The international appetite for US Treasuries is on the wane. Purchases are politically, not economically motivated. No one buys Treasuries for the pitiful interest rates that they offer. The purchases are structured to hold down interest rates. This is what Quantitative Easing is all about. The only way to hold down interest rates into 2014, as the Fed has promised, is for the Fed and the European central bank to continue to purchase Treasuries and buy PIIGS bonds.
In Europe, Spain and Italy join Greece in needing the ECB to buy their bonds or the market will push UP interest rates in these countries to unsustainable levels. QE is the only tool that they have to hold back a tidal wave of rising interest rates, and the economic damage that rising interest rates will cause. $17 trillion has already been injected into the system, but it went to the winners of derivatives, not to the common man. It kept the banks and the system afloat but did nothing for business or growth.
QE will continue in whatever amount is necessary for as long as necessary – in other words, as Jim Sinclair says, we will have “QE to infinity. Expect another $17 trillion in QE.” Once started on the path of QE, there is no withdrawing. The system will collapse if they stop, so currency-induced inflation is a certainty. Gold is your main line of defense. If you don’t understand this simple fact, you will be a big loser.
Why do I keep harping on this? Because QE is nothing more than DEBT MONETIZATION. Debt monetization INCREASES the money supply. An increase in the money supply has a direct effect on the value of the dollar. The dollar is headed to .7200 on the USDX. That represents a 10% loss in the value of the dollar and inversely, a 10% RISE in the price of gold. That puts gold above $1,800, which is the number that the central banks will fight to defend, tooth and nail.
The central banks are comfortable containing the price of gold at $1,650. The market is revolving around that number now, and the price is going no-where. But it will not hold and I see the price rising above this number, not plunging below it as others like Edelson and Gartman suggest. Sinclair’s $1,620, for all intents and purposes, held. Gold has a lot of work to do to break through $1,700 and then $1,800 but I expect to see these round numbers breached well before the year is over. Sinclair’s price objective for gold in 2012 is $1,700 to $2,011. “At $1,764 they lose control.” When the next round of QE is announced, as early as next month, gold takes off. Right now is “the dip period,” and buying on the dips is a very prudent approach, one that I adhere to personally at every opportunity.
Richard Russell’s view on gold is constant. Gold is holding strongly above $1,600. Someone, he says, is buying gold at these levels, probably the Chinese. Russell never sells his gold. He buys the dips. He owns physical gold in the form of coins. He has been a bull since the inception of this bull market, a decade ago and is still a bull. If Russell and Sinclair are committed bulls, then so am I, and you should be too. There is over 100 years of experience between these two elder statesmen. There are still a lot of people I know who pay no attention to either of them. They are fools! Not, Richard and Jim, I mean those who mock them.
Gold is down, as usual, coming out of London. Let’s see if the funds jump in and go long this morning.