As Global Central Banks Continue to debase their Respective Currencies, the Inevitable Consequence will be Higher Prices of Gold and Silver

The Fed is now embarking on an open-ended program to buy mortgage-backed securities (MBS) from banks. According the US Fed chairman, Ben Bernanke the plan will help to increase prices of homes and reduce unemployment. But, since 2009 the Fed has already bought more than $1 trillion worth of MBS to no avail. Housing prices remain stagnant and unemployment remains above 8% (as it has been for almost four years).

In the post FOMC meeting press conference, Bernanke explained that this policy is intended to push money into the economy in the hope that the money will stimulate activity.  Ultimately, the Fed hopes to stimulate growth by making consumers “feel” wealthier. Bernanke said the Fed will continue with the stimulus even after it sees unemployment falling, saying “we’re not going to rush to begin to tighten policy. We’re going to give it some time to make sure the recovery is well established.”

When asked at his press conference how this action will help, Bernanke said.
“There are a number of different channels – mortgage rates, I mentioned corporate bond rates, but also prices of various assets, like for example the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier; they’ll feel more disposed to spend.
“If house prices are rising people may be more willing to buy homes because they think that they will make a better return on that purchase. So house prices is one vehicle … stock prices, many people own stocks directly or indirectly”.
Bernanke was absolutely correct when he said. “The issue here is whether or not improving asset prices generally will make people more willing to spend.”

Frankly, the way I see it is that if the current historically low mortgage rates have not already induced buyers back into the market, the move by the Fed is unlikely to alter that. And, if the Fed hopes to prompt investors to take greater risks by maintaining long-term interest rates lower, making traditional savings vehicles unattractive any rise in equity prices will be muted due to the underlying stagnant growth.  A perceived increase in an individual’s wealth will not induce the required spending needed to boost the economy. But, this is not the only problem the US is facing. It has an unsustainable debt and no effective plan to cut its government budget deficit.

One of the consequences of this monetary policy is that as huge amounts of liquidity is injected into the financial system by the central banks the value of the money (purchasing power) will decrease substantially and higher inflation will become a reality. So as these central banks print more money, and as prices of goods increase, hard-working people will not be able to cover their existing monthly expenses without having to cut back on certain expenditures. However, they will told all sorts of reasons why the cost of items have gone up. The weather will be blamed. Higher oil prices are a favourite blame politicians like to use for the increasing cost of goods and services. But, in reality, the actions of the central banks are the major factor in causing the rising prices as more money in the system goes into buying the same or less amount of goods and services.  A very simple way to explain this is to use an example of let’s say one hundred thousand items each one costing one dollar. And, let’s say that for now there is only one hundred thousand dollars in the system. In this case everything is balanced. But, if you suddenly have two hundred thousand dollars in the system chasing the same one hundred thousand items, prices will double, unless the productivity increases equally.  But, now, we all know economies are contracting and not expanding, so in the above example it may be more correct to state that while the money supply is increasing, the number of items available is actually decreasing. This can only result in a rise in prices.
The actions of these central banks have resulted in massively expanded balance sheets. In the case of the US Federal Reserve it has swelled from less than $1 trillion before the crisis to close to $3 trillion today.  The ECB now has a balance sheet of four trillion euros, but they have lent or guaranteed twelve trillion euros.  The Bank of England’s balance sheet has increased five-fold over the last five years. Most of the assets held by these banks are toxic or junk.

I also firmly believe that it is a total misconception that this policy of money printing can improve the rate of employment and I doubt that the average consumer will suddenly be induced to spend simply because he feels wealthier. If you don’t have a job and you are not earning any income you will unlikely to spend more simply because the value of your investments has suddenly increased slightly. In fact it may have a negative impact in that people may be forced to sell at the higher prices in order to have some liquidity.

The other flaw in this kind of policy is that the money that is created to stimulate economic activity is not flowing to the system and instead is being used for speculative purposes or being held by the banking system and financial institutions.

But, for sure, the inevitable result of these policies will be a much weaker US dollar, significantly higher inflation and higher prices of gold and silver. The value of the dollar has lost some 6% since the end of July when it was trading at 84.The dollar has already been devalued by more than 90% over the last century alone.

For several years now, I have urged individuals to hold physical gold and silver in order to preserve their wealth as the major central banks debase their currencies. Since 2009, conditions in our global monetary system have not improved at all, and instead have deteriorated considerably. And, while the Western bullion banks continue to try and suppress the prices of gold by using derivatives; prudent investors know that all their meddling will only end up in one big disaster. We have practically reached the point of no return and the next stage in this currency collapse has already begun. The dollar, the euro, the Japanese Yen, and Sterling are all beginning to collapse. And, as the dollar collapses, the price of gold will move higher. And, as these currencies fall, more and more people will turn to gold. Even recently, the very same banks who could not see any value in gold when it was $700, $800, or $1000 are now recommending gold to clients as they finally understand the effects currency debasement has on gold.
As this global financial collapse accelerates the only way individuals can protect themselves from the total destruction of paper wealth, will be through the ownership of physical gold and silver. And once again, let me reiterate that physical gold and silver is not an exchange traded fund (ETF) or an exchange traded note (ETN) and it is most certainly not a limited edition medallion. Furthermore, I continue to tell to all my investors not to store your gold bullion at a bank. By doing so you exposed to counter party risk.  Use an independent storage facility that offers you access to your own safety deposit box.

In the coming months I have no doubt that gold will re-test its all-time high and during the course of 2013, we are going to see the price hit new record high prices. Act now and secure some gold bullion for yourself. As I have stated countless times, gold and silver should be a part of everybody’s portfolio. Their values cannot be debased like paper currencies can and there is no third party risk.

TECHNICAL ANALYSIS

As gold prices continue their advance, they are experiencing resistance at around $1800/oz. (R). The golden cross (50 day MA moving above 200 day MA) is also a very bullish sign.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za