By Scott Silva
Editor, The Gold Speculator
8-7-12
To QE or not to QE. That is the
question. The markets waited for the Fed Chairman to announce it is time to
jump in with another round of restorative stimulus, and had bid up nicely
before Big Ben disappointed once again at the conclusion of last week’s FOMC
meeting, stating,
“The Committee will closely monitor incoming information on
economic and financial developments and will provide additional accommodation
as needed to promote a stronger economic recovery and sustained improvement in
labor market conditions in a context of price stability.”
Hardly stimulating. The markets
responded by selling off, but not as sharply as usual following a Bernanke
punt. Traders held out hope that the ECB might do something bold. But alas,
Mario Draghi seemed content to sit on the edge of the bed as well. Apparently,
now is not the time for the central banks to begin a new bond-buying binge. The
bankers must have insight other do not. Could it be that that they expect
economic conditions to deteriorate further, or do they see signs of a sudden
turnaround? Most analysts are pessimistic on the prospect that the Eurozone
debt crisis can be contained. And many do not see the US recovery happening
until a pro-growth president takes the oath of office.
The reason that the Fed policy
has failed to stimulate the US economy is that monetary policy cannot stimulate
demand. And despite what the Keynesians in charge of Washington believe,
government spending does not create demand (except, or course for defense
spending). Even if I accept the Keynesian approach, then also I must believe
that the US is in JMK’s liquidity trap, that eerie nether region of extended ultra-low
interest rates in which no amount of additional money produces any increase in
output. Uncle Ben must secretly know that QE3 would ultimately fail, as did QE1
and QE2. And so too, his legacy as an effective Fed Chairman would never
materialize.
One example of the failure of
Washington central planning policy is the unemployment rate, which has now
reached 15% (U-6 rate) for July. We have not had so many out-of-work citizens
since the 1930’s. If defense funding sequestration occurs, there will be another
700,000 or so joining the jobless ranks. Despite what some may say, the private
sector is not “doing fine”.
The US stock market seems to
have discounted the feckless Fed, re-election campaign rhetoric, and the lousy
July jobs number to closing above 13,000 last week and continuing its move up
this week. The markets seem propelled by some special knowledge that there may
be a bridge across the fiscal cliff. Could reason and responsibility succeed
where rhetoric and redistribution has failed? We shall see. In the meantime,
individuals must remain vigilant and protect themselves against attack by those
who would steal their wealth and give it to others more “deserving”. Да,
Comrade!
Many know that buying and owning
gold is an excellent way of protecting wealth. Gold has been a recognized store
of value for thousands of years. Gold has intrinsic value. Gold maintains its
value especially in uncertain economic times.
The price of gold increases when governments intervene in the credit
markets and create more fiat currency than economies demand. This has been the
case in the US and the EU for the last several years as central bankers have
tripled the money supply through Quantitative Easing and other easy money
measures.
Over the past five
years, US central planners have distributed more than $4 Trillion of stimulus
funding, raising the government share of GDP to 42.3% in 2009 from 35% in late
2007. The Federal spending binge includes add-ons to the agricultural and
housing bills in 2007, the $600 per capita tax rebate in 2008, the TARP and
Fannie Mae and Freddie Mac bailouts, "Cash for Clunkers," additional
mortgage relief subsidies and the president’s $860 billion stimulus plan that
promised to deliver unemployment rates below 6% by now.
Since the beginning of the
Federal stimulus spending spree, US GDP has fallen 61% and the price of gold
has increased 101%. The price of gold is
likely to climb higher if Chairman Bernanke ignores his better angels and
succumbs to another sip from the punchbowl.
And the price of gold is telling
us now that odds are good that the Chairman will fall off the wagon, again,
soon. Today, gold is trading above $1600/oz.
There are signs that gold will
continue its upward trend for some time yet. Technical indicators for
commodities in general are bullish. The
CRB index is in an upward swing, climbing to 12% to over 561 since June. Many
noted commodity traders are adding to their long positions. In particular, large speculators (the smart
money) are accumulating gold. In the most recent Commitment of Traders (COT)
report, Large Speculator bullish sentiment jumped 3 points to 79%. The large
traders added 5,246 new long contracts and shed 7, 841 short positions on
slightly lower open interest of 403,403 contracts. These professional traders
are usually ahead of the herd. As subscribers to The Gold Speculator know, we are bullish on the precious metals.
What will happen to the price of
gold if Helicopter Ben does not dump more bushels of greenbacks from the sky? Well,
the price of gold will still rise. A major reason is the fact that money is
seeping in to the economy from a massive store held as “excess reserves” by
member banks of the Federal Reserve system. These funds are released into the
economy when the banks lend or create new demand accounts. Normally, adding
money into circulation stimulates economic activity. But we also know that
increasing the supply of money when the demand for money is low, as is the case
today at 1.5% GDP growth, leads to higher prices.
Of course, a new round of Fed
bond-buying would be a massive dose; the last two rounds were woefully
inadequate, according to the Keynesians in charge. “If only the stimulus were
larger, say $1.5 Trillion or so, we would have come out of the woods by now.”
Or, maybe $3 Trillion, as Paul Krugman has suggested.
Here’s an idea that might work.
Take Paul Krugman’s $3Trillion number and rather than spending it on
shovel-ready stimulus programs, spend it all on running the Federal government
for a year, and declare a 1-year tax holiday for all US citizens and all US
businesses. Now that would jump start the economy and end the jobless
recession.
'Tis a consummation devoutly to
be wished.
Responsible citizens and prudent investors protect
themselves and their wealth against the ambitions of over-reaching government
authority and debasement of the currency by owning gold. Gold is honest money. Investors from around the world benefit from timely
market analysis on gold and silver and portfolio recommendations contained in The
Gold Speculator investment newsletter, which is based on the principles
of free markets, private property, sound money and Austrian School economics.
The question for you to consider is how are you going to
protect yourself from the vagaries of the fiat money and economic
uncertainty? We publish The Gold Speculator to help people make
better decisions about their money. Our Model Conservative Portfolio has
outperformed the DJIA and the S&P 500 by more than 3:1 over the last
several years. Follow @TheGoldSpec
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