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Negative Interest rates, Euro disintegration, fuel Gold’s historic rallyGary Dorsch The Federal Reserve has just ended its $600-billion Treasury bond-buying program, known as QE-2, and already, traders are trying to figure what new tricks the Fed might have up its sleeve, in order counter a significant correction in the US-stock market in the second half of 2011. Including QE-1 and QE-2, the Fed pumped $2.35-trillion into the coffers of the Wall Street Oligarchs. Together with near-zero interest rates, and the printing of trillions of dollars the Fed fueled a speculative stampede into the commodity and stock markets, enabling traders to record bumper profits, while doing little to reduce the jobless rate. Significantly, upon launching QE-2 in Nov ‘10, the Fed said that it was deliberately seeking to raise the inflation rate in a calculated bid to encourage a further sell-off of the US-dollar’s exchange rate. One result of the Fed’s QE-2 scheme was triggering a flood of hot money into the currencies of the Emerging economies, such as Brazil, China, Chile, Russia, and Korea, (BRICK), where interest rates are much higher than in the G-7 markets. Central banks in the BRICK countries are now caught in a vicious cycle, forced to lift interest rates, to fend off the inflationary pressures that are blown their way, by QE in England, Japan, and the US. The latest explosion in commodity prices has lifted the Continuous Commodity Index to new all-time highs. A good portion of the global surplus of cheap cash is being funneled into crude oil, copper, cotton, Gold and Silver, and food staples such as wheat, corn, rice and soybeans. The world’s most actively traded commodity, - crude oil, has risen to dangerously high levels that if sustained, could derail the global economy, and knock the European, Japanese, and US economies into recession. Despite desperate maneuvers by the US-government to cap the rise of crude oil, such as releasing 30-million barrels of crude from the strategic petroleum reserve in the month of July, the price of North Sea Brent, the world’s benchmark, is resilient, trading above $110 /barrel, and could climb to $140 /barrel, if the Fed launches QE-3.
By locking the fed funds rate near zero-percent, and vastly expanding the supply of US-dollars into the banking network, the Fed was able to engineer a doubling of the value of the S&P-500’s Index from its March 2009 lows, and lifted the Dow Jones Industrials, to as high as the 12,800-level, to levels that prevailed shortly before the collapse of Lehman Brothers. Yet when seen through the prism of Gold, and measured in “hard money” terms, the US-stock market’s rally was in essence, - a monetary illusion. In fact, 1-share of the Dow Industrials can only fetch 7.8-ounces of Gold today, little changed since the lows of March 2009. The Fed was aiming for a “wealth effect” that could lift the animal spirit of US-households, as their brokerage portfolios increased in value, and thereby encouraging them to spend more money in the economy. The Fed got a lot of bang for its buck with QE-2, lifting the S&P-500 index +35% higher. Unfortunately, the stock market gains went disproportionately to the wealthiest 10% of Americans, who own more than 80% of outstanding stock. For the remaining 90% of Americans there was little trickle down from QE-2. Last month, a CNN poll found that 48% of Americans believe another Great Depression is somewhat or very likely. According to a recent opinion poll of 24 bond dealers that trade directly with the Fed, only 20% though the Fed would unleash QE-3 within the next 12-months. St. Louis Fed chief James Bullard said on June 30th, it could take up to a year for the Fed to correctly gauge the effects QE-2 on the US- economy. So it came as a bit of a shock, when on July 13th, Fed chief Ben “Bubbles” Bernanke telegraphed to the markets, that the Fed stands ready to launch QE-3 if the US-stock market runs out of gas, and needs more high octane fuel. “The possibility remains that the recent economic weakness may prove more persistent than expected and deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told the House of Representatives on July 13th. “Given the range of uncertainties about the strength of the recovery and prospects for inflation over the medium term, the Fed remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate,” he said.
By opening the door to QE-3, as early as the fourth quarter of 2011, the Fed chief ignited a powerful surge in the precious metals markets, lifting gold towards $1,600 /oz, and snapping the silver market back to life, - surging higher above $40 /oz. Precious metal investors can hardly believe their good fortune, - the Fed chief is QE addict. Just two weeks since the end of QE-2, the Fed chief was already begun to feel the ill effects of QE withdrawal symptoms, and has an itchy finger to print more money. “Quantitative Easing” (QE), is the nuclear option of central banking. Central banks that experiment with the hallucinogenic QE-drug are in fact, monetizing debt, and attempting to keep long-term bond yields locked at artificially low interest rates, regardless if the underlying inflation rate surges sharply higher, due to the expansion of the money supply. The Bank of Japan (BoJ) for instance, has succeeded in driving the yield on Japan’s 10-year government bond (JGB) to as low as 1.05% this week, even though the supply of Japan’s debt, has mushroomed to 230% of Japan’s GDP, - and its debt rating has been cut to AA-. “Even with the federal funds rate close to zero, we have a number of ways in which we could act to ease financial conditions further,” Bernanke added. What’s little recognized by the unsuspecting public is that with QE-2, the Fed ventured deep into new unexplored territory, by the slashing yield on the 1-year US T-bill a stunning -250-basis points, to a record low of (negative) 3.40-percent. The “real” rate of interest fell sharply as consumer and wholesale prices turned sharply higher, fueled by booming commodity prices. At the same time the Fed was slashing the real rate of interest by 250-bps, it was also pumping $600-billion of “high powered” money into the coffers of Wall Street’s Oligarchic banks and hedge funds, that in turn, pumped the ultra-cheap money into commodities, equities, and Gold and Silver.
It’s not just in the US-money markets, where the “real rate of interest,” adjusted for inflation, is dropping sharply lower. In Shanghai, the inflation adjusted yield on China’s 1-year T-bill rate has plunged to (negative) 3%, from positive +12-basis points, about 1-½ years ago. Five quarter-point rate hikes by the People’s Bank of China (PBoC), lifting its one year loan rate to 6.56% on July 6th, have only acted to stem the slide in the real rate of interest on Chinese T-bills, and short-term bank deposit rates, since the PBoC is lingering far behind the increase in the underlying rate of inflation in China. China’s annual inflation has accelerated to a 3-year high of +6.4% in June, leaving inflation-adjusted interest rates deep in negative territory. That encourages savers in China to funnel their money into inflation hedges such as Gold. Worryingly, there are signs that a weak US-dollar and expectations of QE-3, is still buoying key global commodity prices near record high levels. Furthermore, traders generally suspect that Beijing typically understates the true rate of inflation in the country, while overstating the strength of its economy, when reporting its statistics. So with a backdrop of deeply negative interest rates, the price of Gold has risen dramatically in Shanghai, to a record 10,400-yuan /oz, up nearly +50% from a year ago. The State Information Centre said in a lengthy report in the official China Securities Journal on July 13th, that rising food prices are hurting consumer confidence and squeezing their spending power, thereby undermining the economy. “China’s real deposit rate has been negative for 16-months and prices are still climbing. We suggest the central bank increase interest rates further by one or two percentage points, to change the negative returns on household savings," the centre said. Yet the PBoC is expected to limit further increases in short-term T-bill rates to 50-basis point higher than today, in order to prevent the appearance of an inverted yield curve, and toppling its economy into a hard landing. To read the rest of this article, please click on the hyperlink located below: http://www.sirchartsalot.com/article.php?id=154 ### Jul 18, 2011 321gold Ltd |
