Green Light Turns Yellow
March 21, 2012 by Brien Lundin
It was all going so swimmingly for gold investors: The European Central Bank had thrown out another €529.5 billion in easy-money accommodation for eurozone banks, and Federal Reserve Chairman Ben Bernanke had publicly indicated that his quantitative easing gun was loaded and he had an itchy trigger finger.
Then it all fell apart. It started with Bernanke’s most recent testimony before Congress, which was then firmly backstopped by last week’s policy statement from the Federal Open Market Committee. Both strongly suggested that further quantitative easing is off the table in the short term.
After riding high for much of February on bullish news, precious metals prices hit the skids following Bernanke’s testimony on Feb. 29 in front of the House Financial Services Committee.
How dramatic was the fall in gold? Consider that the metal hit its monthly high… and its monthly low… in the same day.
This was a major, bearish technical signal that simply had to be acknowledged. And in doing so, we must also admit that the rally of the previous weeks was much more fragile, and more dependent upon speculative trading funds, than anyone had imagined.
The fact that the markets nose-dived so quickly upon Bernanke’s testimony indicates that some very big money, in a limited number of hands, had been betting that Bernanke was going to outright endorse a third round of quantitative easing in a very clear and direct fashion.
In the end, the markets reacted not so much to what Bernanke said, but what he didn’t say. In short, he didn’t come right out and publicly endorse more quantitative easing. And last week’s FOMC statement did not do so either.
Other factors have played a role in gold’s correction, most notably the brightening economic picture in the United States and at least a temporary resolution to the European credit crisis. In other words, the market believes that even Bernanke can’t find sufficient cause for another round of quantitative easing.
At the very least, the downdraft in gold has been accompanied by significant short-selling. And this infers a short-covering rally to follow at some point.
Regardless, the correction in gold seems to be well overdone and unjustified, given the broader monetary backdrop. There’s already far too much liquidity in the global system, along with obvious inflation in Asia and “stealth” inflation in the West, to see a collapse in gold demand.
As the Wall Street Journal editorial board put it:
In addition to the European Central Bank’s liquidity burst, China is easing its reserve requirements to stimulate more bank lending. The Bank of England has been all-in for some time, and the Bank of Japan recently joined the party. Lesser central banks have been following suit, as the world takes its cues from the grandest monetary maestro, Mr. Bernanke, who has announced that the Fed will keep interest rates at near-zero for another three years.
Does this sound like a tight-money policy? Purely on monetary momentum alone, the future looks bright for gold and tangible assets over the long term.
In addition, we can’t forget about the $1.5 trillion in excess banking reserves that is being held by the Fed right now. This money officially doesn’t exist… until the Nation’s banks start withdrawing the funds to make loans and thereby insert the money into the economy.
Sustained U.S. economic growth, in other words, won’t be the end of liquidity injections. Instead, it will mark the beginning of a new phase, as the velocity of today’s huge, overhanging money supply accelerates and inflation truly kicks in.
And finally, does anyone really believe that the Fed and the ECB are going to drain the punch bowl anytime soon? Is Bernanke going to suddenly stop printing money?
In fact, one can put forth a very credible argument that more quantitative easing will be necessary — unemployment is still at record levels in the eurozone and the economic data in the U.S. continues to be mixed. In his Senate testimony, Bernanke claimed that the record for quantitative easing was “positive,” and he maintains that his previous two monetary injections didn’t spark inflation at all.
Rest assured, Bernanke still has his finger on the QE trigger, and it’s itchy.
The technical damage that has been inflicted on the gold chart cannot be ignored, of course. The market’s swift reaction to last week’s FOMC statement, for example, sent gold below its widely watched 200-day moving average.
So in the short term, dollar-bullishness based on improving U.S. economic data and a consensus that the worst is over in Europe may continue to hamstring gold prices.
But over the long term, an improving U.S. economy has the potential to unleash massive amounts of price inflation, which will result in a weaker U.S. dollar and stronger gold and commodity prices.
In short, the future may be a bit choppier than we had hoped, but I’m confident that the metals are headed much higher once the current correction has run its course.
The Potential For Economic Armageddon In November
While gold should slowly but surely resume its climb soon, there’s a very real possibility that the metal could absolutely explode higher. And it’s actually getting more likely every day.
You see, the Republican primary contest has lasted longer, and been more vitriolic, than anyone had imagined. The candidates are doing the opposition research for the Democratic Party, and spending their war chests attacking each other. At this point, I think the odds of unseating President Barack Obama in November are 50/50 at best.
And that means American investors are precariously balanced on a fence. Fall on one side with a Republican victory, and we still have problems… but they’re solvable. Fall on the other side with a Democratic victory, however, and there’s big, big trouble ahead.
We’ll see our debt burden continue to grow with massive spending and no entitlement reform, rising taxes and other attacks on the productive sectors of society, and monetary inflation to a degree that will make recent dollar- and euro-printing pale in comparison.
Make no mistake: This will be economic Armageddon. And the odds of it occurring grow more likely with every day that the Republican nomination remains contested.
That’s one reason why many investors are looking at the current correction in gold and silver as a major buying opportunity. And I agree with them.
In fact, I’m going to provide some specific, bargain-priced recommendations in upcoming issues of my free e-letter, Golden Opportunities.
In the meantime, with Rick Santorum having recently won Mississippi and Alabama, the calls for Newt Gingrich to withdraw from the race are growing more strident. If he remains in the contest, it should help decide the nomination more quickly for Mitt Romney, since Gingrich will split the anti-Romney vote with Santorum.
But don’t count on Gingrich running away from the spotlight he loves so much. To be fair, Gingrich has some great ideas. I’ve discussed many of them with him over the years, as he has appeared at our annual New Orleans Investment Conference.
In fact, as you’ll see below, he presented much of his future platform at our 2010 New Orleans Investment Conference.
Why there? Because the New Orleans Conference is famed for bringing in the world’s top experts in geopolitics, economics and investments together with today’s most successful and opinionated individual investors.
History has shown that there’s simply no better place for investors to get actionable strategies to protect and build their wealth, and there’s no better place for the most accomplished experts to present their views.
Gingrich gave a rousing presentation at the 2010 New Orleans Conference. It’s the speech that’s widely credited with having launched his Presidential campaign, and you’ll see why.
So, enjoy Gingrich’s inspiring speech. But also be sure to protect yourself from the dangers he foresees, and which are growing more real with every day that passes.