Federal Reserve Chairwoman-Janet Yellen today raised the Fed funds benchmark rate .25% but said that she does not see economic growth gaining speed. The world is concerned about the staggering amount of global debt, much of it created by the Federal Reserve during its socialized money creation known as Quantitative Easing. Confidence, the great driver of economic expansion in free market capitalism, is largely absent today. Dubious social financial engineering has stalled out a strong economic recovery, and we will continue to see more investors move into gold and silver among other hard assets.
Today, the U.S. dollar as a fiat currency (not backed by hard assets), is accepted as trade for goods and services, based on the faith in the fiscal strength of the U.S. Treasury, and the Federal Reserve. An economic historian is aware that the U.S. dollar was backed by gold for many years including the period from 1900 through 1933. In January of 1934 the Gold Reserve Act raised the exchange rate of gold from $20.67 to $35 per troy ounce. This 70% rise in value of gold- created an incentive for gold owners outside the U.S., to redeem their gold for this windfall in dollars. The dollar was devalued intentionally by President Roosevelt, in the hope that deflation would be defeated, and inflation would rise.
In the late 1960's and into the 1970's, the U.S. experienced high inflation. Amidst a run on U.S. gold, in 1971 President Nixon suspending the direct international conversion of dollars into gold, and initiated price controls. Price controls are ineffective since they distort the relationship between supply and demand for goods and services. Inflation rose into double digits, and the price of gold quadrupled from $226 per ounce in 1978 to $850 in early 1980. Precious metals such as gold and silver, come under heavy demand, during times of economic distress-particularly when the dollar is losing its value measured in the cost of goods and services.
Fast forward to 2017, and the Federal Reserve has inflated the world with dollars through the use of Quantitative easing. The QE program sounds pleasant enough, until one looks at the staggering $19 trillion in debt that has been created by the Fed. Economic growth is reported at anemic levels of GDP figures often less than 2%, and some are questioning the accuracy of these figures that are often revised downward. These low reported growth figures, are not at levels that adequately support employment of new workers looking to enter the workforce.
I believe that people have lost confidence in the institutions of central planning-particularly the Federal Reserve, and also the Wall Street banks. President Trump did create some renewed hope, but his policies initiatives are already being opposed by the dethroned Democrats, as well as his own party.
Capitalism enables private citizens to make their own economic choices through a free market of exchange. Prices are set rationally based on supply and demand, and not by a central government, nor a central bank. As the European Union Central Bank, and the Federal Reserve continue to inflate their money supplies-the risk of crippling inflation of prices, becomes an almost certainty. Former Federal Reserve Chairman Paul Volcker said, "The truly unique power of a Central Bank, after all, is the power to create money, and ultimately the power to create is the power to destroy."
The miners with strong balance sheets (little to no debt) will continue to prosper as China, Russia, and India are among many countries that are purchasing large stocks of gold and silver-to potentially back their currencies, while diversifying away from the dollar. The three largest reserve currencies are the U.S. dollar, the Euro and gold. Since the top two currencies are under significant debt pressure, there will be more demand for gold.
As an investor, I continue to own miners such as McEwen Mining (NYSE:MUX), and Pan American Silver (NASDAQ:PAAS), based on their strong balance sheets and savvy management. McEwen CEO-Rob McEwen is predicting gold will move towards $5,000 an ounce over the next few years-as he believes the U.S. will attempt to reflate the economy under President Donald Trump. Since the gold price is at $1,200 per ounce today, a move toward $5,000 would be at the same percentage jump-as what we saw in the 1978 to 1980 period. The junior gold mining stock prices exploded along side the strong rise in precious metal pricing. I believe we will see a similarly strong move to the upside.
The only threat to my thesis, would be if the United States declares that it will abolish the Federal Reserve, and/or return to sound money practices. This would require a move away from the welfare state programs that dominate the spending. I see little hope that such fiscal sanity will prevail any time soon.
Disclosure: I am/we are long PAAS, MUX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.