Inflation Guaranteed As Silver And Gold Climbs - Gold Coin Blogger

Economists at the ECB are now predicting “A Century of Inflation,” driven by loose US Monetary policy and rampant Dollar-printing. It’s time to concentrate on the fundamentals – Workers are not getting paid more and we can see no gain in the markets. We are living in a weak-dollar fantasy, partying like it’s Germany in early 1921 while the sane gold bug Speculators celebrate their wise investments as gold crosses 1,503 an ounce. The Dollar is down from 76 yesterday to 74.5 this morning, a stunning 2% drop for a currency in a country that didn’t have an earthquake or a revolution overnight. 75.63 was our low of last November (a one-day spike and we were back at 81 by the end of the month as the market fell apart) and before that we only touched 74.23 briefly in November of 2009 (it’s a bad month for the dollar). We flew up from there to 78 in December and 80 in January and have sunk rapidly since then.David Fry from ETF notes: “Monday’s S&P debt downgrade shocker is quickly old news and steamrolled by freshly minted cash (POMO) with ideas of more to come. Keeping money printing presses on high was a green light to sell the dollar which always causes commodities to rise. The Fed is also rumored to be selling, puts on Treasury bonds to keep rates low combined with maintaining the bogus inflationary “core rate”, to keep you mesmerized. It’s some Orwellian-speak to keep the masses happy even though the disconnect is seen at the pump and check-out counter.”

That disconnect sent gold over $1,503 per ounce and oil touched $112 a barrel this morning where, of course, we are shorting it (very tight stops).

The price of gold has already surged, surpassing an important barrier of $1,503 per ounce. Gold has been up every year since 2001 and has increased roughly 25% in the previous year, outshined only by another precious metal, Silver. Silver has reached a 31-year high by beating the $45 mark. In the last year alone, it has raced ahead by almost 150%. President Ron Fricke of Regal Assets is now referring to silver as gold on steroids. The question is: can the precious metals keep up this pace?

The logical answer lies in why their prices are surging in the first place. Investors may be divided on this issue. Some argue that the soaring prices of precious metals are driven by market speculators. That it’s just another bubble waiting to burst, much like the housing bubble in the US in 2007. Other investors believe the rise in gold and silver is not the result of crazy speculation; rather, they feel that the rise is connected with the economic fundamentals of modern economies. One important thing to remember is that the prices of gold and silver are not related to industrial demand. The price of copper, for instance, has gone down over fears that the economic recovery might stall. Gold and silver, on the other hand, flourish on news of problems in the economy. Precious metals have been driven up by fears of crumbling economic activity and creeping inflation. As we saw earlier, the price of both gold and silver skyrocketed after S&P changed the outlook of US debt from stable to negative. Lowering the US credit rating will make borrowing for the US government much more difficult and expensive, leading to a weaker dollar—its yo-yoing will keep gold and silver in tact for long time.

The precious metals have also been propelled by problems in another major paper currency – the Euro. Eurozone’s two-speed economy – with the recovery gaining firm ground in countries like Germany and France, while debt-ridden economies of Eurozone’s periphery remain very close to declaring bankruptcy – raises fears over long-term sustainability of the Euro project. Such prospects are likely scaring some investors away from the Euro. When things get rough, investors want to invest in something more tangible than stocks or paper currencies, which are ultimately just pieces of paper.

Precious metals should be viewed as just another form of currency. The major difference between the dollar and gold/silver is that the latter relies on mining. In general, the increase in the supply of precious metals is a single-digit number on a yearly basis. On the other hand, the supply of dollars is controlled by the Fed, which has the power to increase its supply by a much larger amount. This is exactly what the Fed has been doing with the program of quantitative easing, prompting many analysts to comment on the liquidity flood of biblical proportions. A strong rise in the supply of major paper currencies also contributed to their fall in value in comparison to gold and silver.

So, how far gold and silver can go ultimately? It depends on economic fundamentals and the shrinking value of the dollar. “For the dollar, the S&P statement earlier this week revising its long-term outlook for U.S. debt from stable to negative,) was like getting kicked when you’re already down,” said Matt Zeman, a senior market strategist at Kingsview Financial in Chicago. “The dollar is losing its status as the king of the hill, and gold is looking to take its place.”

