What the Fed's Announcement Means for Gold 34 comments
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The surprise move to quantitative easing by the Federal Reserve yesterday caught the market unaware. The $300 billion bond purchase sent gold prices jumping $50 an ounce and must have given a few gold bears a nasty awakening.
Gold prices will surely now go higher as the market digests what the start of printing dollars means for the USA. The Bank of England started printing money a week earlier and its success in lowering yields perhaps encouraged the Fed to take this step into the abyss.
Inflation objective?
For an inflationary abyss is what opens up if these central banks have got their calculations wrong. Or is it that the central banks now think their banking systems are in such bad shape that a good dose of inflation is the only thing that will sort them out?
The Fed sent bond yields tumbling 0.5 per cent just as the Old Lady of Threadneedle Street managed to accomplish. However, the US dollar also took a three per cent tumble, following the pound in yet another competitive global devaluation.
Bond holders gained capital value as yields fell but that gain was immediately eroded by the currency fall. Is this a pattern that we are going to see repeated with more and more printing of money via quantitative easing?
There really is no such thing as a free lunch in economics. Countries with massive budget deficits should be cutting expenditure, and not borrowing more.
Buying up your own debt is no more useful than swapping one credit card for another. It is nothing close to sound finance. It is the last act of desperation when there is nothing else left to do.
Inflation and debt
You do not need to be highly qualified in economics to see where this is leading. You flood an indebted banking system with money, you get inflation and the relative value of fixed debt goes down.
But this is not a magic bullet. You get inflation back in the system, and anybody on a fixed income becomes poorer as prices rise. If you are an investor, your dollars become worth less, and eventually worthless.
That is why the gold price jumped yesterday. And it is going to go a lot higher as investors reach for a safe haven. Beware being left sat on cash when you should be owning gold and silver as a hedge against desperate actions by the central banks.
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Diversification is the key. Sure, they are buying up farmland, but I guess they are also buying a lot of other things, including gold.
On Mar 19 09:11 AM yellowhoard wrote:
> The billionaires are buying up quality farmland around the world.
> They'll get everyone's gold eventually in exchange for food.
Putting more oil in the car doesn't solve the problem it just puts it off inevitably creating more damage.
On Mar 19 10:46 AM BS Detector wrote:
> "It is nothing close to sound finance."
>
> Of course it is. If I'm in between jobs and have an oil leak in
> my car which will eventually lead to engine failure, should I borrow
> money to fix the leak or hope that the car survives until my paychecks
> resume?
"Never sell the farm".
Today add the word "mortgage" for something big this way comes.
On Mar 19 09:11 AM yellowhoard wrote:
> The billionaires are buying up quality farmland around the world.
> They'll get everyone's gold eventually in exchange for food.
The Fed is more terrified of deflation than inflation. Gold is a good bet over the near term after the Fed move. Prior to that, I think Gold was ready to fall back.
I moved into GLD, GDX, and SLV a while ago and now am happy that I did. I think we all should take a flyer now on some solid junior minor stocks. If inflation starts to roar, these stocks could rise dramatically.
But remember, there are some very smart people out there who are still not convinced that we are headed for inflation (John Maudlin for one). Stay tuned...
silver-bug: Right on!
I'm sure that will help to bring price stability to the US real soon.
Get your gold while it's still cheap.
Anybody heard from Rolex? Was he quick enough to cover his shorts after the price dropped Wednesday morning and before it skyrocketed Wednesday afternoon?
agree
A bond is an IOU for a fix time period for which interest is being paid. A bond is a less liquid equity, at least compared to US dollar bill. A Dollar bill is an IOU - but it has an indefinite time period, no interest and is extreme liquid.
So the question is who is selling their treasuries to the FED and what are they going to do with the enhanced liquidity.
Here is my bet;
a. foreign holder will line up to sell to the FED
b. the liquid dollars will be exchanged for another currency.
If I am right then Wednesday we heard the FOMC announcing that the Chinese pressure had accumulated to the point that they need a sign of 'good will'. One phone call from China to Washington - get us out off some of these long term IOUs.
INFLATE OR DIE! That's the mantra, folks.
