Keepin' the Dollar Cheap
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- Published on Friday, 14 September 2012 19:24
- Written by Sara Nunnally, Editor, Inside Investing Daily
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Everyone knew it was coming, but no one can help feeling optimistic about the fresh round of quantitative easing from the Federal Reserve.
Reuters reporter Pedro Nicolaci da Costa says the package is "a large move, a very aggressive move."
This round starts with $40 billion in mortgage-backed securities and ends when unemployment is under control.
From the Fed's meeting minutes:
If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.
That means this "round" of QE is open-ended. The Fed also announced another extension of its Operation Twist program, in which the Fed exchanges short-term, higher-interest-rate bonds for longer-dated, low-interest bonds.
Now the program will continue through the end of the year, and we're also going to get to keep our absurdly low interest rates (between zero and 0.25%) through mid-2015.
Keepin' the dollar cheap!
On the news, gold spiked $50 per ounce, up to $1,777, and we're ticking higher again today.
This move could be just the beginning of another massive gold rally.
But the markets really liked the move, too. The S&P 500 climbed 25 points in two hours, rallying right along with gold.
There's something fundamentally wrong with this picture.
Cheap dollars mean lower values for goods and investments. Any rally in the markets will be handicapped by the falling value of the dollar.
And here's the other thing. When the Fed stops propping up the markets, we're going to get a huge slide back. We've seen it before. Let me show you the last few times the Fed sparked a "paper rally."
In this five-year chart of the S&P 500, the green triangles are Fed injections into the market -- whether they are special loan programs, bond-buying rounds or Operation Twist. The black circles are when each of these programs ended.
It's not hard to see that the Fed wants to stimulate markets. It could be looking for a breakout here, but the real economy won't support that kind of momentum.
That's why this round of easing is open-ended.
Every time a Fed stimulus/easing program ended, the S&P 500 fell 14-16% in two short months. That's nearly two-thirds of this year's total gains. Heck, that's about half of the S&P's total gains for the past two years!
This means long-term bad news for the dollar and your investments.
Here's what's been interesting. Look at the S&P 500, compared with the most popular gold ETF over the past two years.
Gold has maintained its rise, even as markets were turning in gains... even as the price of gold was in decline.
That's what makes gold such a good investment. Gold is traditionally a hedge against the dollar, because when the value of a dollar falls, the value of gold climbs.
This is the U.S. Dollar Index versus the price of gold over the past year. The two are mirror images of each other.
Yet the market is climbing away, fueled by the Fed's paper stimulus. The real gains are in gold.
I've got my Macro Trader subscribers in the Sprott Physical Gold Trust (PHYS:NYSE), an exchange-traded asset that lets investors actually take delivery of gold if they want.
PHYS is a good option for those investors who want the security of owning gold without the hassle of having to store, insure and guard it 24/7.
I'm going on record now to say that the paper rally the Fed's orchestrating is going to hit a sour note very soon.
That 14-16% drop could be just a small part of a big move lower. Expect some tremors by the end of the year...
Happy Investing,
Sara
Editor's Note: Gold is in transition to being viewed as a "neutral currency." As governments around the world fight against the crushing weight of debt, they will discover they have no option other than to print large quantities of paper money. This will devalue all paper currencies relative to gold, the only "neutral currency" not subject to the whims of a printing press.
This means gold is going a lot higher. Gold should be in your portfolio right now. But exactly how much and at what price? Find out more here.
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