While Gold reached a record $1,506.03 an ounce, the Treasury Department has projected that the government will reach the $14.3 trillion debt-ceiling limit no later than May 16 and run out of options for avoiding default by early July. “As the numbers show, the debt cannot be repaid without dollar debasement, so there is the reason people are warming up to the idea of hoarding gold,” Zeman said.

Source: http://goldcoinblogger.com/inflation-guaranteed-as-silver-and-gold-climbs/#more-2967

Overall analyst said GOLD will move higher later..now is buying opportunity in market correction.

Gold Could Hit New High By Year-End But now Caught In Commodity-Wide Correction

 “I see gold moving to new highs later this year,” although first they could end up “oversold” during the recent commodity-wide correction lower, says Ira Epstein, director of the Ira Epstein division of the Linn Group. “As I see it, nothing has materially changed to alter gold’s role or longer-term price direction,” he says. “That doesn’t mean that outside forces can’t pull down gold in the near term and change the short term trend…However, given that the U.S. has not changed its monetary policy, things really haven’t changed.” Still, the entire commodity complex has corrected lower, he says. “Keep in mind that funds that trade commodities tend to move their investment in waves,” he says. “The wave that carried commodity prices up to new all-time highs has temporarily peaked and prices are now moving down across the whole commodity spectrum in unison.”

By Allen Sykora of Kitco News; asykora@kitco.com

Barclays: Commodity Sell-Off ‘Represents A Potential Buying Opportunity’

(Kitco News) - Barclays Capital sees the recent commodity-wide sell-off lately as a buying opportunity. Analysts describe the retreat as a repeat of a pattern seen several times during a commodity price recovery that began in early 2009. For copper, often viewed as a good gauge of the health of the global economy, fundamentals appear to be improving, with a big rebound in China’s copper semis output in March, draws of 55,000 metric tons in Shanghai Futures Exchange stocks in the last seven weeks and stronger Asian premiums, Barclays says. Regional Purchasing Managers Indexes this week showed expansion in manufacturing activity.  “Finally, we would highlight the fact that yesterday’s price declines have not been accompanied by any significant move in price spreads within individual commodity markets,” Barclays says. “These are still reflecting strong demand, sluggish supply and low inventories in many sectors. Brent crude remains in backwardation at the front end of the curve, the aluminum cash-to-three months contango tightened and lead remains in backwardation as well. In our view, the current sell-off represents a potential buying opportunity, particularly in those 

markets that we currently favor including, copper, corn, far forward crude oil, aluminum and gold.“ However, Barclays says it does not put silver on this list.

HSBC: ‘We Sense That The Bullion Price Could Be Close To Bottoming’

(Kitco News) -- While further price declines in precious metals are possible, “we sense that the bullion price could be close to bottoming,” says HSBC. “We expect emerging-market buying to increase at these lower prices. Merchants already reported an increase in physical demand for gold and silver. Premiums on silver increased, implying an increase in local demand. The power of Indian buying can be immense.” Gold like will stabilize before silver, HSBC says. Any further dollar weakness is likely to help gold stabilize, the bank says. “As the world’s supreme hard asset, gold logically is inversely correlated with the world’s supreme paper asset, the USD.” The relationship is not necessarily lockstep, but holds in the long run, says the bank. One factor that has helped gold in the past is concern about the ability of the U.S. to repay its debt.  “If the gold rally is at least partly predicated on long-term credit concerns, then the long-term picture still looks positive for bullion.”

Mexico, Russia, Thailand Add $6 Billion of Gold to Reserves, IMF Data Show

The Bank of Mexico added 93.3 metric tons of gold to its reserves since January, according to International Monetary Fund data through the end of March. Photographer: Jean Chung/Bloomberg

Mexico, Russia and Thailand added gold now valued at about $6 billion to their reserves in February and March as prices advanced to a record, the dollar weakened and Treasuries lost investors money.

