While the erosion of our petrodollar agreement with OPEC certainly threatens the dollar’s status in the Middle East, an even larger threat resides in the Far East.  Our greatest benefactors for the last twenty years– Asian central banks– have lost their appetite for holding U.S. dollars.  China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever.  Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency.

If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies.  If not, the rest of the world will abandon the dollar as the global reserve currency.

Both Congress and American consumers will then find borrowing a dramatically more expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt.  We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , ,

Gold – The Escape From Slavery

August 22, 2012 by Leave a Comment

By Axel Merk

Vice President Joe Biden was accused of racism when suggesting a Romney administration would “unchain banks” that in turn might put the black audience he was talking to back into “shackles.” The political uproar overshadows a reality that knows no racial boundaries: a person in debt is not a free person; a nation in debt is not a free nation. Does it mean those with large bank accounts are free? Not so fast…

We don’t want to downplay the horrific crime of slavery, but want to provide food for thought: debt is often taken on voluntarily; once taken on, however, one is forced to work to pay off one’s debt. To be unshackled from banks and creditors, investors may want to consider living debt free and owning gold. Let us explain.

Chains and Dollar

Access to credit may fundamentally change one’s lifestyle. On the plus side, it opens the path to home ownership and access to capital goods, be that a car, or these days even a mattress or exercise machine. But it also makes the creditor, rather than oneself the boss. One symptom of the building credit bubble that caught my attention a decade ago was the rise of Spanish language billboards promoting mortgages. Proud immigrants in search of the American dream were lured into mortgages they could ill afford. Rather than focusing on feeding themselves and their family, the focus shifted to serving the bank. That shift only became apparent once the loan became too expensive to service, either because interest rates were resetting to higher levels or because someone lost their job and thus their income, but the debt remained.

Berkshire Hathaway CEO Warren Buffett famously discusses in his annual shareholder letters that the insurance business is a great business to be in, as policyholders pay him to hold money:

“Insurers receive premiums upfront and pay claims later. … This collect-now, pay-later model leaves us holding large sums — money we call ‘float’ — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. …”

Indeed, Buffett has said that he would never allow his firm to be in a situation where he is at the mercy of banks. It doesn’t mean he will never borrow money. But it means that when borrowing money, he always wants to be in a situation where he could pay it back if needed. Consumers have seen all too often that they only qualify for a loan when they don’t really need it. Jamie Dimon, CEO of JPMorgan Chase has said responsible banks act like mothers: they will decline your loan request if it is too risky for you.

One cannot be a truly free person with debt. While bankruptcy may have been downgraded to a mere business transaction in the U.S., some countries continue to put those that can’t pay into prison. The neighborhood surrounding Dubai’s airport has seen thousands of abandoned cars, often Ferraris or other expensive vehicles, as the formerly rich fled the country after their fortunes turned to avoid debtors prison.

Anyone is likely to argue that a nice pile of cash in a bank account will make one feel financially secure – some place that pile at $100,000. Some at a million; as a million bucks isn’t what it used to be, the wealthy often say they are not comfortable if they don’t have $10,000,00 or more. We have met people with very modest means that feel that they are wealthy; and others that have lots of money, but don’t feel wealthy. Aside from the fact that some of them might simply have a distorted sense of reality, the wealthy often also carry a great deal of debt. Those able to manage their debt thrive in this low interest rate environment. But let even a wealthy person with debt hit a road bump, say lose a job (or face an obstacle in refinancing a loan) and such a person may quickly join the lower ranks of the 99%. In our assessment, highly accommodative monetary policy is a greater driver of an increasing wealth gap than the policies of either Democrats of Republicans.

But even with $100 in a bank account, what does one really hold? One owns a promise by the bank to pay $100. The $100 bill is a Federal Reserve Note; it’s a piece of paper issued by the Federal Reserve. That $100 bill could be returned to the Fed; in return the Fed would issue a credit balance to your account (you would have to go through a bank, as the Fed won’t open accounts for individuals). The “resources” of the Fed are without limit: through its various quantitative easing programs, the Fed has increased the credit balances of the financial institutions where it has purchased securities. The Fed literally creates money out of thin air, with the stroke of a keyboard. Even prudent central banks like to see a little bit of inflation; it means that the dollar bills you hold erode in purchasing power, giving you an incentive to put the money to work to make up for the shortfall.

Importantly, the $100 bill in your bank account is really someone else’s loan – the bank’s loan, the Fed’s loan. In fact, if you take out a loan from a bank, you will pay a merchant, who will in turn deposit the proceeds in his or her bank. As such, we talk about credit in a society. For simplicity’s sake, let the banks hold 10% in reserves; $100 in bank reserves with an offsetting $100 in demand deposit liabilities can thus be multiplied into $100 in bank reserves plus $900 in loan assets with an offsetting $1,000 demand deposit liabilities through the leverage of the fractional reserve banking system as banks lend and new deposits are made in a circular fashion. Between the Fed and the banks and the banks and their depositors the system can have a multiplier effect of about 100; that is, $100 created by the Fed can lead to $10,000 in credit. That’s why we sometimes call the credit created by the Fed (the monetary base) super credit. In the current environment, banks have not been aggressive in lending, and as such, we have not seen the “velocity” of money pick up. A key reason why many are concerned about the Fed’s increase in monetary base is because it has the potential to fuel inflation. Indeed, a key reason I personally hold a lot of gold is not because of the environment we are in, but because I am concerned about how all the liquidity that has been created might be mopped up one day. Federal Reserve Chairman Bernanke claims he can raise rates in 15 minutes; we think there may be too much leverage in the economy to have the flexibility when the time is needed; the political will to induce a severe recession to root out inflation may not be there.

It’s all about debt. So if one doesn’t want to have debt, what is one to do? The answer is real assets that are free of claims. Real estate held free and clear might be one answer, although keep in mind that governments tax real estate, thus making home owners tenants of the government. As the housing bust since 2008 has shown, the fact that many others owe a lot of money on their property changes the dynamics of this real asset.

The purest form of a debt free asset is gold. Gold is true money, the only form of money that isn’t someone else’s liability. While central banks might be able to lower the gold price by dumping their own reserves, central banks cannot print more gold – it’s very difficult to ramp up gold production. If your bank goes broke, if Greece goes broke, gold will still be there. Some call gold a relic from the past. To us, it’s the purest indicator of monetary policy, precisely because it has little industrial use. We created the cartoon below last year after CNBC’s Steve Liesman suggested to me on the air that gold might not be accepted in a store.

Cash vs. Gold

Mind you, we are not suggesting that everyone should sell all they own and buy gold instead. Everyone should consult with his or her financial adviser for specific investment advice. Specifically, one must be keenly aware of the volatility the price of gold can have relative to the U.S. dollar; given that we have a lot of our expenses in U.S. dollars, one has to be aware of the fluctuating value of the investment relative to the U.S. dollar. But we want to get investors to be keenly aware that we live in a credit driven society. We also believe that the developed world has made too many promises, too much debt has been issued.

Governments with too much debt may a) engage in austerity to pay off their debt; b) default outright; c) default though inflation. All scenarios suggest to us to hold assets that are debt free. We see gold playing a very important part in portfolios that take the risk into account that our policy makers continue to spend and “print” more money than is prudent. We don’t need actual money to be printed – credit creation through quantitative easing – is far more powerful.

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

Filed Under: Currency debasement, Featured, Gold, US Debt Crisis Tagged With: , , , , , , , , , , , , ,