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Why the Fed is checkmated already in this game of Chess (sound money)

May 18, 2011 9:56 AM ET
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waf76's Blog
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Silver will be on sale for the rest of the 2nd quarter and most of the 3rd quarter heading into September where I see a precious metal rally taking hold.  During this timeframe there will be three events unfolding that I will be paying particular close attention to.

  1. Paper vs Physical Price of Silver
  2. Physical Supply of Silver
  3. Fed's Policy after QE2 ends

As the spot price remains in the mid 30's, we will continue to see premiums well over $5.  At $35 silver, $5 represents a 15% premium.  I've seen premiums as high as $6.99 which represents a 20% premium. On eBay there is easily a 25-30% premium on American Eagles, Canadian Maple Leafs, and other Government minted coins.  You will also see heavy premiums on silver rounds. 

These mark ups have not deterred silver buyers.  In fact the buying breadth is so strong that it has impacted delivery times.  Expect wait times of 3-4 weeks for a roll of American Eagles.  Most silver investors recognize the opportunity for what it's worth and are more than happy to pay $40 per coin including the premium when last month $50 per coin was the price you'd find 1 oz American Eagles on most websites (i.e. Gainsville, Apmex, NWT). 

As the price has declined I've also noticed eBay sellers pulling their supply of 2011 American Eagles.  You normally can do an eBay search of 2011 American Eagles and you will get hundreds of listings but now if you do that you get Maple Leaves.  The American Eagles are in very short supply.

This brings me to bullet # 3 that I would like to go in depth on.  That is what will be the Fed's policy once QE2 ends? To me the answer is quite simple, more stimulus.  While a very short term deflationary cycle might be upon us, it won't be because of an interest rate hike.  The Fed fears deflation the most.  The Bernank would rather drop money from out of helicopters than to see a protracted period of deflation.  He also has these issues to consider:

  1. The trillion and trillion of dollars in derivative debt.  Most of these are owned by JPMorgan, Bank of America, Wells Fargo, and Citibank.  An interest rake hike would kill the TBTF banks.
  2. Interest rake hikes would effectively kill the housing market pushing down home prices further.  More people will start defaulting especially as ARMs reset.  More people will walk away as they see they are fighting a losing battle paying their mortgage and their home value continues to sink further and further.
  3. Credit card defaults will be on the rise as the credit card companies (mostly TBTF again) raise their rates.
  4. A collapse of the Treasury market as the Fed is essentially the sole buyer purchasing US Debt.  A shutdown of the government and/or possible default may occur.
  5. The stock market will fall, highly leveraged market participants will be squeezed and be forced to sell exasperating the stock drop and further contracting credit
  6. Political grandstanding by politicians will put the Fed in their line of sight as they look for a scapegoat for the current crisis.
Market factors are working against the Fed.  Other countries only have so much patience with the US.  They are currently subsidizing our standard of living. Unless the US gov't implements painful, unpopular austerity measures, the US debt is unsustainable. 

Interest rate hikes will make financing the debt the largest budgetary item besides Social Security and Medicare only rivaling defense spending.  As Americans are unwilling to cut SS, Medicare, or Defense spending (more like Offense), the Fed's decision to devalue the dollar in order for the gov't to at least pay its obligations in form rather than substance becomes a no brainer.  The dollar's decline will continue and it will be rapid with the occassional dead cat bounces. 

The Fed will not be able to collude with other Central Banks in the future. At some point they will start raising rates irrespective of what the Fed does. Everyone will have to save their own hind.  They don't need to prop up a phony housing market in order to keep their banks solvent the way we do. As rates rise in other countries, capital will flow out from the US.  It's just as Jim Rogers says, you go where the money is. In the currency debasement battle, the Fed wins as the US dollar will plummet the most.  Sound money like silver will profit greatly as people will want to get out of the dollar. 

If you know anyone who has a great deal of savings in the bank please let them know what is coming down the pipe because those are the people, including our elderly population, that will be hurt the most.  The transfer of wealth is in set-up phase.  Time to get ready.


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