Mexico bought 93.3 metric tons since January, adding to holdings of about 6.9 tons, according to International Monetary Fund data. Russia increased its reserves by 18.8 tons to 811.1 tons in March and Thailand expanded assets by 9.3 tons to 108.9 tons in the same month, the data show.
Central banks are expanding their gold reserves for the first time in a generation as purchases by billionaire investors including John Paulson contributed to bullion extending its longest winning streak since at least 1920. Countries were also boosting their holdings in 1980 when gold rose to a then-record $850 an ounce, only to fall for most of the next 20 years.

“Central banks have good reason to buy gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and a former economic adviser to the U.S. government. “The dollar is no longer a safe asset for backing currencies. Treasuries are not a sound investment” and budget and debt issues mean central banks should buy gold, he said.

Gold for immediate delivery climbed to a record $1,577.57 an ounce on May 2 and traded at $1,539.29 by 3:04 p.m. in London today. Prices are up 8.3 percent this year and have gained the past 10 years. Global holdings of gold by governments and official institutions such as the IMF stood at 30,523 tons by April, according to the World Gold Council.

Lowest Level

The dollar today slid to the lowest level since July 2008 against six major currencies. Treasuries lost investors 0.14 percent in February and March, according to Bank of America Merrill Lynch indexes.

Bullion earlier today dropped after the Wall Street Journal reported Soros Fund Management LLC sold precious metal holdings because of a reduced risk of deflation, citing unidentified people close to the matter. The Soros fund held shares in the SPDR Gold Trust and the iShares Gold Trust equal to about 508,800 ounces as of Dec. 31, a U.S. Securities and Exchange Commission filing on Feb. 14 showed.

Since the end of 2009 countries including India, Sri Lanka, Mauritius and Bangladesh have bought gold. Before this year’s purchases, gold accounted for about 0.2 percent of Mexico’s total reserves, and 2.6 percent of Thailand’s reserves. The metal accounts for more than 70 percent of reserves of the U.S. and Germany, the biggest holders, World Gold Council data show.

“Mexico’s gold accumulation confirms the demand of emerging market central banks to diversify their reserves,” said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. “They will be the big buyers for years to come.”

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net.
To contact the editor responsible for this story: Claudia Carpenter atccarpenter2@bloomberg.net

Greatest Profit Potential of the Last Decade is back

Greatest Profit Potential of the Last Decade is back By Toby Connor May 3 2011 1:39PM

After what should be a brief pause this week commodity markets will move into the greatest rally of the last decade. As usual I will stay focused on the precious metal markets. They have been the leaders during this entire move out of the `08 bottom and they will see the largest parabolic move of all commodities during the final leg up.

I've noted in the past that consolidation size is usually a good leading indicator of how large the following rally will be. Gold just consolidated for 5 months. That is going to produce a massive rally. It's already produced a large move and it's just started.

Gold and especially silver have already come much further than I originally expected at this stage of the game. I was looking for gold around $1650 and silver at $50 by the top of this C-wave. Silver has already reached that level and gold tagged $1575 yesterday. This has unfolded in only the first two daily cycles. The third daily cycle is where the real parabolic gains are going to occur.

The third and last daily cycle higher during the semi parabolic move in `09 added 200 points in a little over a month.

The coming parabolic move will be significantly more powerful than what happened in `09 as this will be a final C-wave move. We should easily see a 300- 350 point move in gold and it's anyone's guess as to how far silver rallies during the final parabolic finish. $65 or even $70 isn't out of the question.

Now for the downside. The final dollar collapse is also going to drive the rest of the commodity markets wildly higher. That will include the energy markets. Oil is due for a brief move down into its cycle low this week too. Once that has run its course we will see oil soar higher, possibly even reaching the `07 high of $150.

$150 oil collapsed the global economy in `07 and the economy was in much better shape with much lower unemployment than it is now. In an environment of already high unemployment $150 oil and soaring food prices are going to drive the global economy into a recession even worse than what we suffered in `08.

Social conflict in the Middle East and many emerging economies is going to intensify. People in depressed countries already can't buy food to feed their families, what do you think will be the response if food prices double again?

