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Will The Precious Metals Rally Continue if There is No QE3?

Let's attack this question from two angles, the fundamental economic and geopolitical environment, and from a technical analysis perspective. First the fundamental and geopolitical perspective:

Clearly, Gold (and Silver and the Mining Stocks) has risen more than six hundred percent over the past decade, a decade that has seen fiat money supply rise dramatically domestically and globally. Over the past two years, U.S. money printing has exceeded all the money created from the time of the Founding Fathers through the Reagan administration. This fanatical printing of U.S. Dollars has debased the purchasing power of the Dollar, forcing precious metals to rise as a defense against this hyperinflation. So there is a monetary hyperinflationary push behind the rising value in precious metals. QE2 has supported that.

There is also a geopolitical risk, safehaven component to the value of precious metals. Terrorist attacks, sovereign debt defaults, revolutionary regime overthrows in the Middle East, natural disasters such as earthquakes, tsunamis, volcanoes and hurricanes, and global warming risks have dominated news stories with increasing frequency over the past ten years. Survival uncertainty increases demand for precious metals.

Then there are supply and demand issues related to metals valuation, especially from speculation and the likely event that some rogue nation will decide to back their currency with Gold or Silver, forcing all nations to either follow, or go to war. Supply and Demand issues also include industrial usage, with growth in emerging economies and the explosive growth in China boosting demand.

The fact of the matter is, QE2 has been an abject failure at stimulating an economic recovery. It has done a great job levitating the stock and commodities markets, but has in fact done a great deal of damage to the domestic and global economy, driving the cost of living for billions of people higher without providing matching revenue for folks to absorb these costs. Because of the Fed's QE2 policies, and the printing of fiat currencies by participant nations in this strategy, food and energy costs have risen to levels that will surely send the global economy into a double dip downturn that could lead to a depression. This has been behind a great deal of populace discord over the past year, leading to revolution in many countries. The Fed is buying securities from large Wall Street firms in exchange for printed dollars. Now the holder of billions of dollars, these mega banking firms have to do something with the liquidity. It is not being loaned. It is being used to bid up the prices of everything except real estate. Agricultural futures, precious metals, oil, stocks, and bonds--which keep interest rates low. With the cost of basic raw materials, essential for life, being bid up higher than otherwise would have occurred had cash not been so available to the Wall Street mega firms, the price of commodities would not be as high as we see them, and therefore we would not be exporting hyperinflation-based civil unrest throughout the world. In this sense, QE2 is evil. The trillions of QE1 and QE2 dollars have not gotten into the hands of the real economy, of consumers, of households, of small businesses, where real money multiplying from transactions and real economic growth can occur and spur broad-based recovery and prosperity.

Look at the economic statistics of the past few weeks: Factory Orders fell 0.1 percent in February. Durable Goods Orders were down 0.9 percent in February. February Construction Activity dropped 1.4 percent, and according to the Commerce Department, the third straight monthly decline to half the level typical of a healthy economy, the lowest reading since October 1999.

New Home Sales plunged 17.0 percent in February versus January's level, the slowest annualized pace on record (250,000), ever, and less than half the sales that happened in 1963 (560,000) when there were 120 million fewer people than there are now, and 73,000 less than the previous worst record (323,000). 700,000 is considered normal for a healthy economy. Existing Home Sales fell 10 percent in February, with 33 percent of sales all-cash deals, bypassing the banking system. The Conference Board announced that its index of Consumer Confidence dropped sharply in March to 63.4 from 72.0 in February.

The March Labor Department Report on Unemployment revealed that 16.7 percent of Americans are under/unemployed, including involuntary part-time workers and unemployed folks who are discouraged, a figure the mainstream media will not report.

The Bureau of Labor Statistics also reported that the economy had created 216,000 new non-farm payroll jobs in March 2011. However, upon closer inspection, we note that 117,000 of these reported 216,000 were let's pretend, not-counted, wild-assed guestimate jobs the Labor Department thinks may have been created by new businesses that may have started up in March 2011, per the CESBD report. Of the remaining 99,000, the report mentioned that 29,000 were in temporary help service jobs. So at best, the economy created 70,000 new jobs in March 2011. However, we need to create 150,000 new jobs each month just to breakeven with population growth. So March came in far below breakeven, and woefully below what is needed to get the unemployed back to work. And these numbers do not address the issue of quality jobs being replaced by clerical and menial low paying jobs, yet counted as employment.

Does this sound like a reviving economy? Of course not.Yet the stock market levitates on QE 2 money the Fed prints out of thin air and gives to large Wall Street firms so they can make huge profits trading with that cash, in stock and commodity markets. We learned this week that the largest of these privileged Wall Street firms, Goldman Sachs, paid its CEO $14.1 million in compensation for a job well done. We also learned that mega-firm General Electric did not pay any federal corporate income taxes in 2010. Yet miniscule payroll tax cuts for individuals for 2011 have been devoured by rising food and energy costs of living. With Oil at $110 a barrel on Thursday, April 7th, could $5.00 a gallon gasoline be far behind? A faltering economy is not a formula for higher tax revenues, and the political landscape is not going to embrace spending cuts. Cuts are okay if they are coming from someone else's government handouts, but not if one has to sacrifice their own subsidy or entitlement, and with trillions of unfunded liabilities, and burgeoning federal deficits across the globe, sovereign debt issues are just going to get worse. QE2 has not helped these matters, not one bit.

The point is, with or without QE3, the U.S. economy is headed for trouble, and probably global economies as well. With economic trouble will come civil unrest, political upheaval - both orderly and possibly revolutionary, and an increase in the risk of war, just as has occurred after every Great Depression and Great Recession over the course of time. This volatile environment will prove a catalyst for rising precious metals prices.

And what will the Fed's response be to a faltering economy and geopolitical crises? More liquidity infusions, and most likely once again through the Wall Street sieve. In other words, QE3 is inevitable. They may call it something else. They may hide that they are doing it, but there is no way out, so Fed policy will be to pump more and more liquidity into Wall Street until fiat currencies are so debased that a new precious metals backed currency is forced into play.

As far as the technicals, the picture is dreadful for fiat currencies and euphoric for precious metals. The chart below shows the damage to the U.S. Dollar from Fed monetary policy over the past decade. It projects the Dollar will crumble from it present 75 value to below 40 over the next several years. This is telling us that either a competing currency will be backed by precious metals, or QE 3, 4, and 5 are coming, all increasing demand for precious metals at a far faster pace than the supply of precious metals can grow.

Image 1

Gold and Silver remain in huge rising trend-channels, and are telling us precious metals are headed much higher over the next several years.

Image 2

Image 3

In conclusion, precious metals are headed higher, much higher, as there is no way out for global economies to return to stable fiat currency management contemporaneously with healthy economies and sovereign fiscal responsibility. Not going to happen for years, maybe decades. Could metals correct along the way? Yes, however, the trend is up for a long time.

 


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"Jesus said to them, "I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day."

John 6: 35, 38, 40

 

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