Will the Fed print or won't the Fed print?
Richard Russell snippet
August 23, 2010 -- The economic "experts" are still trying to understand gold. In the Wall Street Journal, August 21 (Saturday), we see a piece entitled, "Rethinking Gold. What If It Isn't a Commodity After All?" The piece concludes that gold is a "shadow currency." The article points to a STUDY THAT SHOWS THAT an historic study shows that there is little correlation between gold and inflation or deflation. The same study demonstrates there is a close correlation between gold and the US dollar.. Dollar up -- gold down. Dollar down -- gold up.
Thus, those waiting for inflation to drive gold higher are missing the boat. It's a sinking dollar that will send gold higher.
There is an incredible amount of debt in the world today, much of it denominated in dollars. This is why a few years ago I termed massive debt a "synthetic short" against the dollar. The more debt that's created in dollars, the more dollars are needed to carry or retire that debt.
The following excerpt is from a piece which appears in the current issue of Barron's. The piece was written by Ned Schmidt of Schmidt Management. The article is entitled "Gold's Outlook."
"Why might the dollar continue to appreciate when the financial situation of the US seems so dismal? First, dollar denominated assets, primarily US treasury debt, remains the largest liquid investment in the world. A large liquid Eurobond market does not exist. Rather, to invest in euros, one must buy individual national debt. Which limits the possibilities.
"Second, the dollar, because of the anemic money-supply growth, has been becoming rarer. Until the Fed officially adopts quantitative easing, the dollar will remain relatively rare.
If the dollar remains relatively rare for a period of time, the current rally in gold could be short-lived. Now is not the time to be buying gold."
Chart below courtesy John Williams' Shadow Government Statistics.
Russell Comment -- The question is -- will the Fed print or won't the Fed print? If the US economy remains weak and approaches actual deflation, I find it difficult to believe that the Fed will not print. Also, if dollars remain scarce, the fact of their scarcity will drive interest rates higher, something the Fed most definitely does not want. Therefore, I believe that the odds favor more "quantitative easing" (printing).
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