When the Fed announced that it would not immediately begin reducing (tapering) its “asset purchases,” that was a watershed moment, and it will have tremendous impact on the gold and silver markets in the years ahead.
For decades, Keynesian economists have asserted that governments can manage economies by deficit spending and money manipulation. Basic to Keynesianism is the premise that the Fed would increase the money supply (purchase assets) during recessions (and financial crises, as in 2008) and would decrease the money supply (sell assets) when the economy “overheated.”
Obviously, today the economy is not overheated, but the Fed now cannot even REDUCE the rate at which it is buying assets while the economy is growing (albeit at a slow rate). In all probability, the Fed will NEVER sell previously purchased assets as prescribed by Keynesian theory.
What has happened is that the “marketplace” is now determining Fed action.
Early in the summer, the Fed floated the trial balloon that it would begin tapering in the fall. Stocks and the metals suffered sharp price declines and interest rates begin climbing, which caused the Fed to do a lot of back-pedalling. It spewed statements that tapering in the fall was not a given, and, indeed, it wasn’t. No doubt the Fed loved seeing gold and silver prices decline, but huge drops in stock prices and rising interest rates were unacceptable.
So, here’s where we are: the Fed cannot even reduce the RATE at which it is printing new money, much less employ the lie that it can “unwind its balance sheet” by selling any of the trillions of dollars worth of Treasury bills and mortgages that it has bought since 2008.
The United States is clearly on the road to massive inflation. Andrew Dickson White, in his legendary Fiat Money Inflation in France, noted that once a country starts down the road to fiat money, it cannot be stopped.
I am convinced that gold and silver remain time-tested hedges against monetary inflation and that they are as solid today as they were in 2000, when gold traded below $300 and silver below $5.00.