While the whole world seems to have turned against Gold in the last month, I’d like to note that this latest pullback in the precious metals’ space has given us an extraordinary opportunity to load up on premium quality inflation hedges at bargain basement prices. It’s also told us the following...
And so here we are, with austerity measures and higher taxes occurring in Europe because of bankers’ greed and dishonesty. Having realized that their politicians aren’t going to do the right thing, the people are now openly expressing their disgust at the ballot box (Angela Merkel’s party is getting slammed in Germany for supporting the bailouts) and the streets (protests are occurring across Europe). And it’s just a taste of what’s coming to the US.
The issue now is how far the Fed will let things collapse. When QE 1 ended in April 2010, stocks dived 15% before the Fed stepped in and began hinting at more QE. By today’s numbers this would mean the S&P 500 falling to 1,160 or so. However, given the extreme degree of danger in the world today (the European banking Crisis, the Middle East, China overheating and Japan’s nuclear disaster) there is plenty of room for surprises to the downside
Last month I warned that the Fed would LOVE to see another round of deflation so it could set the stage for more money printing in the second half of this year. My long-term forecast remains the same (serious inflation accompanied by a US debt default), however, it’s now clear that we’re heading into another round of deflation in a BIG way.
I find it odd (to say the least) that anyone on the planet even considers paying attention to the Fed’s CPI measure. According to CPI inflation has only risen 3.2% in the last 12 months. This is during a period in which gas rose 33% while ground beef, cheese, and vegetables are all up in the double digits as well. Heck, even RENT rates have jumped in the last year. But somehow because housing prices and iPads have fallen in price… inflation is under control.
The big picture here concerns the US Dollar which had already fallen to test its 50-DMA. If the US Dollar breaks below this line and fails to reclaim it then the US Dollar rally is over. The technical pattern here is a falling wedge pattern. As the below chart shows we hit right up against upper descending trendline. We’re likely to test the lower trendline now which is around 72 or so.
I recently discovered that famed financial commentator, Mike “Mish” Shedlock published a piece in which he quoted an article I published and proceeded to tear my views (at least what he claims my views were) to pieces.
The pullback in commodities has been EVEN BETTER for other lesser known inflation hedges. Indeed, individual players were absolutely decimated, bringing them to valuations we haven’t seen since 2008.
Consider that during 2008, Gold traded around $900 per ounce. Today it’s at $1,500. And yet, based on reserves and underlying assets, many inflation hedges today are trading at valuations equal to when Gold was only at $900 per ounce.
You’d think that the world’s largest economy (and home of the world’s reserve currency) exceeding its debt limits would be big time news. But we’ve yet to hear a peep about it from the mainstream financial media. It’s even stranger that we haven’t heard mention of the fact that the US is in fact RAIDING pension funds to continue to fund its debt.
The Fed has done NOTHING but loosen monetary policy since the Financial Crisis began… the problems that the Fed has been battling have not gone away… and the Fed is somehow going to magically starting tightening?!?! Discussions of the Fed tightening should be up there with Elvis sightings: entertaining but worthless. The only thing the Fed knows how to do is throw money away.
IF this happens, then expect stocks to take a BIG hit. So far they’re held up relatively well although as we all know by now, stocks are ALWAYS the last to “get it.” So the fact that stocks have held up while commodities (especially the economically sensitive ones like copper and oil) have taken a dive could in fact be a BAD thing as it predicts some serious pain for stocks.
The ENTIRE 2008 episode was the result of the Credit Default Swap (CDS) market imploding (CDS, a type of derivatives, comprised about $50-60 trillion in value). And to claim that the Fed didn’t know why the Financial Crisis happened is a lie. Indeed, as early as 1998, Ben Bernanke’s predecessor, Alan Greenspan, tol , soon to be chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born, that if she pushed for regulation of the derivatives market it would implode the financial system.
The QE 3 debate has been raging ever since the Fed announced QE 2 in November 2010. However, this debate is moot. The reason is because the Fed HAS to perform QE 3 in some form or another.
The similarities between the US today and Weimar pre-hyperinflation are striking. As in Weimar, US fiscal authorities are not taking any steps to rein in their loose money policies. Similarly, the US Fed, like Germany’s financial elites believes that currency depreciation is a good thing.
While ultimately its own entity, the Federal Reserve IS a political institution. True, they pretty much do whatever they want… but only to a certain degree. The Fed can’t just unleash $500 Oil in six months without causing full-scale rioting. And money printing and interest rates don’t do much as defense against angry mobs. So with political heat turning up due to price increases, not to mention we’re approaching an election year, the Fed needed to step back for a bit. This is why they didn’t announced QE 3 yet.