Be careful about buying gold if Geithner's March 11 announcement sneaks thru Congress:
"The Obama administration soon will also push Congress for legislation that allows the IMF to 'mobilize' its stockpile of gold, Geithner said today. Congress would need to approve the IMF funding expansion, although it wouldn’t count against the budget deficit, he said."
otoh, GATA doesnt find that possibility (inevitability) alarming:
www.gata.org/node/5988
> Some poor soul here announced gold is not a performing asset, which
> just makes me laugh so hard....
I guess you're referring to my assessment of gold as not having earning power.
> so lets do some simple math....Lets see, GOLD was at about $30 when a dollar was worth a dollar.
When exactly was a dollar not worth a dollar? Who are you, Yogi Berra?
> Then the dollar peg to gold was announced during Nixon's...
Though by the 1970s, the dollar's link to gold was tenuous at best. Market prices for gold were almost always higher than $35 in the late '60s and into 1971, and were often higher than $40. With foreign governments playing arbitrageurs with US gold, the end of Bretton Woods was inevitable.
> AND- since the de-pegging of gold to
> the dollar, the dollar is now worth 3 cents and gold is about $1000.
From 1971 to today, the dollar's decline as measured by the CPI is about 87%. Clearly, letting gold sit on a shelf has been much better than letting cash sit on a shelf. But since that's not what I said, it's fairly irrelevant.
> I WOULD CALL THAT EXTRAORDINARY ASSET PERFORMANCE, unmatched by any
> other asset.
How about some simple analysis? The London gold fixing on the last day of the year in 1970, 8 months before Nixon officially ended Bretton Woods, was $37.375 per ounce. The p.m. fixing today was $956.50. That's a pre-tax gain of 2459%. The pre-tax returns on the S&P 500 over the same period, including dividends, is about 2710% (+/- 10% depending on this month's dividends). Gold will end up being better after taxes, but I'm guessing not by nearly as much as you think.
Now I'm going to select a timeframe. How about from the depths of the last recession to today? Seems as fair a comparison as any. Let's call it the end of 1982 so that comparison is easy. Gold closed 1982 at $448 per ounce - since then, it's appreciated 114%. Over the same period, the pre-tax total return on the S&P 500 has been 994%. In this case, the S&P's the overwhelming victor.
So the real question in my mind is one of valuation. Which is the better buy - gold near inflation-adjusted all-time highs, or the stock market at 24-year lows on Shiller's 10-year P/E basis?
> Keep the math simple, its as easy as that = the more dollars are
> printed, the higher gold goes.
Yes, let's not concern ourselves with difficult concepts like reserve requirements or the velocity of money.
> Moral of the story: Gold is REAL MONEY...
When was the last time you paid for something with gold? Pretty sure I never have.
> BUY SOME GOLD to assure staying power to any dollars' decreasing
> value
Based on current valuations, I don't think gold is a great hedge against inflation, and certainly not as good as equities. But gold is a much better hedge against the end of society. So if you think that's in the cards, by all means, stock up.
> One year from now you will have double the value, because one year
> from now US dollars will be worth half what they are worth now
So are you borrowing all the money you can to plow into gold? You should have no qualms about borrowing for one year at 25%, right? I mean, since you're so sure of how the value of gold is going to grow?
> END OF STORY
Never is, is it? The real moral of this story: don't blindly believe. Be skeptical and check facts.
Sources: www.lbma.org.uk/stats/... (used because it was the first source I found that provided year-end gold prices all the way back to 12/1970), Berkshire Hathaway's 2008 Annual Report (p.2), www2.standardandpoors.....
> TIPS are unique
> among asset classes in that they are guaranteed to lose purchasing
> power if held to maturity... Even if
> you assume that the CPI accurately tracks your cost of living (probably
> laughable), you are guaranteed to lose purchasing power due to taxes.
> These instruments do not have enough absolute yield to compensate
> for the taxation of CPI-derived accretion.
This is completely dependent upon two things: the inflation rate and the holder's tax rate. With low inflation, TIPS certainly can provide a (small) real return, even with high tax rates. As inflation increases, the real return falls, and does at some point go negative.
However, I limited the choices to cash, gold, or TIPS. Cash is clearly a worse option. Which leaves gold, with which I have two problems: the historically high current valuation, and the uncertainty I have regarding significant inflation. I think gold already has a lot of inflation baked in; if we don't end up with serious inflation, I don't think gold can move up much at all, and if we don't end up with significant inflation, I see no upside to gold. Compare this with equities, which at this point are far more likely to move up, with or without prices.
