Fed Monetizes Debt Leading Investors to Embrace Gold


"For the month of January, GLD gold holdings rose 8.2% or close to a record setting 63 tonnes."

In January gold rose significantly against all major world currencies. In most currencies, except in the U.S. dollar and the Japanese yen, gold actually made an all-time-high.

January Performance:
  • GOLD / USD 5.3%
  • GOLD / EUR 16.7%
  • GOLD / AUD 16.5%
  • GOLD / JPY 4.4%
  • GOLD / GBP 5.8%
  • GOLD / CHF 16.3%
  • 10-Yr Yield 13.0%
At the same time, most capital markets have been falling.

January Performance:
  • DOW -11.5%
  • S&P -11.4%
  • NASDAQ -9.0%
  • FTSE -6.4%
  • DAX -9.8%
  • Nikkei -9.8%
  • Shanghai -9.3%
The governments around the world are trying to take initiative while private capital is sitting on the sidelines, preferring the safety of government bonds and precious metals.

Investors typically do not trust the governments to implement any effective economic solutions. Moreover, this lack of faith in central planning continues to grow since the U.S. government has no other plan of action than to save the old, compromised and untrustworthy financial system. What the Federal Reserve together with the Department of Treasury has shown is that they will inject a vast amount of newly created money into a hugely ineffective financial system.

While in the fall of last year, in fear of devastating deflation, analysts were competing in downward projections for the price of gold, now the competition is to estimate the amount of losses incurred by the financial institutions around the world. The maximum assessment is now at $4 trillion, with Nouriel Roubini coming in close second at $3.6 trillion.

The lack of trust in the ability of insolvent financial institutions to run the modern financial system is moving investors into gold.

An even more important gold catalyst was the Federal Reserve. In comparing the two latest Fed statements, two things stand out. Here is the evolution in wording:
  • December Statement: "In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters."
  • January Statement: "In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
  • December Statement: "The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities."
  • January Statement: "The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
First, the FOMC sees a threat of deflation and second it is prepared to counter this threat by purchasing longer-term treasuries.

Purchases of long-term bonds is the most inflationary move that a central bank can undertake because it represents direct monetization of the government debt and, hence, an unconcealed debasement of national currency. (This is happening at the same time as the new Secretary of Treasury is chastising China - the main U.S. creditor - for currency manipulation.)

Gold investors are sniffing out the coming price reflation, as they piled into the SPDR Gold Shares (GLD) at an increasing rate.

For the month of January, GLD gold holdings rose 8.2% or close to a record setting 63 tonnes. At this rate, GLD will soon surpass Switzerland in its gold holdings, thus becoming the world's sixth largest gold owner after the U.S., Germany, the IMF, France and Italy.

If the Fed continues to purchase long term treasuries, it is clear that there is only one way for gold and gold stocks and it is up.

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