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.
Sure, but why have the prices (in $US) of gold, silver, platinum, palladium, and even rhodium all fallen over the last 2-3 years, all while QE has continued/expanded unabated?
If falling metal prices are due to deflationary-forces associated with high unemployment and continued lack of confidence that the economy is going to recover, might this price-depression in precious metals continue until the end of the Obama presidency? And if Hillary wins (God-forbid), might it continue ever onward?
Many factors influence prices of the metals complex, but that they have fallen in near unison over the last 2-3 years suggests a macro effect, as opposed to a micro effect such as over production. First, toss rhodium because it is not a monetary metal. Actually, platinum and palladium have scant history of having been used as money; however, they follow gold/silver prices except during exceptional instances, such as production problems, which caused them some years ago to more than double the price of gold. Now, on to issue of falling gold/silver prices over the last 2-3 years.
First, all bull markets have periods of corrections, meaning price declines within an overall bull market. Because its gold we’re dealing with, we have to recognize that the government (and the Fed) do not want to the price of gold to “get out of hand” for that causes our fiat dollar to receive attention. During such times, more and more people become educated as to the dangers of fiat money. Although it is rarely mentioned (forgotten?), in the mid-1970s the US Treasury and the IMF sold gold (via auctions) with the express purpose of keeping the price down. Why would the government not want the same now? This time, though, the job has been passed to the bullion banks, who, apparently, have been given get out of jail free cards. So, in 2011, with the gold/silver markets a little overheated, the banks sold short, reaped huge profits and made the people at the Treasury and the Fed happy.
Deflationary forces? Falling prices do not necessarily mean deflation is upon us. Prices declines are common in commodities markets, as noted above. Deflation comes about as a result of a shrinking money supply, which certainly is not the case today. $85 billion a month is being added to the US dollar supply, not to mention the currency additions in Europe, the UK, Japan and China.
The price declines over the last few years represent a lull in the storm.
To RK in TX, I agree with Bill.
Also, with respect to this question: “And if Hillary wins (God-forbid), might it continue ever onward?” The answer is NO: it cannot continue ever onward! Consider the basic law of supply and demand but with a twist. If prices are manipulated LOWER than the market will bear, product SHORTAGE will occur. If prices are manipulated HIGHER than the market will bear, then product SURPLUS will occur. Low prices simultaneous with monetary expansion is not rational market behavior. An expansion of the money supply, which is by definition inflation, must eventually result in an increase in aggregate prices. This will continue as long as the powers that be can possibly prolong it.
Expansion of the money supply via the various QEs is very similar to opening a head-gate at one end of a river with a torturous path that dumps in a lake at its end. The sudden increase in water supply is not immediately recognized by users at various locations along the river and does not immediately begin to increase the level of the lake. Those closest to the head-gate get to enjoy the liquidity without suffering the ill effects of the rising lake. When it becomes evident that water in the lake is rising fast and may soon spill out, devastating homes and flooding the neighborhood, shutting off the head-gate does not immediately stop water in the river from flowing into the flooding lake and damaging the nearby community. Depending on how long the river is, there could be enough water flow after shutting off the head gate to flood the whole community so everyone moves on. This is the road to hyperinflation.
The longer prices stay low and QE stays high, the less likely it is that the dollar will survive. Prices of physical gold and silver are generally diametrically opposed to strength of the dollar. USD prices of all commodities will be much different in the future than they are today. So long as the floodgate is open, probability continues to increase that future prices will be much higher. Probability also continues to increase that the entire community will eventually be flooded thereby forcing everyone to move on.