The Game Is Over, But There’s Still Time Left On The Clock – Gold Miners Weekly

RJ Wilcox ~ Gold Seek

We put the finishing touches on our October newsletter earlier this week and within it forwarded the following prediction regarding the debt ceiling.

“We can expect a last minute agreement to be struck to avert disaster…”

Well, there you have it, proof our crystal ball works!

Now, if we can only get it to show us what the gold price will be in a couple years, now that Ms. Yellen (aka the Dove) can put the pedal to the QE metal and freely feed the U.S. Treasury fresh digital dollars by the billion.

All kidding aside, there are some important ramifications surrounding the news. Let’s get into ‘em.

A Billion Trillion Here, a Trillion There, Sooner or Later we’re Talking About Real Money…Gold

Whew! That was a close one!

With the debt ceiling raised, the Treasury can now pay the interest on its debts, thereby avoiding a default. They are also permitted to borrow more money and continue to rack up more debt to fund trillion dollar budget deficits into infinity.

For reference, here’s a chart showing the U.S. national debt, the debt ceiling, and the gold price since 2000 (chart credit goes to Nick Laird, www.Sharelynx.com).

As we commented in Ben Bernanke is Just Stringing You Along, the traditional buyers of U.S. Treasury debt, China and Japan, have significantly reduced their purchases or in some instances, completely balked at offerings.

This has essentially left the Federal Reserve with the responsibility to pick up the slack. And, although the Fed maintains that the purpose of its Quantitative Easing (QE) program is to stimulate economic growth and create jobs, as we spelled out in the above referenced article, we don’t really believe him! To quote the article:

“… QE3’s $85 billion per month in bond purchases equates to $1.02 trillion a year. Despite the Feds assertions to the contrary, it’s strange that the amount of bond buying needed to stimulate the economy is very similar to the federal government’s budget deficit.”

On Sept. 18^th, the Fed announced that it would not taper its $85 billion QE stimulus program. It shocked the market, as a tapering announcement was supposedly a forgone conclusion. With that choice as the catalyst, the Fed’s credibility was metaphorically kicked in the groin.

The decision also telegraphed the Fed’s tell, tipping off the market and revealing that it’s bluffing, and thus actually plans to keep the QE spigot wide-open, indefinitely.

It may be a coincidence, but on Sept. 15^th, Larry Summers withdrew his name for consideration as the next Federal Reserve Chairman, leaving only one candidate, Janet Yellen. And, as already mentioned, just 3 days later the Fed decided it would not taper.

With the almost certain nod going to Ms. Yellen, who has the reputation of the quintessential dove, it seems in hindsight there may have been a good reason why the Fed decided not to taper.

Perhaps it is because they already knew who the next Chair(wo)man was and therefore, knowing her affinity for stimulus, decided that it would be an inopportune time to change a Fed policy that would presumably be continued by the soon to be successor.

Therefore, if this is even a little-bit true, maybe the Fed saved what little credibility it has left by not tapering. Knowing full well that when Ms. Yellen took the reins she would likely flip-flop and resume QE to infinity, resulting in even more reputational damage.

The main point is, regardless of what they say, the Fed is engaged in QE for two reasons, to fund U.S. government deficits and keep interest rates, and thus interest payments, on the $16.7 trillion U.S. debt from exploding.

It will achieve these two, shall we say unofficial, mandates by printing what should rationally be considered ultimately a disastrous amount of dollars.

Speaking of the dollar…

Extend and Pretend

In our China To Rebuild The Great Wall With Gold article, we focused on the affect the U.S. government shutdown was having on the dollar. At that time, the dollar index had broken the psychologically important level of 80.

Since the shutdown, and during the debt ceiling debate, the dollar index recovered somewhat and sat at 80.57 at the close on Wednesday, an increase of 0.71%.

What was interesting was the dollar index trade after the announcement on Thursday. After digesting the big news, the market firmly decided that the dollar was not the best place to be and as a result, the index was punished and once again fell through the critical support of 80.0, to close at 79.72; a drop of over 1%.

We have made reference to the inverse relationship between the dollar and gold in the past and although we concede that this relationship fits better over a long-term time frame, it was definitely in sync on Thursday as gold rallied US$37.40; or 2.9% in the face of a declining dollar.

We will be keeping an eye on the dollar index as it flirts with sub-80 status. We don’t want to draw too many conclusions about one day’s trading activity.

However, one could infer that the market may be realizing that the continued and likely increase of accommodative monetary policy, stimulus, QE, money printing, or whatever you want to call it, is quite simply a program to devalue the dollar.

Another quote from our “Ben Bernanke” article:

“Our main point is that they are hoping the dollar will weaken and thus will stimulate exports while at the same time undermining the value of the massive US debt load.”

Fake it Till You Make it…or Until the Bond Market Says ‘No’

continue article at GoldSeek.com:

http://news.goldseek.com/GoldSeek/1382105820.php