As The Fed Continues Printing Money, Sprinkle Gold And Silver On Your Portfolio

Includes: GLD, PAAS, SLV, SPY
by: Duru

For those who have paid attention to the words of Federal Reserve Chairman Ben Bernanke, it is no surprise that money-printing continues to be the response to persistently poor economic performance. I became aware of Bernanke's now famous 2002 speech "Deflation: Making Sure "It" Doesn't Happen Here" in late 2008. In response, I wrote "America Will Print As Much As It Takes." This piece solidified my bullishness on gold and silver. I have marveled at how gold bears ignore thousands of years of human history that has relied on gold and silver as stores of value. Presumably, they believe that we "moderns" have finally figured out how to print money and manage its value properly through the omniscience and benevolence of a centralized monetary authority. While I am not an anti-Fed zealot, the mirage of the "Great Moderation" was enough to erase any lingering over-confidence I had in the value of paper money.

Now, we are closer than ever to some kind of "end game" for paper money, an ultimate test of monetary resolve. The Federal Reserve has now written a blank check for the American economy, promising to apply quantitative easing until the economy responds:

"If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases."

Under such a regime, holders of cash have almost no choice but to find inflation hedges or otherwise bear down the threat of on-going dilution by the printing press. The Federal Reserve's resolve is all the more clear in its willingness to ease policy even with the S&P 500 (NYSEARCA:SPY) sitting around 4-year highs. Across the Atlantic, the European Central Bank (ECB) has promised to buy sovereign bonds in unlimited quantities. While the ECB has also indicated it will sterilize these purchases, the concept of a boundless realm for monetary policy is taking hold as the globe's economic problems prove deeply entrenched. Japan has struggled for years to keep pushing monetary bounds ever outward, and now the Chinese, backed by mountains of reserves, seem locked into rapid cycles of stimulate, cool, and stimulate again.

Under these conditions I think gold and silver should get more popular than ever. Fresh highs are around the corner. The gold bears who held their umpteenth celebration of the end of gold's 7+ year breakout will be proven premature yet again. Since Greenspan, the Federal Reserve has become the gold and silver investor's best friend. New buyers for precious metals will come from those who assumed that the Federal Reserve would not dare ease further and/or those adamantly opposed to further easing for its potential inflationary threat.

Here is a reminder of gold's bull market using a 20-year chart of gold from the World Gold Council:

The era of easy money has been very good for gold

Source: 20-year The World Gold Council

As you can see, the era of easy money has provided few choice opportunities for hopping aboard the gold bull (further compounding the frustration of gold bears). The financial crisis presented the last fantastic buying opportunity. In another year or two, we will appreciate the past year as another one of those rare choice buying opportunities.

Zooming in on SPDR Gold Trust (NYSEARCA:GLD), we can see gold's most recent breakout and the achievement of a first milestone of recovery: the erasure of all the losses starting from the big sell-off February 29th.

Gold has broken out, confirming a successful test of recent support

Here is the breakout in iShares Silver Trust ETF :

Silver's bounce from recent lows is now confirmed by its breakout

Given silver is not yet performing as well as gold, it might present an even better buying opportunity. My favorite silver miner, Pan American Silver (NASDAQ:PAAS) has also achieved important price milestones: A break above its 200-day moving average (DMA) and a higher high. I last made the case for PAAS in "Pan American Silver Remains A Cheap Play On A Recovery In Silver Prices."

The strong recovery in Pan American Silver continues

Source for charts:

It might be tempting to think that stocks are the best place to hide. In general, they should do well as fresh money inevitably finds its way into the stock market. However, when priced in gold, we see that stocks have been a relatively poor store of value since the bubble burst in 2000. In fact, when priced in gold, the bubble in stocks looks particularly egregious.

When price in gold, the S&P 500 remains at levels last seen in the nascent years of the last big bull market

Source: S&P 500 prices from Y! Finance, gold prices from The World Gold Council

Zooming into recent years makes it clear that the S&P 500 has barely recovered from the historic crash in 2008 and 2009. In fact, the S&P 500 made new lows during last year's version of euro-driven panic. The rally from those lows seems to be coming to an end as its momentum ended months ago.

The S&P 500's rally versus gold from 2011's historic lows appears to be ending

Source: S&P 500 prices from Y! Finance, gold prices from The World Gold Council

With these charts, we can see that the Fed's race to print is not only an effort to get the economy to respond to monetary stimulus, but it is also a race against the appreciation of gold. It is a cycle that the Federal Reserve is losing even as fears of a deflationary collapse remain just as stubborn as the Fed's printing press.

I am not recommending buying gold instead of stocks. I am also not pinning a "fair value" for the S&P 500 priced in gold. I am just emphasizing that gold and silver need to be part of your "cash is trash" investing/trading philosophy.

In the past few years I have tried to get cute with my gold and silver investing by trading around a core position. For this next run in gold and silver prices I see little benefit in trading except to buy the dips.

Be careful out there!

Disclosure: I am long GLD, SLV, PAAS. 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.