Wow, it seems like yesterday QE2 ended. It was actually a month ago. Already there is talk in currency markets about another round or quantitative easing, QE3.
I can’t find fault with the logic of it as it worked so well the first two times. Just think of how far we have come. Last Friday’s GDP figures were pathetic. The revised number for the first quarter was 0.04%. That is barely positive. The ISM numbers on Monday are sure to bring continued worries about the health of the economy to the center stage. I can hardly wait for the jobs report on Friday as that promises to be the end of a perfect week. No hope, no jobs, no growth but at least the corporate earnings reports were great. That will certainly assure all of the middle class people that are working three part time jobs, if they are lucky enough to find them. Today it was reported that HSBC (HBC) will be cutting 2,000 jobs by next year. Add that tally to the Cisco (NASDAQ:CSCO) layoffs and I see a trend.
Dr. Bernanke said in his last meeting with Congress that interest rates are likely to stay low for the foreseeable future, which means the dollar will remain weak. A weak dollar means higher prices for everything we use. Add to this the continued speculation from the media about QE3, which will further debase the dollar and we will be seeing $6.00 a gallon gasoline, $5.00 a gallon for milk and a steady diet of franks and beans.
The sad fact that is that three years after the economy was brought to its knees by a global financial crisis it hasn’t come close to creating enough jobs that would sustain an economic recovery and do away with the need for addition economic stimulus.
The anemic GDP numbers, the pathetic ISM numbers and what I can only expect will be very disappointing payroll numbers only exacerbates the U.S. economy’s risk of a return to a recession. I can only conclude that the pressure on the authorities to do something will only continue to grow.
At the aforementioned meeting of Dr. Bernanke and Congress, Dr. Bernanke warned that QE3 may become necessary if the economy falters in the second half of the year.
If there is a silver lining (forgive the pun) for my readers it is that out of this terrible suffering of our own people my readers will be the big winners as they have properly positioned themselves in gold and silver.
Everything that could have possibly gone wrong for the economy has seemingly given an impetus for gold and silver’s safe haven appeal. Last Friday’s anemic GDP numbers sent gold soaring to $1,637 an ounce as the U.S. continued to add more reason to doubt the stability of the world’s largest economy.
When gold hit the psychologically important level of $1,600.00 many investors took their chips and cashed them in. No one ever got hurt taking a profit. As worries of debt continued, however there was a psychological shift in the minds of investors who saw that levels above $1,600.00 were sustainable. Buyers are beginning to adjust their mind set to a much higher gold price.
Through it all there has been a constant debate on how high gold continue to run up. My answer is that gold will continue to run up as long as there is continued global debasement of currencies. I believe that the debt worries in the United States and Europe alone can push gold to $2,500.00 an ounce and if all of the stars line up it could run to $5,000.00 an ounce. I base this on studying human nature, which is an essential tool for a market trader. With all due respect to Dr. Bernanke, I think gold is the “magic bullet" around which all currencies dance as they are worth less in times of deflation and more in times of inflation.
Gold is not subject to the laws of supply and demand as the fears of finding a safe haven feed the hunger of investors as they scramble to find a safe port in this economic storm. In this respect gold has no peers.
In conclusion, silver has not fared as well as gold of late. The reason for this is that while silver had an amazing parabolic run from February until the last week of April, many investors were burned when in the first week of May silver collapsed and gave it all back. The investors that were burned will not soon forget. While gold has had a steady, healthy run up, silver has been wildly volatile. For the moment it seems stuck in a range but when it breaks out it will do so with a vengeance. I see silver trading at $55.00 to $60.00 by year’s end.
Disclosure: I am long GLD, SLV, SLW, UXG.