Record $1,594 high for gold as QE3 talk boosts inflation fear
Posted on 14 July 2011 with 3 comments from readers
Remarks from Federal Reserve chairman Ben Bernanke that a third round of quantitative easing, or money printing, could be on the cards if the US economy does not pick up soon sent gold and silver prices sharply higher with gold hitting a new all-time high of $1,594.
At the same time retail sales in China were up 17.7 per cent in June suggesting an overheating economy and runaway inflation. No wonder the Chinese are now big importers and major buyers of gold. For them inflation is already an important issue.
Stock bubble
Stocks also rose in response to the QE3 hint from Ben Bernanke. Investors hope that the bubble pumped up by QE1 and QE2 will continue. However, valuations look stretched and the global pressure on interest rates is up and not down with the crisis in the eurozone still very far from settled.
The problem with trying to understand the eurozone crisis is not just the six countries in trouble at the last count but the fact that high politics make it hard to fathom. Just how strong is the political will to keep Europe united? Nobody really knows until it is tested to destruction.
But can the US dollar really be a strong currency against the euro when its central bank is set to resume printing money to stabilize a weakening economy and stop asset price deflation from setting in?
It is a very uncertain world, and gold and silver represent currencies without counter party risk.
It Armageddon can be avoided – and the US debt ceiling deadline on August 2nd is another date to watch – then the muddle through is going to be a rather stagnant global economy and much higher inflation and interest rates.
Nowhere to hide
Not many investments will perform well in this environment. In the late 70s cash and precious metals stole the show. Cash because high interest rates offered the best available protection from inflation and gold and silver because they inflated faster in price than inflation due to increased investor demand.
What goes around comes around but usually with a new twist. Sadly the main difference with the 70s is the worldwide nature of the crisis and the scale of the debts and deficits.
The risk is to the downside with a muddle turning into a serious accident.
3 Comments posted by readers:
As we casually glance at the complexity and interconnectivity of the world’s financial “systems”, and the legions of synthetic instruments such as futures, options, credit default swaps, interest rate derivatives, etc., even a layperson recognizes that there is massive counter party risk everywhere we look.
One example here: JPM and GS have sold tons of credit default swaps to Europe, in a desperate attempt to contain the massive financial problems there. So in essence, these derivatives contain massive counter-party risk. If Greece defaults, these US banks will lose almost as much as the big Euro banks (but the US doesn’t want the world to know that!).
So yes, indeed, “this is a very uncertain world” as the Ed. stated; and since physical gold and silver are currencies without counter party risk, the only thing that we can do to avoid counter-party risk is to own physical gold and silver.
obewon hit the nail on the head. The amount of public, corporate and private debt out there now is crazy. No one knows the total amount of credit default swaps waiting to explode and bankrupt many financial institutions. All I can say is that many experts keep writing that the lack of government oversight and regulation of the banking system will, sooner or later, cause another collapse worse than 2008.
You would sure want to own some physical gold and silver if that happens.
I’m watching a parade of people on Kudlow all of a sudden telling Congress to quit fooling around with the debt ceiling. The fat cats are starting to sweat as they contemplate what will happen to their wealth if the USA doesn’t pay its’ bills.
Interestingly, Pritchard wrote in the Telegraph that the money supply in the euro zone was shrinking which usually forewarns of a recession within 6 months.
Here’s a frightening statistic:
The total amount of derivatives (of all kinds) has now exceeded 1 quadrillion! In 2008, it was approx. $700 trillion.
Source: http://www.infiniteunknown.net/2008/06/11/total-notional-value-of-derivatives-outstanding-surpasses-one-quadrillion/
The natural question that we, as laypeople, should ask is this: “Why did Obama sign the Dodd-Frank Financial Reform bill into law, when all of the financial experts stated last year that it would be a total failure?”
This bill was written by the lawyers who work for JPM, GS, Citi, B of A, etc.; so the big Wall St. banks got exactly what they wanted from this financial reform bill (loose translation: “OK, boys, we got what we wanted; it’s now business as usual.”)
One of Many References is Here: http://www.zerohedge.com/article/barney-frank-goes-apeshit-over-sp-insinuation-dodd-frank-miserable-failure-hypocritical-hila
As a result of the passage of that bill into law, the Wall St. banks “donated” over $500 million to political candidates in 2010.
. . . and the answer to the question I posed above should be obvious to most people: Obama has stated that he wants over $1 billion in new campaign funds for his re-election. Since Wall St. can continue with their fraud, corruption, manipulation, cover-up games, they will pour hundreds of millions of US dollars into the Obama re-election machine.
Hell, they can easily donate the $1 billion that Obama said he needs!
Welcome to fascist USA!