The world is about to pay the price for Bernanke's attempt to print prosperity and it is going to be a very steep price and cost many lives.

also read here http://whygoldnow.blogspot.com/2011/04/why-gold-is-biggest-opportunity-in-your.html

Brace for a ‘perfect storm’ in gold

By Thomas Kaplan

Investment implies moving some part of one’s assets from financial safety to a position of acceptable risk with the hope of increasing wealth over time. What qualifies as “acceptable risk” may thus be seen to be the gating question for the investment criteria of a “prudent man”. This has come to be known as the Prudent Man Rule to guide persons entrusted with the finances of others.

Although the rule remains a guiding principle in the fund management industry to this day, at least one key element has changed. In 1971, our understanding of ultimate safety was transformed when President Nixon ended the US government’s certification that each dollar in circulation was, in effect, worth exactly 1/35th of an ounce of gold.

Since all major currencies had been linked to gold via the US dollar since 1945, when the US held the majority of monetary reserves, the announcement provoked a momentous change in the financial culture. Cash no longer meant gold: the amount of dollars the Federal Reserve could print would not be restricted to some degree by a stored metallic tangible asset with a finite supply. In a great leap of faith, paper dollars and traded US federal liabilities became “risk-free” assets while gold, long regarded as money itself, was disdained as a “commodity”, a volatile “risk asset”.

This historically radical new notion was validated by the arbiters of money themselves. Central bankers dumped gold, driving prices down sharply during the 1990s. They thereby reinforced the MBA textbook perceptions that the dollar and US Treasury bonds were “risk-free” assets and gold a “barbarous relic,” as John Maynard Keynes famously called it.

Even today, as the gold rally has reached the 10-year mark (following a 20-year bear market), the metal represents a mere 0.6 per cent of total global financial assets (stocks, bonds and cash). This is near the all-time low (0.3 per cent) reached in 2001, and significantly below the 3 per cent it accounted for in 1980 and the 4.8 per cent it was in 1968.

However, there are changes afoot. After a lengthy absence, some asset managers and central bankers are readmitting gold back into the group of prudent asset classes. Assessing the devastation of financial industry and government balance sheets, fiduciaries have been reminded that one of the principle reasons to hold gold – that it is the only major financial asset that does not represent someone else’s obligation to repay – is not the arcane concept it once appeared.

I believe the renewed appreciation of risk management is in its infancy and that gold, like stocks and bonds, will recover its relatively small, but significant historical position in the world’s investment funds. Considering the tiny size of the gold market, the implications of a potential return of gold into the world’s largest portfolios are enormous. For, unlike stocks and bonds, whose supply can increase to meet demand, there is not enough gold to go around at today’s prices.

According to International Strategy and Investment Group (ISI), if gold ownership rose from 0.6 per cent of total financial assets to only 1.2 per cent, still less than half its 1980s level, this would equate to an additional 26,000 tonnes, or 16 per cent of aggregate gold worldwide. This represents 10 years’ worth of current production.

Is such a momentous development likely? I suggest it is more likely than not, as the metal is set up for a “perfect storm” from a supply/demand standpoint. At a time when mining companies can barely find enough gold to replace their reserves and production growth is anaemic, central banks have not only stopped selling their gold but are now aligning with investors to accumulate it.

As it dawns on the wider market that the bull market in gold is real, the impact on gold mining equities will probably be dramatic. Until recently, in spite of their theoretical leverage, miners have lagged behind the metal’s performance. This should not be so surprising. As most analysts haven’t changed the long-term pricing of their cash flow models to reflect a sustained bull market in gold, the shares have underperformed amid assumptions that are outmoded.

This disconnect is similar to the experience of energy equities in the early 2000s. Even as oil surged, it was not until investors accepted that oil might not stay low forever and started to factor in higher prices that the equities were revalued. With the total market capitalisation of all gold mining companies only fractionally higher than that of Apple, any move by investors to capture the inherent leverage of these equities could drive stock prices substantially higher.

Asset managers and central banks are just beginning to readmit gold back into the select group of prudent asset classes. That this is occurring at a time when what might be seen as the world’s safest financial asset classes may also be its scarcest suggests interesting times ahead for those who own gold.

