Tuesday, October 01, 2013
$9 Gas and $3800 Gold coming?
Although the analysis below is from a gold bug, it is conventional economics. The only real question is WHEN the greenback will drastically lose its purchasing power. China is buying everything it can worldwide while their big store of greenbacks will buy something
Now that the Fed has announced they will not taper their enormous stimulus program, it's more obvious than ever that a few powerful men have hijacked our economic, financial and political structure. And here's a news flash: They aren’t socialists or capitalists. They’re criminals. The Fed's decision to continue buying $85 billion worth of toxic banking assets and U.S. debt per month means the money-printing factory has just gone into high gear. Not only can you say goodbye to your paper-based savings and retirement, but the Fed just guaranteed $9 gas and $3800 gold.
Every month in 2013, the Fed has been increasing its balance sheet by $85 billion, consisting of $40 billion in mortgage-backed securities and $45 billion in 10-30 year treasuries. The Fed is on pace to monetize roughly half of the US budget deficit in 2013. Putting it all together, the Fed's balance sheet will increase to $4 trillion on December 25, 2013. A total increase of $1.17 trillion in one year!
The Fed has been promising to taper their stimulus program pending the improvement of the labor market. But as the labor market continues to stagnate, now the Fed has reversed course and announced that they will continue their reckless stimulus program (a.k.a "money printing") for the foreseeable future.
They call it “Quantitative Easing," or QE. The reason QE is like the gift that keeps on giving for a holder of gold is because it blatantly debases the U.S. dollar. Allow me to illustrate:
Round one (QE1) started November 25, 2008 and ended March 31, 2010. During that 17-month period, a gallon of gas rose from $1.75 to $2.75 and gold rose from $725/oz. to $1125/oz.
QE2 was started Nov 3, 2010 and lasted seven months until June 30, 2011. During the seven months of QE2, gas prices rose from $2.80 to $3.60 and gold from $1325 to $1700. QE2 was also marked by massive global food inflation and global riots. QE2 ended June 30, and we have had no further ‘major’ balance sheet expansion until mid-September 2012.
In the last few weeks leading up to QE3 and the week after, gold rose 15%. During the summer of 2013, when the Fed starting backing off their "tapering" talk, gold rose a staggering 13% in a matter of months. The proof is in the numbers.
This policy is complete insanity. By 2018 when the debt peaks, gas will be over $9 per gallon! These same factors put gold at $3800 by 2018! It debases the U.S. dollar significantly at a time when we need fiscal responsibility more than ever.
Posted by John J. Ray (M.A.; Ph.D.).