Fed Tapering QE and the Price of Gold

fed tapering qe - the monster gets his revenge

If the threatened Fed tapering QE comes to pass, how will the price of gold be affected and what is the rational response of the individual trying to survive in the wacky world of a centrally planned US economy?

Should the government side with the devil, (let interest rates rise), or just dive into the deep blue sea, (keep monetizing new debt)? Either choice ends the same way – high inflation, more municipal defaults like Detroit, an economy that grinds eventually to a halt and – barring a miracle – either the default of the US government or a Big War to distract everyone. (Followed by the default of the US government once the shooting stops.)

What a choice, huh?

Here’s some of the factors our Overlords are dealing with daily:

Gold Down/Gold Up

Gold was down a bunch in April in response to someone selling 500 tons in one fell swoop. It was down a bunch more in May. The direction is now reversed. Gold is up this morning a bunch, up 10% in the last month. Can you say “volatility”? There, I knew you could do it.

QE or Taper

The Fed is dumping $85B a month into the equities markets via banks through their QE program for almost 2 years now. They are threatening to stop, or at least “taper” that program sometime soon. If the Fed stops QE, the bull market comes to an end. If the Fed keeps QEing, they will eventually own ever bond, mortgage and IOU in the world. They’ve already quadrupled their balance sheet in the last 5 years. That can’t end well.

Interest Rates vs. Inflation Rates

The official inflation rate is higher than interest rates, though not by much. Long bonds are at historically low yields. In the primary market, yields are actually below the inflation rate. Savers have almost no incentive to save in this market because the return on savings is negligible.  In real terms, the return on savings is negative – as anyone who actually pays for groceries, gas and housing has noticed.

Good Dollar / Bad Dollar

The US Government needs a weaker dollar, because its debt is denominated in dollars. But every other central bank on the planet has the same need – weaker currency. This is the reason for the infamous “race to the bottom.

The government is caught between a rock and a hard place. It’s run up debts that can’t be paid in current dollars with current growth. It needs more growth and a weaker dollar to pay the debt. But growth has to be organic, and the Fed is not allowing that. Growth requires investment, investment requires capital reserves, capital reserves demand higher interest rates, higher interest rates will create a stronger dollar and will also make it even harder to pay dollar-denominated debts.

So the game the Fed and the US government are trying to play is to stimulate growth in the absence of any of the factors that historically stimulate growth. Or, as my friend The Fearsome Pirate said, “centrally planning markets is impossible.”

Conclusion

Long gold.

Prices of gold are still well below where fundamentals say they should be. But I’d be buying – and taking delivery of – physical, not this goofy-ass paper stuff.