QE3 May Be In Discussion

By: Elizabeth Kraus

As long as the markets continue to whipsaw, time to put some words down on paper as this usually serves to clarify perceptions, the main question is, “What is going to happen to gold and silver in the near term?” Thanks to CNBC for pointing out, that when Bernanke’s speech hit the wire, apparently because he said that he’s not worried about inflation still, gold went nuts! The headlines were screaming at the top of every financial media outlet that night: The Dow Closes Above 12,000 For the First Time in Two Years!So, what’s going on here? Is the recovery well and truly underway? Everywhere we look in the media, it’s all about jobs, jobs, jobs…and yet that’s still the Big Kahuna to a lot of our problems regarding the meandering economy. To get back to this thriving economy were told, the forecast for January jobs created was updated a few days ago shows that the experts believe 145,000 jobs were created in January…not exactly the stuff that our strong economy is made of!

And, if it is, why is the Fed dropping hints again that “QE3 may get discussed” at future Fed meetings, as Kansas City Fed President Thomas Hoenig said on Feb 1st?

Speaking of QE3… I saw something yesterday that plays well with my thought that we’ll probably see QE4, and then maybe QE5… Hoenig, who normally is known as a “hawk,” mentioned something yesterday that the markets probably missed…when he said, that QE3 “may get discussed.” The day after, Wall Street let out a collective squeal of excitement.

Part of the subtext that was lost in this enthusiasm is that, in saying that QE3 may get discussed, he wasn’t offering hope to Wall Street, but was instead criticizing the existing policy of the Fed. The way to understand the comment is to put it in the context of Hoenig’s long-standing dissent and open criticism of quantitative easing. My guess is that his complete remark was something like “The current trajectory of Fed policy is dangerous. When will it stop? Who knows? Aside from fueling speculation and inflation risk, QE2 won’t help the real economy, but if the numbers are disappointing, even more reckless policies like QE3 may get discussed.” Just last week, Hoenig warned of another boom-and-bust cycle, and repeated his call for the Fed to reverse course, saying “I hope I’m wrong. I hope they’re right. But I don’t think so.”

Well, I guess we might as well pucker up and kiss QE3 right on the kisser, because… QE1 did not, and QE2 is not going to create jobs… It only causes people to get comfortably numb and begin to spend again, and then it all comes crashing down, because consumption does not create wealth!
Given the raft of good economic news lately, one might be forgiven for wondering what the Fed has in mind here. If everything is so economically rosy, why are they already dropping trial balloons about more Quantitative Easing? What are they seeing that we are not seeing, that justifies more than $100 billion in thin air money each month, and why won’t they just tell us what it is?

While it’s true that retail investors have only very recently begun moving more money into stock funds than they have been removing, reversing a 33-month-long outflow, this is focusing on the wrong element in the equation. Retail investors provide only a very minor amount of the rocket fuel used to elevate the stock market over the past several months.

So, what is going to happen to gold and silver in the near term? Newmont CEO Richard O’Brien comments on where he thinks the price of gold is head: “For me this is a year where we see gold trade between $1300 – $1500 trading ranges. It will be volatile, but I see continued upside from there over the next couple years. This super cycle mentality, creating a middle class in China, demand for gold as an investment….the worry point for us would be if the economy really slows down and we don’t see growth, particularly in China and India. If that forecast is wrong, then gold goes down. Otherwise we’re in a great spot. I think there’s a lot of shine in this metal.” Regal Assets President Ron Fricke commented on the effects of QE1 and feels that QE is taking us down a road of no return: “Quantitative Easing in layman’s terms is the printing of money. Look at any nation that tried this and all you will see is failure. It may create a temporary feel of recovery but in the end it will only compound the issues at hand”.

Precious metals – and gold in particular – have been the asset class of the decade. In fact, before 2011 closes out, Resource Specialist Peter Krauth predicts that each ounce of the prized “yellow metal” will be trading at $1,900 – an increase of about 37% from the recent closing price of around 13+.

To understand where gold prices are headed this year, it is important to recognize that most of the selling in recent weeks has come from U.S. and European short-term institutional traders and speculators – banks, trading firms, commodity funds, and hedge funds – operating mostly in derivative markets, some simply taking profits, others betting on the downward momentum of the market, and many reacting to the reversal of “safe-haven” funds that late last year sought security in U.S. dollar assets and gold.

These players have no long-term view of gold and certainly no allegiance to the metal as an inflation hedge, store of value, portfolio diversifier, insurance policy, and traditional savings medium. They simply sense a profitable trading opportunity. Today gold is in their sights. Tomorrow, it may be petroleum, cocoa, rice, steel or long-term U.S. Treasuries. And, one day they will be buying gold again.

While the global economies are looking at consolidating their recovery this year, with phases of higher uncertainty in terms of the sovereign crisis in Europe, high rate of unemployment in US and increasing inflation in the merging markets, these nervous spells in the markets will drive up the prices of precious metals once again sky high. Among precious metals, gold is the most stable regardless of its lately manipulative corrections, such as why stocks were flat the other day, and gold was down $8.

So, what you hear about gold corrections is just noise. In other words it doesn’t mean a thing….But wait, sugar at a 30-year high, cotton at a record high, and oil at a 28 month high, what’s going on? Could the markets have been so wrong last year about gold…and the year before…and the year before? All of a sudden, they’re discovering that commodities are a lot more valuable than they had thought. How could they have been so wrong before? Or are they wrong now? Or is it just more noise? The prognosis for the gold and silver in the near term, is that they will move up in price supported by the growth of the emerging and meandering economies.

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