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Money printing damage to markets is already done whatever the Fed does next, gold’s time still coming

By: Peter Cooper, Arabian Money

-- Posted Thursday, 21 February 2013 | | Disqus

Stocks tumbled by the most in three months yesterday after news that Federal Reserve members are divided over the effectiveness of money printing through QE. The markets reacted as though the inflation of stock prices would stop the moment the Fed turns down the money presses.

Actually that is true. But what is not correct is to assume that inflation will go away as quickly. That is the nasty unintended consequence of QE that is now baked in the cake and waiting to erupt. You cannot add trillions to the balance sheet of the Federal Reserve and increase the money supply this much without causing inflation.

Cash piles and inflation

There is a pesky time delay, however. New money can just sit doing nothing as cash. US companies have their highest cash balances in history. Once this money gets spent the inflation will emerge and then some. Warren Buffett just bought his can of beanz.

Ironically that is more likely to happen if the Fed pulls back on QE. For that would signal the OK to companies to spend their cash because they would assume this meant the economic downturn was over. Indeed, they ought to do so as quickly as possible to avoid paying inflated prices. Spot the inflationary spiral!

What can central banks do in these circumstances? Imposing controls on property sales is one response. We are seeing it in China and even the UAE is looking at raising loan-to-value ratios for mortgages. But this is no more than a finger in the dyke to stop the deluge. It only delays the inevitable inflation that always, always follows money printing.

Real assets

Precious metal, and for that matter real estate investors should take heart. The golden crosses in the gold and silver market only flag up a correction while shares sell-off. The new lows will be excellent entry points for the huge rebound that will not be long in coming.

Indeed, buying precious metals at the bottom of this equity correction should be the trade of the year. Our sister publication the ArabianMoney investment newsletter has some interesting ideas on how to play this trade for maximum gain (subscribe here). Our 50 per cent discount offer ends tomorrow.

If you own precious metals then it is best to sit this correction out. For the danger of then missing the sudden rally is more important catching the downtrend right.

The stock market correction was correctly flagged up by our favorite chartist on Monday (click here) so regular website readers should not be too surprised. But if he is right then this is far from over…

-- Posted Thursday, 21 February 2013 | Digg This Article | Source:

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About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link


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