This time last week, many pundits assumed the inevitability that Ben Bernanke would commence the taper of Quantitative Easing 3, the Fed’s economic “stimulus” program that has injected $85 billion into the markets each and every month. After all, the Fed had recently been touting many reasons to believe that the economy is improving, especially a lower official unemployment rate.
While it’s debatable that the job market is improving, one market that has undoubtedly received a huge boost from QE3 is the stock market, which has been riding the “artificial sea of liquidity” to all-time highs the last few months; some have gone so far as to compare equities’ new-found dependency on QE to a drug addiction. So when Bernanke announced on Wednesday that the Fed would continue with its program, the stock market reacted with glee, as it would continue to get its “fix”: The Dow Jones and S&P 500 each reached to new highs.
Gold and silver soared on the news as well, with gold gaining 4% on the single day of trading and silver jumping an even more robust 6%.
It’s all fake. In the short term, the markets (stocks, bonds, precious metals – all of them) are wildly fluctuating on the back of this artificial crush of liquidity. At least for right now, you may as well take your fundamentals and throw them out the door.
So what’s real? It’s a sobering reality: the economy is still struggling. And by continuing with QE at current levels, the Fed couldn’t have acknowledged this more clearly. They can boast all they want about official unemployment levels coming down, but the old adage stands: Actions speak louder than words.
Eric Green of TD Securities said that the decision “feels less dovish than it does outright scared. Confidence in the outlook has dimmed. That Bernanke had a free pass to begin that tapering process and chose not to follow is telling.” Ron Paul goes further, calling out the Fed for saying that things are good as “the seed of deception.”
With reality established – that of an economy that refuses to significantly improve and that demands for Quantitative Easing to continue – what wins? And what wins not just in the short term, when the smallest of flinches from Bernanke sends the markets amok, but what wins in the long term?
It’s not stocks… and that conclusion is due to the simplest of rationales: In what world can equities perform well in the long run when the economy is poor?? Mike O’Rourke of JonesTrading puts it best: “It is remarkable that the equity market continued to buy into easy money over economic growth. QE3 has been ongoing for nearly a year and the economy is not strong enough to ease off the accelerator (forget about applying the brake).”
But physical precious metals? The current environment is very supportive of long-term growth, and again it’s a simple argument: As fixed supply assets, gold and silver increase in value when the supply of other assets increase. And boy, does the supply of the U.S. dollar continue to increase! To reiterate: $85 billion. Each and every month. For the indefinite future.
Ron Paul cautions that we should “prepare for the destruction of the dollar”. Maybe that’s what we’re destined for, but regardless of when that were to happen – this year, next year, or not even for a decade or two from now – these simple facts remain: (1) The Fed does not believe our economy is improving in any substantial fashion. (2) Therefore, more dollars continue to enter the economy each and every month. (3) Through it all, the supply of physical gold and silver remains constant.
Gold and silver will ride out the short-term fluctuations and remain standing in the long term. But stocks? Until the economy actually improves, there is no reason to believe that they can continue to soar as they have.
If you believe your portfolio is overexposed to stocks, bonds or mutual funds, give us a call today and we can help protect whatever portion you’d like with physical gold and silver.
Precious metals on the move
London Fix PM price at week’s end, and change over previous Friday:
- Gold: $1,349.25, up 2.3%
- Silver: $22.74, up 4.7%
- Platinum: $1,447.00, up 0.4%
- Palladium: $726.00, up 3.7%
In the news
Gold is your defense against Fed policies
“The two-year bear market for gold is over, and the uptrend is going to resume. Gold is your defense against your policies of the Fed, and in my eyes, the Fed lost a lot of credibility today. Just when you thought the Fed was very dovish, they pull an even more dovish act, and many in the markets were blindsided.” – Peter Boockvar (link)
Fed has boxed itself into a corner”
“The endgame is a total collapse, but from a higher diving board. The Fed will continue to print and if the stock market goes down 10%, they will print even more. And they don’t know anything else to do. And quite frankly, they have boxed themselves into a corner where they are now kind of desperate.” – Marc Faber (link)
Equities to “hit a top and back off again”
“Emerging markets are backing off, and I really think we will have a poor year in 2014. The good news is if we have another year or 2 of slowed growth, we may be a in a stronger position for more robust recovery at a later stage, looking at 2017 or 2018. I think the economy will weaken again, relatively soon, we will have maybe one more quarter of rising equity markets and then we’ll hit a top and back off again.” – Lars Christensen, CEO at Saxo Bank (link)
The week ahead
Lost in the Fed’s decision to not commence the taper: Potential for a government shutdown starting next week. Bernanke touched on this point in his news conference on Wednesday, saying that failure to keep the government running “could have very serious consequences for the financial markets and for the economy, and the Federal Reserve’s policy is to do whatever we can to keep the economy on course.”
If the economy truly is as bad as the Fed seems to think it is, the consequences of beginning to taper – should the Fed have chosen to go down that route – may pale in comparison to what a government shutdown could do to the economy. So as our representatives at Washington dig in for negotiations this week, keep a close eye on how this plays out.