Thomas Kaplan is Chairman of Tigris Financial Group

Mexican central bank buys 100 tonnes of gold

The central bank of Mexico bought nearly 100 tonnes of gold in February and March, the latest emerging market country to turn to bullion as a means of diversifying away from the faltering dollar.

The purchase is one of the largest by a central bank in recent history. The gold, worth $4.6bn at current prices, is equivalent to about 3.5 per cent of annual mined output.

The central bank did not publicly announce the move, but reported it both on its own balance sheet, posted online, and to the International Monetary Fund’s statistics on international reserves.

Central banks became net buyers of gold last year after two decades of heavy selling, a dramatic reversal that has helped propel the price of bullion to a series of record highs.

On Wednesday morning, gold was trading at $1,535 a troy ounce, down from the nominal record of $1,575.79 touched on Monday.

Mexico follows other booming emerging market economies, including China, India and Russia, which have all made large additions to their gold reserves in recent years.

Matthew Turner, precious metals strategist at Mitsubishi, the Japanese trading house, said the purchase “seems to confirm there’s an appetite now among emerging economies with large forex reserves to add to their gold reserves. Gold is seen as one way in which to diversify away from the dollar- or euro-denominated assets.”

The dollar has plunged 10 per cent since January against the world’s major currencies and is trading near an all-time low. Robert Zoellick, president of the World Bank, has suggested that gold should form part of a new international monetary system.

China announced in 2009 that it had bought 454 tonnes of gold over the previous six years; India bought 200 tonnes of gold directly from the International Monetary Fund in October 2009; and Russia has bought just less than 400 tonnes on the open market over the past five years.

However, Mexico’s buying in February and March, which amounted to 93.3 tonnes of gold, is one of the most rapid programmes of accumulation on record. Apart from India’s off-market purchase in 2009, the 78.5 tonnes bought in March is the largest monthly purchase by a central bank in at least a decade, according to data from the World Gold Council.


Financial Times
source:http://www.ft.com/cms/s/0/cbc02e10-7637-11e0-b4f7-00144feabdc0.html#axzz1LP2rmH1V

Governments worldwide are taking steps to protect themselves

iShares Silver Trust and SPDR Gold Trust Holdings Increase As Worries Over Paper Money Grow

April 21, 2011

Both the iShares Silver Trust (SLV) and the SPDR Gold Shares Trust (GLD) saw holdings jump on the week as precious metal prices continued to climb.

The holding of the SLV increased by a substantial 213.98 tonnes over the past week after posting a decline of 192.74 tonnes in the previous week.  The all time record holdings of the SLV was reached on April 11, 2011, at 11,242.89 tonnes.

Strong investment and fundamental demand for silver continued to push silver prices higher with the London PM Fix Price for silver closing yesterday at $44.79, up from $40.22 a week ago.

While some analysts worry about the "inflation" in silver prices, the world's most successful investor is worried about dollar inflation.  Warren Buffet - "We're following policies that will lead to a lot of inflation down the road unless changes are made".  The U.S. can't "run the kind of deficits we're running and other policies...without it being enormously inflationary".

The SLV currently holds 359.6 million ounces of silver bullion valued at $16.1 billion.  The SLV has seen seen an astonishing increase in the value of its holdings.  At the Trust's inception in April 2006, silver holdings of 653.17 tonnes were valued at $263.5 million.

GLD and SLV Holdings (metric tonnes)

	20-April-2011	Weekly Change	YTD Change
GLD	1,230.25	+17.29	-50.47
SLV	11,183.69	+213.98	+262.12

Gold holdings of the SPDR Gold Shares Trust increased on the week by 17.29 tonnes to a total of 1,230.25 tonnes, after an increase of 7.49 tonnes in the previous week.  The GLD now holds a total of 39.6 million ounces of gold valued at $59.4 billion.

Gold continued to gain this past week and, as measured by the London PM Fix Price, closed yesterday at an all time high of $1,501.00.  Gold has gained $43.50 over the past week and since the beginning of the month is up $83 per ounce or 5.8%.