I think a discussion of CPI is out of scope here, though it might be quite interesting to geeks like me.
> selling TIPS is almost an ideal scam: you get to tax both the
> accretion and the interest, and you get to decide what the
> accretion factor is going to be! It's as if I could
> issue you a bond and then decide each year how much interest I want
> to pay you, also knowing that I'm going to get 1/3 of it back from
> you no matter what.
> Madoff had nothing on these guys for the sheer
> brass of it all.
This last bit is really nonsense, you know. You have to think the CPI is not just incorrect, but regularly manipulated by the government specifically to change the values of TIPS. And then there's that pesky payment at the end for the increased value that's been taxed. Madoff-like? Seriously?
This uproar about the Fed "debasing the currency" is a little late. If a government agency buying government debt is nothing more than "printing money," then we've been at it for more than 20 years.
Cooper at the end of his article says: “Beware being left sat on cash when you should be owning gold and silver as a hedge against desperate actions by the central banks”. To use a double negative, I don’t think this is stupid advice.
Since major commoditites are traded in dollar, globally. There is a limit to the effect of dollar currency devaluation. Shadowstats.com shows M3 at 15 trillion so expanding by a trillion is about 7% -gold rose 8%.
Overall what's going to drive prices is monetary velocity. The shadowstats.com inflation chart shows inflation rate decling 50% over twelve -it's a nearly vertical chart. The new upslope is not nearly so steep.
Reversion to mean is a more realistic expectation, even too optimistic! The easy money Greenscam Years were a one-time deal, and even the Maestro admits he got it wrong.
Did we already forget that?
On Mar 19 09:59 PM WAKEUP wrote:
> OK, so tell me this: If gold is THE money, why don't people who have
> always bought and held gold own EVERYTHING IN THE WORLD, by now?
> I'm laughing, that people don't see the absurdity of using nominal
> prices w/ dividends of the S&P500 from 1987-2006 - a grotesque
> Bull Market - as the benchmark for "what stocks should return" for
> the next twenty years.
Once again, I guess this is referencing my post, since I'm the only one who mentioned the S&P 500. It's kind of funny - that makes two of you who say you're actually laughing at things I did not write.
I never specified the 1987-2006 timeframe, nor did I make any statement about expected returns over the next 20 years. So there's a bit of strawman-ing happening here (gee, how unusual - that never happens here).
But fine. Shall we also disregard the last 18 months, since it was more or less unprecendented, too? What a bunch of nonsense. Don't cherry-pick data, either way.
> Look at the inflation adjusted return, factor in 'survivor bias'
Since I was comparing the returns of two assets over the same period of time, inflation is irrelevant. I also don't see how survivor bias is relevant - you're claiming the S&P 500 is flawed how exactly?
> ...compare five other 20-year periods: the recent
> past is very warped, and unlikely-to-be-reprodu... Don't consider
> the Great Bull Period "normal" or "average."
Fine by me, as long as the goldies understand that the 1970s was a period for gold far more abnormal than any ever experienced in equities.
> Reversion to mean is a more realistic expectation, even too optimistic!
Disagree, but whatever. Here's a calculator: www.moneychimp.com/fea... (I can't vouch for its accuracy, but it says it uses Shiller's data - www.econ.yale.edu/~shiller/data.htm). Pick a period and learn the tax-less compound annual growth rate (CAGR). Here are a few:
1871-2008 - 8.52%, 6.33% adjusted for inflation
1900-1999 - 10.34%, 7.01%.
1933-2008 - 10.29%, 6.54%
1933-1986 - 11.38%, 7.06%
1947-1996 - 12.22%, 7.82%
1948-1986 - 11.77%, 7.41%
1987-2006 - 12.81%, 8.3%
1987-2008 - 8.49%, 5.37%
1997-today - 1.28%, -.0.05
Looks like a 7% real pre-tax return is pretty fair estimate of historical performance, going from the depth of the depression to your "forbidden zone" starting in 1987.
> The easy money Greenscam Years were a one-time deal, and even the
> Maestro admits he got it wrong.
> Did we already forget that?
Looks like you did. Or, at least you forgot what he "admitted." Yet more merit-less Greenspan-bashing.