As foreseen, Federal Reserve Chairman Ben Bernanke is having a little trouble reigning in the credit offered by the Quantitative Easing programs and the market reaction is creating one of the best opportunities we’ve seen to buy gold since December of 2011. Last week, Mr. Bernanke appeared before the Congressional Finance Committee and failed to definitively mention an official third round of the fiscal stimulus known as Quantitative Easing. While this may not seem like a big deal, it caused a market reaction that is still unwinding. The Dow posted its biggest drop in three months this week and commodities, excepting oil, have also been posting a decrease.
The fiscal stimulus provided by Quantitative Easing is the preferred drug by market participants because it is a short-term injection of liquidity from which bankers and investors can make millions. Unfortunately, however, the injection eventually becomes an addiction and those same bankers and investors have a hard time living without it. Like any drug, it also carries very serious risks and side effects, the most prescient of which in this case is a dilution of the purchasing power of the US dollar.
For every dollar created in the Federal Quantitative Easing programs, the dollars in existence are worth less on a purchasing power basis. A gallon of milk is at a record high, yet it costs no more to produce than it did twenty years ago. The gallon of milk has not changed. The dollars you buy it with have changed a lot and are worth a lot less.
While the price of gold is currently down about $100 from before Mr. Bernanke’s comments, it is the best investment you can make because of this inflationary dynamic. While dollars are continuously diluted in the market, and we have only begun to see the effect of the first two rounds of Quantitative Easing, gold continues to gain in price and in value. The current decrease in the gold market is clearly linked to the Federal Reserve’s announcement and it is very much a temporary effect.
As a long-term investment, gold is the only way to hedge the Federal Reserve’s policy of injecting dollars into the marketplace. As the Fed today released a press announcement that it may consider a “sterilized” round of Quantitative Easing, it is clear that it cannot disengage from fiscal stimulus without damaging the economy. There will be more fiscal stimulus and gold will fundamentally benefit from it, it’s just a matter of time. Buy gold now to gain from the Fed’s action in the future.
Senior Staff Writer – Certified Gold Exchange