Prospective on Quantitative Easing & the Effect on Gold

The Fed’s Asset Purchases
The Federal Open Market Committee (FOMC) announced another round of planned asset purchases earlier this month. The FOMC expects to buy another $600 billion in long-term Treasuries by the end of 2Q11 ($75 billion per month), in addition to the $35 billion per month in reinvested principal payments from its portfolio of mortgage-backed securities.

The Imminent Demise of the US Dollar
The world has been awash with criticism of this move, with many warning of doom and gloom and the imminent demise of the US dollar. There has been much criticism of the move in the financial press, warnings of a dramatic fall in the US dollar, and the re-emergence of inflation. Certainly, there are risks in the Fed’s strategy. However, it’s not that different from past policies.

Take a More Balanced View
We have stated a number of times that the reader must not be influenced by the daily headlines and must view the longer term trends. Our thesis remains that the US economy is the strongest in the world and will continue in its strength in spite of short term fluctuations. Investors should not be influenced by daily headlines.

We Remained Committed to Gold
We also remained committed to gold, but not to the purchase of gold itself. Rather to the purchase of shares of junior public companies involved in the exploration for, the development of, and the mining of gold. We have stated before our rational for this belief and will repeat it again in the future. But the move by the FOMC just doesn’t make much of a difference.

Here is a quote from one of the purveyors of low interest rates and easy money. Alan Greenspan recent remarks regarding gold – “(Gold is) the canary in the coal mine to keep an eye on. It is a signal there is a problem with respect to currency markets globally”. Such a comment from the man that Congress applauded and idolized for so many years should be striking fear in the hearts of the reader. However, in a speech prior to Greenspan’s rise to eminence, he advised that the reader should be investing in gold to protect wealth. So his current attention to gold is a re-affirmation of his earlier beliefs.

But the essence of the comment is that regardless of the FOMC moves, one should be investing in gold junior stocks.

Should We Fear this Quantitative Easing?
On the day of the announcement, the markets shot up and there was enthusiasm everywhere. Even the golds and the commodities rose dramatically.

Guess what? Two days later, the enthusiasm vanished and the markets gave back all of their gains for two days in a row.

Now how do we interpret this? Firstly, the great fear repeated by all of the news shows and all of the pundits, proved, as it usually does, to be completely the wrong read on the market’s reaction to the move. It is hard to come up with a more dramatic example of why the reader should never paid great attention to the talking heads. They talk nonsense usually and are wrong more often than they are right. I often ask, if a talking head really knows what is going to happen in the market, they would be an investor, not a talking head.

Quantitative Easing is Not Something Unusual.
It’s textbook economics. People have been thinking seriously about liquidity traps and how to get out of them for a long time. That doesn’t mean there aren’t controversies. Plenty of smart people have their doubts. However, comments that quantitative easing is “reckless,” “financial heroin,” or other such nonsense are not based on any theory of monetary policy.

Understanding What is Happening
On a long term basis, the more money the Fed prints, the more it devalues the US dollar (the world’s reserve currency). It’s a predictable attempt to increase economic output but only seems to make commodities trade higher. We see it week in and week out.

But what is important, is that this amount of money is not really significant in the overall scheme of things. Perhaps some tweaks to the economy or the flow of money is needed. Perhaps not. We think not, but whether the policy is correct or incorrect, the basic fact remains that the US economic powerhouse will power ahead, as it always has, and will for the foreseeable future.

Another Example of the Same sort of Nonsense – The Irish Bailout
Tonight, the ‘futures’ are very positive on the news that there is a bailout in the works for the Irish banking crisis. I sometimes have to shake my head at this nonsense. Was there ever any doubt?

So you can be sure that tomorrow the markets will have a big initial rise, and then shortly thereafter, or a few days thereafter, the markets will return to where they started.

I often wonder, if all of these movements in the markets are just moves by the big guys, to fleece more money from the average investor.