What the Fed's Announcement Means for Gold


". . .you should be owning gold and silver as a hedge against desperate actions by the central banks."

The surprise move to quantitative easing by the Federal Reserve yesterday caught the market unaware. The $300 billion bond purchase sent gold prices jumping $50 an ounce and must have given a few gold bears a nasty awakening.

Gold prices will surely now go higher as the market digests what the start of printing dollars means for the USA. The Bank of England started printing money a week earlier and its success in lowering yields perhaps encouraged the Fed to take this step into the abyss.

An inflationary abyss is what opens up if these central banks have got their calculations wrong. Or is it that the central banks now think their banking systems are in such bad shape that a good dose of inflation is the only thing that will sort them out?

The Fed sent bond yields tumbling 0.5%. However, the U.S. dollar also took a 3% tumble, following the pound in yet another competitive global devaluation.

Buying up your own debt is no more useful than swapping one credit card for another. It is nothing close to sound finance.

You flood an indebted banking system with money, you get inflation and the relative value of fixed debt goes down.

But this is not a magic bullet. If you are an investor, your dollars become worth less, and eventually worthless.

That is why the gold price jumped yesterday. And it is going to go a lot higher as investors reach for a safe haven. Beware being left sat on cash when you should be owning gold and silver as a hedge against desperate actions by the central banks.

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