Schmidt's "Gold Thoughts" 07 September 2011

Only one way to explain it. Aliens are attacking. They have launched their assault on Earth by apparently first infecting the bottled water served at meetings of the U.S. Federal Reserve with some agent that causes bizarre reasoning and actions. What else could explain it all?

Toward the end of August each year the Kansas City Federal Reserve holds the annual “Festival of Failure”. At this weekend meeting, in Jackson Hole WY, delusional Keynesians celebrate their past glories, and begin to unveil their plans for the coming year. Any other organization, especially in the private sector, with a near-perfect 100-year record of failure would not have the audacity to hold such a public display. At most, perhaps cocktails on Friday night would have been reasonable.

Chairman Bernanke was the keynote speaker for this grand celebration of the failure of Keynesian ideology. Were he a compassionate individual, he would have declared that meeting the last. But, he did not. What he did say was that the Federal Reserve was ready to help the U.S. economy. Help? Please, please, Mr. Chairman, we can’t handle any more of your help!

If the promise of more help from Federal Reserve was not sufficiently scary, an additional day was added to the September meeting of the Federal Open Market Committee. Sure hope that is not to plan more help for us. 100 years of Federal Reserve help has reduced the value of a 1913 dollar to a few cents. The help of the past 20 years has pushed Gold to more than US$1,900, and caused the return on U.S. equities to wither to a pittance. Not sure we can handle more help.

A consequence of the U.S. FOMC’s previous “help” is beginning to be evident in the chart above. In that chart is plotted in red the year-to-year percentage change of the U.S. money supply, M-2 NSA. Until the end of the first quarter, the U.S. monetary growth rate had been languishing around the 4% level. That anemic rate of monetary expansion was not something to worry about. That has all changed in recent times.

All that liquidity provided by QE-2 is now flowing into the economy, for whatever the reason. U.S. money supply growth is now above 10%. That is both worrisome, and an indication that no more “help” from the Federal Reserve is needed. The rate of monetary inflation in the U.S. is now more than 7%, 10% money growth minus the potential of the real economy to grow.

With that knowledge we can now reflect on the outrageous, repugnant, and wealth destroying policy promoted by the President of the Chicago Federal Reserve Bank on CNBC recently. While hoping his comments were simply more bizarre behavior due to the alien attack, some concern should exist that his policy prescription might become accepted U.S. monetary policy. Out of respect for Thumper’s father, we only ask a question. How did he get his job?

Per CNBC via Yahoo finance, 30 August, Evans advocated continuing QE until either unemployment falls below 7%, or the inflation rate, presumably the core, rises to above 3%. Take a moment to ponder what is being proposed. The Federal Funds rate, the base rate for all rates, would be maintained at ~0.25% until inflation rises above 3%.

What is being proposed is that up to 2.75%, or more, of the wealth of savers, investors, retired people, etc. is to be “taxed” away by the Federal Reserve. That wealth would be effectively transferred to the hedge funds and speculative funds that the Federal Reserve has been freely supporting for more than a decade. What right does the Federal Reserve have to impose such a “wealth tax”? Where in the enabling legislation for the Federal Reserve is authority for such a “wealth tax”? When is the Federal Reserve going to begin supporting savers, investors, and those that live on Main Street over the interests of the Street?

As a consequence of the ongoing destruction of the U.S. economy by the Keynesian ideologues at the Federal Reserve, investors, en masse, sought refuge in $Gold. However, that panic sent $Gold into a parabolic formation, as shown by the black arrow in that chart. That parabolic does now seem to be breaking down, and may have begun the creation of a head and shoulders pattern. Neck of that possible pattern is indicated by the black line.

Investors were certainly justified in seeking out protection from the rampage of the Keynesians. However, those emotions may have become too strong. In the short-term, Gold may have more risk than reward. Silver certainly remains a strong sale candidate. Alternative investments to consider include Chinese Renminbi denominated assets, perhaps Rhodium, or agricultural land. On the latter see 5^th Annual U.S. Agricultural Land As An Investment Consideration – 2011.

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a now victorious mission to save investors from what became the financial abyss of paper assets, and the now the great Silver Bear Market. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: valueviewgoldreport.com