Don’t Bet Against Gold or Silver

You have to respect the power of the Federal Reserve when just a statement can turn the entire stock market around in a day. Yesterday, the Fed admitted the economy was not good and in a statement said, “. . .downside risks to the economic outlook have increased.” Because the economy is tanking, the Fed promised to keep a key interest rate at near 0% for “. . . at least through mid-2013.”

The Fed is essentially handing out free money at negative interest rates for 2 years. The Fed also seemed to signal that a third round of quantitative easing (QE3 or money printing) was being considered. The Fed statement went on to say, “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.” (Click here to read the complete Fed statement, released 8/9/11.) With interest rates near 0%, the only “tool” left with any torquing power for the economy is money printing. The buck will be burned.

The stock market loved the announcement, but anyone holding dollars was left with a sinking feeling.

Bloomberg reported yesterday, “The dollar tumbled the most in at least 40 years against the Swiss franc after the Federal Reserve pledged to keep its key interest rate at a record low . . . The greenback declined versus the majority of its most-traded peers as the Fed said growth was “considerably slower” than it expected and it’s prepared to use a range of policy tools to boost the economy.” (Click here for the complete Bloomberg story.)

The gold market has been hitting one new all-time high after another because of past, present and future money printing. I think big money is panicking into the gold market for safety. Sure, the Treasury market is the biggest and most liquid on earth, but how safe is it when the U.S can print trillions of dollars at will to pay its bills?

It is not the small investor that’s causing $50 a day spikes in the gold price. Hedge funds, sovereign wealth funds and central banks are the ones doing the buying and shooting the gold market higher. Recently, South Korea bought 35 tons of gold, and Mexico bought 93 tons of the yellow metal. Why don’t these countries just hold Treasuries in reserve? In the past few years, India, China and Russia have all been adding to their gold reserves. EU nations have stopped selling their gold, and with the sovereign debt crisis in Euroland, who could blame them. Italy and Spain are teetering on collapse. Don’t be surprised if the European Central Bank prints money and bails them out too.

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