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Will Quantitative Easing Continue?

Release Date: 
Friday, June 14, 2013

Gold and Silver Prices:

Gold prices began forming a bottom this week, trading above the $1,375 level for most of the week. Ending on Friday at $1,392.50, up $6.90. Silver finished the week up slightly, closing at $22.18, up $0.39 for the week.

Gold May Increase $1,000: Hathaway

John Hathaway of Tocqueville Gold warned investors that gold may rapidly rise by $1,000 due to failed central bank policies: “I firmly believe we are reaching the point at which this notion that the central banks have everything under control, that the economies of the world are on the mend, and that the bond market will tolerate the withdrawal of liquidity in a very sanguine way, I think all of this is going to be severely challenged as we go into the second half of this year.  I believe it will boil down to a loss of confidence in the policies which have been in place since the credit meltdown of 2008. Ultimately, this will lead to a loss of confidence in central banking, and that will translate into a loss of confidence in paper currencies.  I don’t think this will happen slowly.  My belief is this will happen much more quickly than anyone guesses.....

“The bottom line, and my message, is that investors have to be positioned, despite the pain, in order to capture the repricing of gold, which could be very, very sudden.  And I’m not talking about $100.  I’m talking about another $1,000 on the upside.” 

Pointing to the commencement of gold’s bull market, Mr. Hawathay noted the similarities to the recent consolidation. “We launched … in 1998 when gold was considered to be a joke.  But this is the most negative sentiment has been on gold since we started the fund in 1998. That was basically right near the beginning of a 13 year bull market.  So from a contrarian point of view, the setup is perfect for the commencement of a huge upward leg that will take gold and silver to all-time highs.” (“Hathaway - Gold To Shock World With Rapid $1,000 Advance,” King World News, 6/13/13.)

Money Will Flow Back to Gold: US Global Investors

Two fund managers with U.S. Global Investors, Inc., Frank Holmes and Brian Hicks, were interviewed this week the about the factors that will likely affect gold prices. Mr. Holmes explained how gold prices are affected by both the “love” and “fear” trade.

“The fear trade captures most of the attention… The fear trade kicked in due to governments monetizing debt at an excessive rate, creating negative real interest rates… The other half of the equation is the love trade, which is gold bought for cultural reasons, such as gift giving for holidays, weddings and birthdays. Given that China and India account for 40% of the world's population, the rising per-capita gross domestic product in emerging economies is important for the love trade…Typically, in June, gold investors see a bottom. In late July and early August, 35 years of data show that the love trade demand picks up and runs until February.”

Mr. Hicks opined that investors will return to gold to diversify their portfolios. “We still have a large output gap and high unemployment. There is a lot of complacency in the equity markets. That has taken some money growth out of gold, but as Frank has said in the past, gold is insurance. At some point, money will flow back into gold because of the tenuous and difficult state of the global economy. Gold is a good portfolio diversifier.” (“Positive on Gold Price Negativity,” BullionVault, 6/10/13.)

Deutsche Bank Opens New Gold Vault

Deutsche Bank AG, one of the leading global banking and financial services companies, has opened a gold storage facility in Singapore, its largest vault outside London, based upon “strong demand from existing clients…”

In commenting on the new facility, the bank’s Asian-Pacific head of wealth planning said,“We’re going through a corrective trend after 12 years of a bull run… In the short term prices may fall a little further, but in the long term now is a good time to be phasing in.” (“Deutsche Bank Starts Gold Vault for 200 Tons in Singapore,” Bloomberg, 6/10/13.)

Low Inflation Supports “Aggressive” Fed Monetary Policy

Federal Reserve Bank of St. Louis President James Bullard told an audience that, since inflation remains below the Fed’s 2% target, the Fed may prolong the “aggressive” use of bond buying to support the economy and job market. “[S]urprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame.”

“Bullard is a hawkish-leaning centrist on the FOMC and his comments should be taken quite seriously,” said the chief financial economist at Jefferies Group LLC and a former Fed economist. “This is an inopportune time to be talking about curtailing [quantitative easing]….”

Mr. Bullard acknowledged that inflation should be running higher and its failure to increase was making him “a little bit nervous.” (“Fed’s Bullard Says Low Inflation May Warrant Longer QE,” Bloomberg, 6/10/13.)

Is the Fed Missing Signs of Inflation?

While the Federal Reserve has touted low inflation as one justification for its aggressive quantitative easing, there may be indications that inflation is much higher. Yahoo! Finance published an article this week listing ten products or services that have increased the most in the past ten years, well above the government’s measured Consumer Price Index. These include gasoline (108%), home fuels (145%), college tuition (88%) and hospital services (85%). (“10 Items Whose Prices Have Jumped the Most in the Past 10 Years,” Yahoo! Finance, 6/6/13.)

On Friday, the Labor Department released wholesale price information showing that prices rose for the first time in three months with the producer price index rising 0.5%, well above estimates. Core wholesale inflation, which excludes food and fuel, rose 0.1%.

Despite this increase, one economist stated the Fed will likely consider inflation to be “tame.” “There’s just a lack of any inflationary pressures across the economy,” said the chief economist at PNC Financial Services Group, Inc. “From the Fed’s point of view, I think that the fact that it’s a bit higher than expected doesn’t in any way change the view that inflation is still quite low, quite tame.” (“U.S. Wholesale Prices Rise More Than Forecast on Fuel, Food,” Bloomberg, 6/14/13.)

Rating Agencies May Downgrade U.S.

Following S&P’s upgrade of the U.S.’s credit rating to “stable,” a Bank of America Merrill Lynch analyst warned investors that two other credit rating agencies are likely to downgrade the U.S. “We continue to believe that Moody’s and Fitch are more likely than not to downgrade the US one notch this year, which would put them in line with S&P….While the surprise factor of a Moody’s move this summer would be quite mild relative to the S&P downgrade in August 2011, we think it could catch the market off guard, given the recent improvements on the deficit front.” (“ANALYST: Two More Downgrades To The USA's Credit Rating Are On The Way, And They Could Surprise Markets,” Business Insider, 6/11/13.)

Goldline provides a wrap-up of the week's precious metals news along with important commentary on the American Advisor Week in Review audio program. Click here to listen.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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