After the RIP-ROARING SUCCESS of the Federal Reserve’s last two efforts to kick start the US economy — by simply reinflating asset bubbles to get people spending — the wise and bearded one has gone all-in with his third round of QE (quantitative easing). In plain English it means money printing.
Or as I call it, ‘Questionable Easing‘.
The markets have been crying for it all year, and ‘QE3′ is now here.
The most important aspect of it is that it is open ended. The Fed will keep buying US$40 billion of bonds each month —until the unemployment rate falls to some unspecified level.
This makes it a very different beast to QE and QE2. And importantly, how long will it last?
What the Questionable Easing Means for the USA
I’d assume that it lasts for at least 12 months, based on previous form. But the fact is no-one knows. And what is the Fed’s unemployment target anyway? Seeing as Questionable Easing hasn’t worked so far, we could see QE3 continue in vain for years.
Why has the Fed opted for such open-ended policy? They would probably say that it gets over one issue of the past 2 rounds of QE, which was a sudden vacuum of uncertainty at the end of it. This is too volatile a business environment for anyone to make long-term decisions in.
The board members deny their plan is politically motivated, but…when was the last time hundreds of billions of dollars were spent without politics being involved?
The elections are looming, and Mitt Romney could lead the Republicans to victory. And they want Bernanke out of a job. So it looks a lot like Bernanke is putting his legacy in place: the printing presses will keep spitting out dollar bills regardless of whether he’s still Chairman, or writing his memoirs. We’ve got a suggestion for a title: How to Fix America Using Counterfeit Money.
With this nudge from the Fed (QE3), the global economy is drunkenly stumbling into a dangerous and complex future. An endless stream of cheap money coming into the market is one hell of an experiment, and will cause unforseen results.
But the effect won’t be limited to the US. It will cause monetary mayhem in other nations. During QE2, Brazil rightly accused the US of ‘Casino Capitalism’.
And as with all casinos, the key is to drive punters back into this ‘casino’, to get them giddy on the spinning dollar signs, so they start spending at the shops again. It’s all part of the Fed’s money printing policy. Last week, Bernanke said as much:
‘There are a number of different channels…for example, the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more — more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they’ll, you know, make a better return on that purchase. So house prices is one vehicle.
‘Stock prices — many people own stocks directly or indirectly…And if people feel that their financial situation is better because their 401(k) looks better or for whatever reason — their house is worth more — they’re more willing to go out and spend, and that’s going to provide the demand that firms need in order to be willing to hire and to invest.’
I could complain at length about the criminality of this, but … you don’t want to get me started. Besides, as editor of Diggers and Drillers, my job is to think about how this affects financial markets in general and mining stocks specifically.
Commodities Rally, Some to Surge
Anyone invested in the market already will be rightly excited by the prospect of a Fed-driven rally. The old saying: ‘Don’t fight The Fed’ holds true, because the Fed’s actions are squarely aimed at forcing investors back into the market if they want yield.
In fact equities are already rallying, with some of the biggest gains coming in smaller stocks, and commodities are surging. The London Metals Exchange index was up 4.3% on Friday night alone, and is now up 13.8% in a month. Gold is up nearly 10% in a month, and silver tops the charts with a 23.4% gain in the same time.
Even iron ore is lifting its head after a recent beating, probably on the prospect of massive Chinese infrastructure spending when the government changes guard soon. As regular as a Swiss cuckoo clock, this has been the pattern in the past.
Copper has held its ground well over the last 12 months, and is looking explosive now. In fact, US Commodity Futures Trading Commission data show that copper traders’ holdings surged 25-fold — the biggest ever gain.
And after 18 months of sinking markets, small-cap indices are at bargain levels, like the Small Ords (XSO) and Emerging companies (XEC). Coupled with rising prices in shares and commodities, this is an explosive mixture for small-cap mining stocks.
So I’d be lying if I said I wasn’t very excited at the prospect of Diggers and Drillers readers doing very well in the next 12 months…despite the craziness of the Fed’s actions.
Watch Precious Metals
Gold stocks have gained more in the last week, with the Market Vectors Gold miners index (GDX) up 28% since the start of August. The gold chart is looking more bullish by the week, but is looking incredibly bullish now.
Gold’s golden cross — to herald the next 3 year long, 100% rally?
One important point in this chart is that the gold 50-day moving average (blue line) is about to cross the 200-day moving average (red line). This is the ‘golden cross’ — and is a powerful confirmation of a change of trend. We last saw this at the start of 2009 and it led to a three-year rally that saw the gold price DOUBLE.
As for silver, it has been outperforming gold two-to-one on the latest move, and I’d expect this to continue. Silver comprises a far smaller market, so is more sensitive to the kind of liquidity we are seeing now from the Fed. And don’t forget that the European Central Bank (ECB) is talking about unlimited bond purchases, which will increase the liquidity much further.
The gold to silver ratio shows how many ounces of silver it costs to buy one ounce of gold. Silver has risen so much faster than gold that this ratio has dropped from 60 to 50 already. During QE2, the ratio fell from 70 to 30, so we could have much further to go just yet. This makes this a very exciting time for silver investors.
The key is going to be how to position your trading for the coming rally. I’ve been busy all year with Diggers and Drillers tips focusing on gold, silver, oil, and strategic minerals. These should all do well, but as ever…there are always other hidden opportunities that I’ll keep looking out for.
Dr. Alex Cowie
Editor, Diggers and Drillers
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