"This is one small step for man, one giant leap for mankind."
What used to be small steps for the Federal Reserve have turned into quantum leaps of money printing. It's a bonanza! Free money for everyone!
The Central Bankers Were Who We Thought They Were
The problem with this level of open-ended money printing is it will never end. Once the market gets hooked on this drug, any temporary respite in printing will cause a crash. See the Great Depression.
I noted in my previous article, Minsky Moment, that Goldman Sachs had already documented this phenomenon on the current markets. The US faces our Minsky moment, and the central banks are determined to print their way out of it.
The Bankers think the Great Depression was caused by too little money in the system. But it was only the flood of money into the system that caused the artificial boom, and that allowed currency to be reduced in an ill-fated attempt at reigning in bubbles, which then caused the larger crash. The bankers now realize once the dollar-crack gets flowing, you can never allow it to stop.
This is what they will not allow again. There will be no more limitations. It's QE to the death of fiat money. ALL fiat money.
The Fed is not alone in this hysteria; the ECB and China have rented some of Bernanke's helicopters and will be spreading the dollar-crack euphoria over their respective lands. The effects, like all drugs, will be increasingly temporary. And it will goad other nations to yell 'bombs away' and join the currency wars once and for all to keep their exports competitive and their economies from flatlining.
This is the biggest currency experiment ever done on the global stage. And given the history of endless currency 'liquidity' programs, it will not end well. Expect massive inflation to slowly start and then build quickly in food and energy first. The inflation virus will eventually spread unchecked throughout the host economies, eventually killing them.
However, one area of the economy is expected to benefit big time from fiat, gold and silver miners.
"Gold and Silver Are Money. Everything Else is Credit"
JP Morgan was right, of course. As one of the architects of the Federal Reserve system, he understood the roles of fiat money and gold quite well.
The miners have staged a comeback. I wrote previously, in Gold and Silver Break Out, that under normal valuations, the sector was undervalued by 35% at the bottom during the summer. I provided some nice chart action on what looked like bullish trends in both metals.
Since then, my portfolio of gold stocks has jumped 25%. 15% of that came before the global money printing announcements this week, with an additional 10% after. Gold investors were clearly anticipating the announcement of QE and were correct. But many probably did not expect an open ended program, so in addition to the baked-in expectation of printing, good gold stocks continue to surge higher.
Gold and silver miners have lagged behind the rise in the metals for much of the decade-long bull market as documented in my last article. But I will reason why this will no longer be the case moving forward.
One (Gold and Silver) Ring to Rule them All
Analysts have largely pointed out that miner stocks may no longer be the way to play the gold and silver market. There are many companies, but not all produce. Every sector has their winners and losers. There is much risk. So, ETFs have become a haven for speculators, traders, and even those investors wanting to diversify some of their long term portfolio in precious metals.
With the ETFs and other paper derivatives taking so much of the investor cash, why would anyone risk buying individual stocks of companies they have no idea will perform?
Well, obviously, ETFs are not a complete substitute for stocks which are a levered play on the metal itself. Investors who choose the right stocks will gain returns in multiples of the rise in metals prices.
This occurs because miners are under-appreciated as a sector and cheap compared to spot metals prices. Miner profits are very fat. In addition, their vast hordes of in-ground, proven and probable resources makes them extremely valuable as acquisition targets, the value of which will benefit investors quite handsomely in M&A activity as resource-rich companies are gobbled up at their P&P reserves valuations.
ETF investments are also limited by the physical markets and how much gold is available. Physical market buying, which includes retirement funds, central banks, and large investor purchases, are very strong right now. Even at current prices, demand is much stronger than supply which has resulted in the long bull market.
Since ETFs must (or should) be backing their investors with equivalent gold holdings, they rely on the physical markets. With less supply than demand, any additional demand for gold and silver will raise prices and force miners to pull metal out of the ground.
This essentially brings current P&P (proven and probable) resources into the market and close the gap between the current miner valuations with their full acquisition-value prices by monetizing their in-ground inventories. This is massively bullish for the mining sector.
Since the Fed has announced both record low interest rates into 2015 and open-ended and scheduled money printing, gold and silver prices will continue very strongly to the upside. Profits will bring in larger players, such as retail traders and hedge funds to complement the central banks, retirement funds, and large investors. Gold and silver get pulled out of the ground, and miners monetize their inventories while shareholders reap the profits in both share price and dividends.
The rise in ETF popularity only contributes to miner profits and investor gains, as long as ETF funds are matching contributions with equal physical metal backing. ETF buying is a signal for increased physical demand which has to now come from miners, and is not a substitute for miner stocks. ETF demand will drive higher stock valuations in the resource-rich miners in this now very bullish market!
The end game for the fiat currencies is now known. And so, too, is the future of precious metals and the miners that produce them.