Currency Markets, QE4 And Silver Prices

Includes: AGQ, SLV
by: Mark Thomas

It has been interesting to watch Japan's new government and its bold action to lower the value of the Yen vs. other major currencies. So far it's working and if you haven't already read Jim Rickards book "Currency Wars" these actions are exactly what he predicted. Basically his theory is that one after another countries will adopt the US Federal Reserve policy of quantitative easing or similar monetary expansionary policies in an effort to lower the relative value of their currency. More countries are then forced to adopt similar policies as their currency becomes overvalued, hurting their exports and importing inflation. His main point is also that the level of the US dollar index (DXY) will almost single handedly predict if another round of QE in the US will be announced since its main purpose is to lower the value of the dollar, not anything they say in public. This leads to a race to the bottom for all currencies which eventually hurts all the countries engaged in it and the world economy. We saw the US begin the race in 2009 with QE1, then the UK, European Union and now Japan. It is like a carousel with more and more countries getting on and currencies rising and falling constantly but in the end the currencies really going nowhere relative to each other because they are all falling in value.

Getting back to the silver market, it really is amazing that we can now buy silver again at $30 per ounce. I thought that would be the bottom of the price range for 2013 so I'm either really wrong or the current price is a steal. It is ironic because the first time I bought heavily into silver with more than 25% of my assets was in December 2010 right before the huge move. That definitely proves that you can't just buy and hold silver, you must actively trade it. You can keep a core position and keep it away from the tax man by holding, especially going forward if you buy at these great prices. However you will still have to trade a majority of your silver holdings back and forth to harness the volatility of silver and harvest profits.

I know I have taken on a huge amount of risk going long the Pro Shares Ultra (NYSEARCA:AGQ) making me the equivalent of 140% long silver. I told you that I'm determined to have a big 2013 because I think that two full years after the short squeeze in silver which peaked in May 2011, I think 2013 is going to be a good year because silver has been essentially flat for two years. We won't reach $48 but I think $40 is likely and $42 is probable. As we get deeper into 2013-2014 the sins of our monetary policy will become more evident as we go. There will probably be an erosion of confidence in financial markets somewhere. It will probably start with the sovereign debt market starting in Japan and then spreading. Eventually interest rates in the US will rise and it will cause a great unwind of excess leverage in the derivative market. The only way to prevent interest rates from rising in the US will be for the Federal Reserve to buy the entire annual federal deficit and if they did that the bond market would sink.

I want to stress the most important point about the relationship between quantitative easing and the performance of silver going forward in 2013. The difference between the new round of QE and the last round is that beginning in January, the new one again begins buying net new US treasury bonds, like QE1 and QE2 originally did. QE3 was misleading because the operation twist feature simply bought longer-term treasuries with the proceeds from shorter-term bonds already purchased as they matured. The reason this is critical is that they weren't actually injecting new funds into the system, just maintaining the level of outstanding existing funds. That was to keep the liquidity already in the system from being withdrawn, not to add new liquidity to the system, so in essence calling quantitative easing was very misleading. It also was to target long-term interest rates in order to stimulate housing. Then the rest of QE3 purchased mortgage bonds again targeting housing. The reason this is so important is that when the Fed purchases mortgages, the banks turn right around and lend again on another mortgage. This limits the ability of the funds to sit in the available excess reserves in the banking system and therefore weren't seeking out riskier investments, so it has a different effect on money flowing into financial markets. Traditional QE artificially stimulated asset prices much more so now that it has reverted back to the traditional policy, the monetary expansion will lead to more stimulation of asset prices in financial markets. That will begin to drive gold and especially silver prices higher in the next two to three months.

The reason this is so important is that would explain why gold and silver have gone nowhere for almost two years. The good news is that in January, they again begin pumping $45 billion in Treasuries into the system and will continue to buy $40 billion in mortgages every month. If you examine the relationship between QE and the performance of silver prices in the months following, it will help strengthen your resolve about why now is the time to be aggressively buying silver. My preferred vehicles right now are iShares Silver Trust (NYSEARCA:SLV) and ProShares Ultra Silver ETF.

Happy New Year!

Disclosure: I am long SLV, AGQ, SIVR, PAAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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