Yesterday the Federal Reserve announced a new round of quantitative easing, AKA money printing. The Fed plans to purchase $40 billion mortgage-backed securities (MBS) from banks and other lenders every month indefinitely.
The Fed is supposedly doing this to encourage lending and lower interest rates to boost jobs and the economy. In reality they’re probably doing it to save teetering banks. In my mind they’re doing it to boost precious metals. My 401K is loaded with gold and silver and a little oil and it shot up 2.83% yesterday.
Earlier we explained why Bernanke’s actions today mean that the Fed Balance Sheet will likely grow to over $4 trillion by the end of 2013. Critically this flood of liquidity will raise the nominal price of every asset (from whimsical pieces of stockholder paper to barbarous relics and black gold). Some of these assets, like stock prices and high-yield credit spreads do have point-in-time ‘value limits’ to their price – though at times it seems a dream that fundamentals would ever matter again; but some have less of a binding constraint – such as gold. Should the Fed proceed, as seems likely, and do its worst/best to blow its balance sheet wad then we estimate Gold will be priced at least $2250 per ounce by the end of 2013 (of course higher if the Fed sees no evidence of recovery). Meanwhile, deeper underground, the world’s mainstay source of energy, WTI Crude oil, could jump to record highs over $150 per barrel (which just happens to coincide with the ‘pegged’ value of oil in gold). It will be interesting indeed to see how the world’s socio-economic infrastructure hangs together should that occur – can’t happen? Different this time? Indeed it is now that Ben hit the big red ‘panic’ button.
For the sake of comparison, gold is $1767 today and oil is $100 for WTI.
The $40 billion monthly in new money printing is on top of the $45 billion monthly in new money printing for Operation Twist.
Putting it all together, the Fed’s balance sheet will increase from just over $2.8 trillion currently, to $4 trillion on December 25, 2013. A total increase of $1.17 trillion.
This is what the Fed’s balance sheet will looks like:
The Federal Reserve – the central bank of the United States – is tripling its debt in five years. That’s not going to end well for our currency. Real currencies – gold, silver, and oil – are going to appreciate in value. Stocks will probably do pretty well, too – stocks rose 1.83% yesterday. Stocks may not as well as those other things, but they’ll certainly do better than fixed assets like cash, T-bills, and bonds.
P.S. Gold mining stocks were beaten down to historically low levels earlier this year, so I dipped my toe in the water with TRX, GDX, and GDXJ. They outperformed the gold ETFs considerably yesterday.
Silver likewise did better than gold.
Silver’s way more volatile than gold, though. Last year it traded between $26 and $47 an ounce. It started 2012 at $26 and ended the day yesterday at $34. To keep from getting heartsick on the metals rollercoaster I’ve learned to put in stop orders to keep from losing profits when silver takes a header. I do that with other investments, too, but with silver you have to use stops and you have to raise them as the price rises.