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Precious Metals and the Fed's Total Mandate

 -- Published: Friday, 7 February 2014 | Print  | Disqus 

By Dr. Jeffrey Lewis

The errors of financial policy, led by the world's central banks have once again created the makings of a massive crisis. Blind to risk, and completely captured by politics and ideology, it is as if the Federal Reserve and it's counterparts have been awarded a total mandate. All of the misplaced and mis priced risk is poised to flood toward precious metals.

Broken Banking Capitalist Structure

Policymakers have simply failed to admit or assume responsibility. This is parallel to the leadership of the thirteen remaining mega banks who 'survived' in the wake of the 2008 financial crisis, Most have no skin in the game and a horizon shaped solely by the short term and for the shareholder. And many have been rewarded instead of prosecuted.

Monetary policy via currency management has distorted so completely that that return to the slightest semblance of normal will be volcanic. It's as if policy has been merely a veiled containment.

The great irony is that the very same trading structure that gives rise to the all too predictable short term price moves, drives the passions of the technical trading community who, worshipped by the financial media, serve to obscure the truth and therefore the underlying economy from the masses.

Before the great crisis of 2008, many independent or private economists warned of the impending disaster. It was never simple to determine the shape and timing of the crash. It is important to understand that they were drawing on risk that had existed for many decades, and longer. And because of this many of those who were warning others were somewhat surprised by the lack of follow through.

Imbalances Remain

The widespread financial and cultural damage to hundreds of millions were catastrophic enough, but much of the structural imbalances remain intact. Of course, policy makers were praised in there ability to stop it and now we are back again with a large majority back to speculative high gear. The policy response killed the motivation to learn from this.

So we are back again, and this time the risk has not just multiplied, but has grown by an order of magnitude. The US bond market is still viewed as a safe haven inside and out.

It's size dwarfs the equally inflated equity market and a significant down turn or rise in yield, would very likely trigger a truly tragic monetary event, bringing the world's reserve currency to the brink of hyperinflation.

Entrenched Near The Edge

Currently, we are being led by ideologically focused US and Japanese central banks, and in the EU, the motivation is to keep the currency together. The advent of bond buying programs, a euphemism for the money creation, has created massive risks of inflation and a test of major loss of confidence.

Silver and Gold Prices

We have not seen anything yet in terms of real price moves. Most investors today choose a very narrow view of price performance. The issues, imbalances, and response from policy makers has not changed. The same approach and philosophy towards policy exists today that existed before the crisis and long before that as well.

In parallel, the fundamentals for the precious Metals remain unchanged. Silver's rise from $8 in 2008 to nearly $50 in 2011 looked spectacular to those who didn't see it coming. Yet the set up that led to that move had been in place for many years if not decades. Much like overall modern financial risk, the precariousness of a concentrated short held by one or two investment banks in an investment asset very easy to rationalize for it's commodity demand was simply off the radar.

The price of silver and gold had been kept in check for so long that the "risk" of a disorderly move higher was not accounted for. The same can be said for today. Despite the gradual understanding and even mainstream acceptance that precious metals are manipulated and controlled (for many reasons), that risk remains, but even more so as a direct result from the buildup of macro policy error.

The speculative move up in precious metals prices is once again part and parcel to the next "accident" waiting to happen, and an Achilles heel for a financial system that is exceedingly fragile.

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 -- Published: Friday, 7 February 2014 | E-Mail  | Print  | Source:

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