-- Published: Wednesday, 23 July 2014 | Print | Disqus
By John Manfreda
I wanted to address tapering, an end to monetary stimulus, and what it means for gold. In 2013 the price of Gold suffered its worst year since 1981. The general consensus on why gold crashed was because of the Fed’s forward guidance stating the US economy is on the verge of recovery, with government data supporting an economic recovery, which will ultimately lead to the end of monetary stimulus, followed by interest rate normalization.
In terms of fundamentals, none of the fundamentals that lead to a rise in gold from 2003-2011 have changed. When stating this, most people would think I’m crazy, partially because I am ;), but mainly because when one invested in gold, the decision was made because the Fed was printing money, and that the price of gold would rise because of the continuous injection of monetary stimulus. But what those people forget is that Gold is money, and the reason the US is printing money is because it’s insolvent. If interest rates were to rise to a fair market value, the interest on government debt would greatly exceed government revenue, thus leading to a national default on its financial obligations. That is why analyst have said if you believe in math buy gold.
I will admit if the Fed stopped easing, printing money, providing monetary accommodation, whatever you want to call it, that would cause a knee jerk reaction, and create selling pressure, thus reducing the spot price of precious metals. But the reality is, if they completely ended stimulus, slowly at a gradual pace, or quickly, interest rates would inevitably spike, thus causing sovereign debt crisis, which will ultimately lead to a default in the US treasuries market. This would then create a mad panic rush into monetary alternatives to the US dollar, and the strongest alternative to fiat currencies for the past 5,000 years was, is, and most likely always will be, Precious Metals.
I admit I don’t think the Fed will end stimulus, in fact I believe they will reverse the tapering, or come out with a much larger stimulus program in the future; but even if they ended stimulus, the gold fundamentals are still strong because of all the debt in the system, and because it is an alternative to the paper money system we are presently stuck in.
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