The Fed's new money-printing scheme is one we expected and can now say is a market-moving fact for our sector. Gold is up sharply – which was highly predictable; but what happens next?
Casey Research Chief Economist Bud Conrad has a look and tells us what he thinks. This is important reading for all investors in metals and mining – and for all investors in general. I urge you to pass this article along to friends, investors you know, and others who should see and understand what's happening and what it implies.
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||53.86||43.93||63.17|
|Gold Junior Stocks (GDXJ)||24.68||19.84||35.91|
|Silver Stocks (SIL)||24.85||19.04||26.77|
|TSX (Toronto Stock Exchange)||12,499.47||11,853.61||12,293.38|
By Bud Conrad, Chief Economist
As you've undoubtedly heard, the Fed announced a new quantitative easing (QE) program on September 13, 2012. It will purchase $40 billion of agency and mortgage-backed securities (MBS) per month until the labor market improves. This amounts to a substantial $480 billion per year, and there is no specific limit on how long the program will last.
To get a picture of what that continuing policy might look like, I extended the balance sheet of the Fed's assets at that $480B per year out to 2015, keeping all other items unchanged. The Fed said it would be rolling over existing debt as it matures and actually buying $85 billion of assets per month. The crosshatched triangle shows the accumulated growth of the MBS from such a program. By 2015, the Fed balance sheet would grow to $4 trillion, from under $3 trillion today.
(Click on image to enlarge)
This is a huge rise, and the market reactions were big, as would be logical: On the first day, gold was up $40, Dow stocks up 200 points, crude up $1, and the dollar weaker with the euro rising.
Further, the Fed promised to keep its overnight rate at close to zero for an additional year, through 2015. This is consistent with the big MBS purchases of QE3 above, as it will need to keep adding liquidity to force rates to this low level. Just looking at the length of its promise shows how powerful the distortion can be, and how this unprecedented period will challenge the Fed's very ability to keep its promise.
(Click on image to enlarge)
Some say the Fed panicked. I say it is business as usual. It is required to keep rates low to avoid the government going bust, which would happen if it had to pay too much interest on its debt. The Fed has essentially promised to destroy the dollar to keep supporting the banks and to keep the government alive, with debts that the political parties have no way of coming to an agreement on how to fix. The Fed has clearly told us what to expect.
The trajectory is unsustainable. I believe that during the promised time frame to 2015, there will be a new downgrade of US debt, that the Fed will print at least as much as indicated above, and that confidence in the dollar will erode even more. It has happened to many countries before.
The only safe haven is the real money: gold. Not only do the Fed's actions imply that its price is going a lot higher, but gold is the one asset that can financially protect you from inevitable government intervention that will weaken the dollar and dollar-denominated investments.
While QE3 bodes well for gold, a little-known anomaly in the metals market is presenting an even better opportunity for investors.
Gold neared $1,770 an ounce on Thursday, September 13, rising 2% after the Federal Reserve launched an aggressive stimulus program and promised to keep buying assets until the outlook for jobs improves substantially.
Silver was up 3.6% to $34.46 per ounce. Spot platinum rose 2.8% to $1,682.49 an ounce, while spot palladium climbed 2.9% to $690.20.
The announcement was long anticipated by the market and was among the main price drivers since this August. As Bud states above, further stimulus debases the dollar even more, drawing investors to gold and its longstanding store of value.
With gold on the rise again after many disappointing months, the optimistic price forecasts are back.
Gold reaching $2,000 within 12 months is expected by Barrick Gold (ABX) CEO Jamie Sokalsky, Goldcorp (GG) CEO Chuck Jeannes, and Newmont Mining (NEM) CEO Richard O'Brien.
While gold-mining CEOs all have a vested interest in claiming the gold price is going higher, we don't disagree. Their reasons are similar to ours: destruction of the currency, gold's lasting value as an inflation hedge, and continued global economy uncertainties, including the ongoing crisis in the Eurozone.
The situation in South Africa is getting downright ugly. Mametlwe Sebei, a leader of the striking South Africa platinum miners, called workers to go on a national strike to "bring mining companies to their knees." The general strike is planned to start in Rustenburg, with workers marching to the Union Buildings, the seat of government in Pretoria.
The news sent platinum on its biggest one-day rally in a month on Wednesday, September 12. The price has risen nearly 20% since a strike at Lonmin turned violent last month. However, slowing demand from the European car industry – the world's leading industrial consumer of platinum – may keep a lid on the price.