Gold Rallies In Anticipation Of Federal Reserve Decision To Continue The Policy Of "Quantitative Easing" Meaning Massive Amounts Of New Dollars To Be Printed
Gold rallied $15 per ounce Friday in anticipation of the Federal Reserve's decision to further devalue the dollar by super-high "quantitative easing" (QE) - which is their euphemism for "monetizing the debt" or, more plainly speaking, printing dollars with a vengeance. Meanwhile, silver reached another 30-year high at $24.77. Gold rose by a total of 2.5% last week, capping a 3.7% total return in October, following monthly gains of 5.6% in August and 5.0% in September. Silver gained 13% in October, following 12% in September and 7% in August.
Investors are Buying the U.S. Treasury's Phony Inflation Hedge
With gold soaring 15% in the last three months and silver up 35%, investors are now flocking to the U.S. Treasury's phony inflation hedge, the so-called Treasury Inflation-Protected Securities ("TIPS"). TIPS add the offer price to the CPI for total returns. Last week, the Treasury sold $10 billion of its 5-year TIPS at a negative yield (-0.55%) for the first time in history. That means the Fed will only guarantee 99.45 cents on the dollar, barring a future rise in the CPI (Consumer Price Index), which would raise the yield.
The reason this is a "phony" inflation hedge is that 40% of the CPI is tied to real estate prices, which are still deflationary, due to the real estate bubble. Even if prices go up in the remaining 60% of the CPI, the net CPI could still be flat, due to falling real estate prices. Last week, for instance, the Case-Shiller index of home price fell in 15 of the 20 metropolitan areas that they track. Due to an excess inventory of millions of empty and unsold homes, housing prices should stay down, keeping the CPI gains ultra-low.
It's amazing that when gold offers a real, proven inflation hedge, millions of investors choose a net loss or break-even with a phony inflation index instead of the "real thing." The problem is that most investors just assume that a new wave of Fed "quantitative easing" will guarantee rising inflation. Not necessarily.
Even though "helicopter Ben" once said we should drop dollars out of helicopters if necessary, Milton Friedman once said "you can't push a string," meaning that more money alone does not cause general price inflation. Ben Bernanke disagrees, thinking that if you print enough money you will never have to suffer another Great Depression. For instance, he said last week that Japan did not do enough to fight its deflation in the 1990s - a comment that reveals Mr. Bernanke's primary fear: Deflation, not inflation.
Meanwhile, the rest of the world is trying to do the "right thing," by cutting government programs and raising rates to fight inflation, not deflation. This difference in strategy has led to a weakening dollar and a stronger euro, and other currencies. Mr. Bernanke of the Fed, Tim Geithner at Treasury and our over-spending Congress and President are in effect destroying the dollar, which pushes gold up in dollar terms.
Kathy Kristof of The Los Angeles Times quoted Michael Fuljenz on consumer protection in their Sunday Business Section article about gold. Fuljenz said "Just because you see an advertisement on your favorite network doesn't mean that the company has been vetted" and "If you don't know a lot about gold, you should at least know a lot about your gold dealer."
Bloomberg's Business Week covered the precious metals in its October 18-24 edition with "An Analyst's Case for Why Gold Could Keep Climbing." Last year at this time, Barry Ritholz, CEO of FusionIQ, predicted $1350 gold by now, a year later. At the time, gold was barely over $1,000 and his prediction seemed unusually high for a mainstream analyst. But after gold reached $1368 on October 13, Business Week followed up, asking him for his next predictions. Ritholz cited three methods for valuing gold, saying "All three of the metrics suggest gold has not yet reached its highest potential price. Slapping a $2,000 target is not unreasonable and breaching its inflation adjusted target of $2,358 is also possible."
The three metrics which Ritholz uses to show gold to be undervalued are: (1) The value of U.S. gold holdings as a percentage of money supply. This shows gold to be at its cheapest price, as a percent of money supply, since 1968. (2) The ratio of the gold price to the S&P 500 index shows gold trading below its long-term average ratio to stocks. Gold should trade at about 1.5 times the S&P (at 1183), implying $1775 gold today. (3) The inflation-adjusted gold price is currently well below its $2,358 peak in 1980.
The Wall Street Journal included an editorial last week by Charles W. Kadlec on "Gold vs. the Fed: The Record is Clear." This provides a clear argument against the Quantitative Easing debate now raging at the Fed. Under the gold/dollar standard postwar years, through 1971, real growth was 4% per year, inflation was under 2% a year and unemployment never reached 7%, averaging 4.7%. In the years since Nixon cut the dollar's link to gold, our recessions have deepened, with 9% unemployment in three super-recessions (1975, 1982 and currently). Since 1971, inflation averaged 4.4% a year, interest rates soared and growth slowed. There were 10 global financial crises since 1971, but none in the 25 years under gold's guidance. Since 1971, the dollar is down 72% to European currencies, 75% vs. the Japanese yen and 97% to gold.
New Orleans Summary: Higher Gold, no True Political Reform
At the 36th annual New Orleans Investment conference last week, most speakers were bullish on gold, bearish on the dollar and super-bearish on the chances for realistic political reform, even if the Republican challengers take control of the House and possibly the Senate. There is no committed philosophical devotion to the kind of dramatic spending reduction required to seek a balanced budget within a decade or two. Any realistic reform would involve reducing entitlements as well as cutting waste, fraud and abuse.
Turning to gold, the New Orleans precious metals panel has been accurate over the last few years. Last year, they predicted $1200 to $1500 gold, and today's $1350 falls right in the middle of that range. This year, the panelists thought $2,000 was not an outlandish expectation for 2011, and $2,500 is possible. Mary Anne Aden and Pamela Aden said that gold and silver are in the fairly early stages of a very long bull market, likely lasting 20 years or longer, and that the metals are currently entering the "blast off" stage.
One theme brought all speakers back into harmony and that was the fact that the current U.S. government policies are destroying the dollar, pushing up gold and other commodities in dollar terms. It would take a revolution of political will to change that fact. The revolution would involve a commitment to austerity in government, radical cuts in spending, and an abandonment of addiction to easy money via Quantitative Easing, resulting in a short-term serious recession but longer-term health for the economy and the dollar. We'll revisit these predictions and views in twelve months.
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