The price gains in gold continue to confound the numerous skeptics of the golden metal who can't understand why gold is going up in the absence of high rates of inflation.  Perhaps the skeptics should pay attention to the increasingly vocal concerns by governments holding large reserves of U.S. dollars and whose economies are being harmed by the flood of rapidly depreciating U.S. dollars.

COLLAPSING US DOLLAR - COURTESY STOCKCHARTS.COM

Nyet to diplomacy. In extremely blunt remarks, Russian Prime Minister Vladimir Putin, commenting after the S&P downgrade on the U.S. debt outlook, said:  "Look at their (the U.S.) trade balance, their debt and budget.  They turn on the printing presses and flood the entire dollar zone - in other words, the whole world, with government bonds.  There is no way we will act this way anytime soon.  We don't have the luxury of such hooliganism".   Nor is Mr. Putin simply talking tough - the Russian government is also acting to protect its financial interests by reducing their holdings of U.S. treasury debt.  Russia, the world's third largest holder of U.S. debt has been greatly reducing its dollar holdings this year.

China, the world's largest holder of U.S. dollars totaling a massive $3 trillion, has been expressing its frustrations and concerns with U.S. monetary policy for years.  A plunging US dollar reduces the value of US debt held by China.  To offset the losses from holdings US paper assets, China has been reducing its holdings of U.S. dollars and buying physical assets worldwide.  China also took major steps this week to gradually implement full convertibility of the yuan in world markets which would allow it to hold fewer US dollars.

Governments worldwide are taking major steps to reduce loss exposure from holding US dollars that can be printed in the trillions by the U.S. Federal Reserve.  In another sign of disgust towards U.S. fiscal and monetary policies,  Brazil, Russia, India, China, and South Africa recently agreed to use their own currencies among themselves instead of the U.S. dollar.

The result of ultra loose U.S. monetary policies, huge budget deficits and money printing by the Federal Reserve have all contributed to the flight to wealth preservation as reflected by a collapsing US dollar and skyrocketing precious metals prices.

Physical Silver Shortage Worsens Due To Mint Rationing And Surging Investment Demand

The inability of the US Mint to meet public demand for gold and silver bullion products was discussed at a recent House Financial Services Subcommittee hearing.  Testimony by industry experts revealed that the US Mint was losing an estimated one-third of potential bullion sales because they cannot meet demand.

For the past several weeks the US Mint sales figures for Silver Eagle bullion coins have been essentially flat. The US Mint sells its bullion products in bulk to authorized purchasers (AP's).  The AP's resell the bullion coins to dealers who then sell the products to the public.  The US Mint has been rationing the 2011 Silver Eagle bullion coins to AP's, leaving one to conclude that the flat sales of Silver Eagles have been the result of Mint production constraints or supply shortages, rather than flat or reduced market demand.

On past occasions, the US Mint has cited the lack of adequate supplies of silver planchets as the cause for the continuing rationing of silver bullion coin sales. Earlier this year, the Royal Canadian Mint admitted that they were having significant problems in sourcing silver since huge demand was outpacing silver supply.

Combine rationing and surging demand and the obvious result is a severe shortage of  physical gold and silver bullion products.  Confirming this situation, American Precious Metals Exchange (APMEX), announced yesterday that they were seeking to purchase US Mint bullion products from their customers in order to meet "recent incredible demand for gold and silver bullion products".

APMEX, one of the country's largest precious metals dealers, offered to purchase American Gold Eagles and American Silver Eagles at generous premiums over spot prices in order to secure inventory.  Despite the increase in the price of gold and silver, public demand obviously remains incredibly strong.

The American public has been provided with plenty of evidence that out of control deficit spending and money printing policies by the Federal Reserve are destroying the value of the paper dollar and they are acting accordingly (see Why There Is No Upside Limit To Gold and Silver Prices).  A loss of confidence in paper money is fueling the rise in gold and silver prices as people seek to protect their wealth.  Any pullbacks in precious metal prices should be viewed as another major buying opportunity.

source: http://goldandsilverblog.com/physical-silver-shortage-worsens-due-to-mint-rationing-and-surging-investment-demand-0225/

Why There Is No Upside Limit for Gold and Silver Prices

The past decade has seen a virtually nonstop advance in the price of gold.  Silver, which lagged gold until last year,  recently hit a 31 year price high.  Gold and silver, both used as currency for thousands of years, have gained broad investor appeal as a hedge against paper currencies.

