Happy End of the World, everyone. I'm sitting on my farm looking out at
all the snow we got yesterday, and all the trees down or missing branches.
One fell across our road and another cracked a big limb off into our horse
paddock. Thankfully no one was out in this mess when it happened.
In other areas of the world, there was a major dust storm making its way
across Texas on Wednesday, a volcano in eastern Russia erupting for the first
time in nearly 40 years, and flooding in the U.K. is set to continue for the
next couple of days.
The only consolation is that there aren't any locusts... yet.
But you wouldn't know that to look at the financial world. Here are just a
couple of cheery headlines:
- Stocks Plunge as "Cliff" Proposal Fails,
Immediate Deal Unlikely
- No "Happy New Year" for U.K.; Gloom Worsens
- German Consumer Morale Drops to Lowest in over a Year
Indeed, markets all over the world are falling after Congress shelved a
vote on the fiscal cliff budget. Oil
and the 10-year bonds are down, too.
But gold
is ticking higher, as is the dollar.
How did these two get on the same side? These assets should have an
inverse relationship, meaning, when one goes up, the other goes down.
There is no simple answer. Some experts say that monetary policy has
pushed interest rates so low that they can't go much further. Other experts
say that each round of quantitative easing has pushed the precious metal with
less and less strength.
Both are right, but it's this last bit that twists the knickers of gold
bugs.
Each round of money printing and debt buying puts more and more pressure
on the dollar. At least that's the case mathematically. But in real life, if
none of that cash circulates, then its effect on inflation is non-existent.
And without inflation, gold prices don't necessarily move opposite of the
dollar.
It's getting hard to tell which is the parasite and which is the host: the
federal government, or the Federal Reserve...
From the Fed's policy statement last week:
To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the
asset purchase program ends and the economic recovery strengthens. In
particular, the Committee decided to keep the target range for the federal
funds rate at 0 to 1/4% and currently anticipates that this exceptionally low
range for the federal funds rate will be appropriate at least as long as the
unemployment rate remains above 6 1/2%, inflation between one and two years ahead
is projected to be no more than a half percentage point above the Committee's
2% longer-run goal, and longer-term inflation expectations continue to be
well anchored.
In other words, the Fed feels free to keep money über-cheap in a high
unemployment scenario, and they don't really think that'll do much to
inflation. Check out the Fed's own projections, via Tim Iacono:
Interesting that the top inflation projection figure never climbs above
2%, even though the low figure in the range jumps from 1.3% to 1.9%, eh?
This could be one thing to weigh gold prices down.
But there is room for vindication... Over the next two or three years,
we'll find out if inflation will really stay below 2% after all this printing
and cheap credit.
In the meantime, recent gold investors might take this price slide as an
opportunity to average down their gold prices. Bank of America Merrill Lynch
analyst Francisco Blanch said he expects gold prices to climb to $2,000 an
ounce in 2013.
That's a gain of 20%, and better than what the S&P 500 has given us in
the past year.
Happy Investing,
Sara
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