Based on what has transpired with central banks, one expert believes gold should be substantially higher. Paul Brodsky, co-founder of QB Asset Management, believes this week is confirmation that the Fed cannot withdraw and are probably going to increase their quantitative easing.
January 31, 2013
King World News
Today the man whose firm is well known for its $10,000 gold call told King World News he now believes that the price of gold should be substantially higher based on what has transpired with central banks. Here is what Paul Brodsky, co-founder of QB Asset Management, had to say in this stunning interview: “Clearly this week was just confirmation that the Fed cannot withdraw, and if anything they are probably going to increase their quantitive easing. I don’t think people should be expecting any surprises, the trend is your friend here.”
Paul Brodsky continues:
“The Fed can’t end QE, unless they want to see deterioration of credit in the banking system. This would feed through to a deterioration of debt in the broader economy. The Fed, ECB, and the Bank of Japan, they cannot stop creating new base money.
I think the rhetoric that comes out of the Fed and other central banks should be viewed as jawboning....
“They (central banks) want to present confidence to the markets. Where we as a firm come down is that the economy is shrinking in real terms. The amount of leverage that is in the system and the amount of money creation that still has to come is incredible.
Ultimately, where the risk lies for monetary policymakers is in the value of the debt on bank balance sheets, and the value of the debt across the broader economy. This debt is being held at par. Interest rates should be much higher. All of this has led to interest rates that don’t reflect true inflation. PPI inflation won’t show up until it’s time for central banks to produce inflation in goods and services, and there will be a time for that.”
Brodsky also added: “At $2.7 trillion in base money, our call was for $10,000 gold. As base money is now rising, from additional QE, the shadow gold price should rise to about $15,000 in roughly one year’s time.
That’s not necessarily a call. Gold could be worth much more than that, or it may never get there. That simply takes the Bretton Woods system and applies it to where gold would be trading today. As to the timing, there are some recent developments I find very interesting that may lead to an advance in precious metals prices in the near-term.
The pain of holding our ground has no doubt been intense. The good news is that we believe for the first time there are important macroeconomic signs that a fundamental shift in the global monetary system is approaching and that it should be very supportive to precious metals and precious metal miners.
For example, late last year, Japanese Prime Minister Shinzo Abe began preparing the market for inflation targeting in 2013. General consensus was that the BOJ would begin aggressive QE until the Japanese annual inflation rate reached 2%.
Sure enough the news hit the tape on January 21 – the Bank of Japan would target a 2% rate by purchasing Japanese government notes and bills, but it would begin in January 2014. The yen, which had been weakening against the dollar traded stronger on the day but the strength didn’t last. How could it? Japanese debt levels are so high and the domestic Japanese economy is so weak that output would contract meaningfully without increased exports from a weakening yen. The only way to get that is to keep weakening the yen.
“The Yen trade shows two fundamentally critical points related to the global monetary system. The first is timing. Japan was the first major economy to blow itself up on credit beyond all sane recognition and it was the first to take gas. Since the nineties it has been the weakest of the three established major global economies. Benchmark Japanese interest rates were dropped to literally 0% in 1999 and Japan was the first to begin QE in the 2001. This was far in advance of the US and the Eurozone. But Japan was able to survive from 2000 to 2007 because US and Eurozone consumption of Japanese exports increased. Of course the increased consumption was fueled by increasing US and European consumer debt assumption. In fact, consumption of Japanese exports also increased across the globe, to places like China and elsewhere, (which, when you think about it was also ultimately fueled by increasing leverage of Western consumers). The point is Japan was able to muddle through as long as importers were willing to borrow to consume their products. That came to a screeching halt in 2007.”
Brodsky continues: “Against this backdrop, the importance of outright inflation targeting by Prime Minister Abe cannot be understated for holders of all global currencies and precious metals. Japan’s treatment of yen has provided the roadmap for Dollar and Euro holders.
In fact, there has already been unofficial discussions in the US and Europe about inflation targeting. As we have argued over the years, there is no other choice, nothing else that can be done: currencies must be destroyed through dilution and debt must be shifted to central bank balance sheets where it can be left unmarked to amortize or default.
Bringing my point home, by threatening inflation targeting, Japan placed the world on notice that it was willing to stop at nothing to cheapen its currency. And if you look at a graph of the Yen, it is succeeding. Whether or not it works from a trade perspective (global consumers purchase enough Japanese exports to keep Japan afloat), is not our primary area of interest.
We were actually most excited by Japan announcing it would delay inflation targeting by a year, our inference being Abe was counseled by US and Euro allies that by merely announcing the plan Japan would ensure a weaker Yen in the interim but that more time was needed to coordinate a final, more comprehensive solution. We expect discussion of Fed and ECB inflation targeting to become louder and more frequent in 2013 and we expect markets to begin adjusting asset prices accordingly.
The table is set. We currently have rotating currency devaluations and we would argue they are being coordinated by central banks.”
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