According to the author, it is no surprise money-printing continues to be the response to persistently poor economic performance. He believes we are closer than ever to some kind of "end game" for paper currencies and investors have no choice but to find inflation hedges such as gold and silver.
September 16, 2012
For those who have paid attention to the words of Federal Reserve Chairman Ben Bernanke, it is no surprise that money-printing continues to be the response to persistently poor economic performance. I became aware of Bernanke's now famous 2002 speech "Deflation: Making Sure "It" Doesn't Happen Here" in late 2008. In response, I wrote "America Will Print As Much As It Takes." This piece solidified my bullishness on gold and silver. I have marveled at how gold bears ignore thousands of years of human history that has relied on gold and silver as stores of value. Presumably, they believe that we "moderns" have finally figured out how to print money and manage its value properly through the omniscience and benevolence of a centralized monetary authority. While I am not an anti-Fed zealot, the mirage of the "Great Moderation" was enough to erase any lingering over-confidence I had in the value of paper money.
Now, we are closer than ever to some kind of "end game" for paper money, an ultimate test of monetary resolve. The Federal Reserve has now written a blank check for the American economy, promising to apply quantitative easing until the economy responds:
"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases."
Under such a regime, holders of cash have almost no choice but to find inflation hedges or otherwise bear down the threat of on-going dilution by the printing press. The Federal Reserve's resolve is all the more clear in its willingness to ease policy even with the S&P 500 (SPY) sitting around 4-year highs. Across the Atlantic, the European Central Bank (ECB) has promised to buy sovereign bonds in unlimited quantities. While the ECB has also indicated it will sterilize these purchases, the concept of a boundless realm for monetary policy is taking hold as the globe's economic problems prove deeply entrenched. Japan has struggled for years to keep pushing monetary bounds ever outward, and now the Chinese, backed by mountains of reserves, seem locked into rapid cycles of stimulate, cool, and stimulate again.
Under these conditions I think gold and silver should get more popular than ever. Fresh highs are around the corner. The gold bears who held their umpteenth celebration of the end of gold's 7+ year breakout will be proven premature yet again. Since Greenspan, the Federal Reserve has become the gold and silver investor's best friend. New buyers for precious metals will come from those who assumed that the Federal Reserve would not dare ease further and/or those adamantly opposed to further easing for its potential inflationary threat.
Here is a reminder of gold's bull market using a 20-year chart of gold from the World Gold Council:
The era of easy money has been very good for gold
As you can see, the era of easy money has provided few choice opportunities for hopping aboard the gold bull (further compounding the frustration of gold bears). The financial crisis presented the last fantastic buying opportunity. In another year or two, we will appreciate the past year as another one of those rare choice buying opportunities.
Zooming in on SPDR Gold Trust (GLD), we can see gold's most recent breakout and the achievement of a first milestone of recovery: the erasure of all the losses starting from the big sell-off February 29th.
Gold has broken out, confirming a successful test of recent support
Here is the breakout in iShares Silver Trust ETF :
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