Bernanke Has Put The Metal Complex Fully Back In Play

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Photo: Flickr / bebouchard

QE III (+)The great Q.E. III has formally been launched. Its open ended, and the mid 2013 goal posts for easing has been pushed out to 2015.  The comments made at Jackson Hole 2012 were foreshadowing to the catalyst for the announcement made on Sep 9/13/2012.

Mr. Bernanke was extremely clear in his speech on deflation back in 2002, what his actions would be in a worst case scenario. He has followed up on those statements with actions taken by the Federal Reserve under his leadership.

The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.

When this speech was written, the US was just starting to come out of the great tech crash of 2000. The US was starting to turn the corner economically speaking, as low interest rate fuelled our housing bubble.

…Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3

Outside of residential or commercial real estate, most liquid assets are being bid up around the world. Just look at the prices being paid for ranch land or the crops generated by them; grains or livestock.

The irony is that Bernanke talks of a parable about gold and its value dissipating overnight do to alchemy. At the time, gold was going for about $300 per oz.

…What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

As I write this, the US Equity Markets are up significantly this year. Bonds were at near historic lows, and the US Dollar had enjoyed a sharp bounce over the last year, as the European Union showed signs of unravelling.

This started to really change around the time of Jackson Hole this year. As word leaked out that the Federal Reserve was going to initiate its third round of Qualitative Easing.

Over the last year, the giant cash flush stocks, which have instant liquidity, and pay out a yield over 3% have become the retail and professional savings account of the past. This is the 21 Century version of the old Widow’s & Orphan equivalent investments of the 1930’s-1940’s.

Big safe cash yielding companies, with balance sheets strong enough weather what the economy is going to do in the near future, have already been bid up significantly in this period of a very old Bull Market.

High Yield is currently at historic low levels, as everyone chases yield. These moments never end well, but for now, even high risk companies have demand for their paper.

So where does that leave the average investor, Retail or Professional? In my humble opinion, the metal complex which has been cooling off for over 1 year, is now fully back in play. The Global Central Bank printing press wars are going to generate inflation, if it’s the last thing they do.

In my opinion its time to ponder the $AUY, $GG, $ABX, & $SLW and other larger producers that have the capacity to book higher precious metal prices. They tend to be debt free, have built in massive organic growth (AUY & SLW come to mind) over the next few years and pay a dividend competitive with sovereign debt yields for the US or Germany with out the same levels of risk.

  • Bernanke Speech

Filed under: Banksters, Commodities, Currency, Economic War, Economics, Global Macro, History, Risk Management, Stat of the Day, Yield Tagged: ABX, AUY, Bernanke, Chairman of the Federal Reserve, Deflation, GG, Gold, Inflation, Silver

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