The increase in the value of gold and silver is due to the fiscal and monetary policies of nations struggling to deal with massive levels of debt - policies that virtually guarantee a continued rise in the price of gold and silver.

Central banks, having exhausted all conventional means of monetary easing, have moved on to the last resort option of quantitative easing and currency debasement.  Federal Reserve Chairman Bernanke has twice resorted to the printing presses, and then shamelessly explained the "virtues" of his money printing policy (in convoluted terms) to a gullible public on national television.  The subsequent absence of broad public opposition to a policy that is certain to ultimately destroy the financial well being of most Americans seems based on ignorance and/or indifference.

One American who is not ignorant or indifferent to the Fed's policy of printing money issued a dire warning this week on the dangerous path the Federal Reserve has taken.  The reason we should all pay great attention to this warning is because it was issued by a powerful policy maker at the Federal Reserve.

According to Reuters, Richard Fisher, President of the Dallas Federal Reserve stated in a speech that the debt situation in the U.S. is at a "tipping point." He is quoted as saying, "If we continue down on the path on which the fiscal authorities put us, we will become insolvent.  The question is when".   Bank President Fisher further said that no additional extraordinary measures should be taken when the current round of money printing ends in June of this year.

We shall see what happens comes mid year when QE2 is scheduled to end.  The problem facing the Fed is that they are out of conventional policy bullets to ease credit conditions with rates already at zero.  The ease and apparent lack of consequences in printing money has made additional quantitative easing a very seductive method of  allowing huge deficit spending by the government.  QE2 is a thinly disguised monetization of the Federal deficit in which the Federal Reserve purchases government debt from the primary dealers after they purchase the debt at Treasury auctions.

Government officials argue that unprecedented deficit spending and quantitative easing are necessary to stimulate economic  growth, but this theory has not worked in the real world.  Despite trillions in stimulus spending,  job creation and economic growth have been extremely weak and are likely to remain so according to economists Kenneth Rogoff and Carmen Reinhart who wrote This Time Is Different: Eight Centuries of Financial Folly.  According to Rogoff and Reinhart, economic growth is subpar when public sector debt exceeds 90% of GPD which the U.S. and many other developed nations have already surpassed.  In addition, a recovery of the job and housing markets after a financial crisis take many years due to the burden of excessive levels of debt.  Ultimately, Rogoff and Reinhart predict that austerity measures will need to be imposed along with some type of debt restructuring.

Is the U.S. capable of reducing spending and  instituting austerity measures? Cutting deficits means cutting payments to a long list of incomeless recipients who really don't care where the entitlement money comes from.  Those still actually paying taxes will object strongly to any proposed tax increase to fund government spending.  Unable to cut spending or raise taxes leaves the Government with one bad option - print more money.

Politicians, who value getting elected above all else, are likely to strong arm the reliably compliant Federal Reserve Chairman Ben Bernanke to "come to the rescue" again with QE3.   In the minds of politicians and Federal Reserve officials, there will always be very compelling reasons to continue borrowing and money printing.  With the expected retirement of Federal Reserve Bank of Kansas President Thomas Hoenig this October, the Federal Reserve will be dominated by dovish members who favor the easy money policies of Fed Chairman Bernanke.  President Hoenig is one of the few Fed members who oppose continued zero interest rates and quantitative easing.

The correlation between parabolic increases in government debt and the price of gold is clear.   Since 2000 both government borrowing and the price of gold have been closely correlated as seen below.  The increased value of gold directly reflects the decreasing value of paper money.

A nation that has reached the limits on taxation and borrowing has few viable policy options other than a continuing series of quantitative easing programs.  Current government policies, if left unchanged, virtually guarantee a continued increase in the price of precious metals.

TOTAL PUBLIC DEBT

GOLD PRICE - COURTESY KITCO.COM