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Bernanke can’t win
The double-edged sword for QE2
Here’s what to do…
I don’t envy Ben
Bernanke. It seems like no matter what decision he makes, he will face
enormous scrutiny from powerful and powerfully opinionated interests.
For instance, if he continues down the road of printing more
money, (aka “Quantitative Easing”) he’ll hear about it from fiscal
conservatives, libertarians, and a whole group of people who are just plain
angry about the idea of printing more dollars, even though they might not
know exactly why they’re angry.
If you work hard to save your money, invest it wisely and
make responsible fiscal decisions like me, I think you should be angry.
Inflationary policy necessarily hurts those of us who save our money instead
of spend it. It rewards people who spend recklessly – it even rewards people
who go way over their heads in debt to support their profligate
lifestyles.
On the flip side, if Ben Bernanke chooses NOT to continue
his inflationary policy, the economy will surely take a huge downturn – maybe
even bringing the Dow Jones Industrial Average below 7,000. And you better
believe if he pursues a more “austere” fiscal policy, he’d have a variety of
politicians, business interests, other central bankers and hobbyist
Keynesians calling for his termination and possibly his head.
But inflation-as-policy isn’t just a PhD thesis brought to
you by Ben Bernanke – it’s a United States central banking thesis – and even
a world-wide central banking thesis. In short, the idea is that central banks
CAN and SHOULD boost consumption demand by making money easy to
access.
John Maynard Keynes, the progenitor of this theory
flippantly suggested burying jars of cash in abandoned coal mines in order to
get people to work for the money so that it wouldn’t necessarily be
“free.”
Central banks more typically make money easy to access
through a variety of tools at their disposal, the easiest and most obvious
being to lower interest rates. Lower interest rates lower the bar for
everyone to borrow money, which they inevitably spend.
On the other side of the inflation spectrum, you have Ben
Bernanke sending cash directly to the Treasury. That’s the ‘Quantitative
Easing” or QE you’ve been hearing about. Where does it come from?
It comes from nowhere. It’s created by Federal Reserve
computers, and sent to U.S. Treasury computers.
In any event, whether the Fed buries money in jars, or it
lowers interest rates, or simply prints it, the effect is inflationary. And
we know the results of inflation: higher prices for just about
everything.
In that vein – you
should probably be aware of QE’s double-edged sword for short-term commodity
prices.
As you know, I’m predicting higher prices for most
commodities over the long term. But if Bernanke announces QE that’s less than
what the street is expecting, or announces no plans for overt QE at all, I’m
certain that we’ll see some substantial corrections in commodity prices for
the short term.
That can be good news or bad news. If Bernanke really is
abandoning QE and his other inflationary policies, and officially pursuing
austerity measures, well – then we might be looking at a long tumble for
commodity prices as the dollar strengthens and deflation sets in.
I don’t think it’s likely – but even if Bernanke’s
announcement is slightly disappointing, I’d expect gold and silver to get
10-20% haircuts in rather short order as the trading contingent abandons
their precious metal positions.
If you’re a trader and you get wiped out by this news,
that’s bad news for you.
But if you’re like me, and you’re looking for another chance
to buy these commodities at a discount to today’s prices, then it’s great
news.
Here’swhat to do:
wait until November 3 before making any huge purchases of gold or silver. If
he announces huge QE2 numbers, gold and silver will continue rallying, and
you should buy the trend.
If QE2 disappoints, you can wait for gold and silver to hit
a bottom and then buy at a discount.
Yes, I fully expect that gold and silver will continue to
rally, but if QE2 disappoints, your money would be better off waiting for the
correction.
If you’re looking for some basic guidance on how to buy
the dips in stocks, I recommend taking a look at Ian Wyatt’s
$100k Portfolio. Ian is the CEO and Chief Investment Strategist
here at Wyatt Research, and he’s put $100,000 of
his own money on the line. In his current portfolio, he owns several gold and
silver stocks that should benefit from the long-term trend in precious
metals.
If you take a look at his portfolio over the next two weeks
while we wait for Ben’s announcement on QE2, you’ll be ready, willing and
able to make the correct moves.
If you don’t like what you see over the next 30 days – you
can receive a full refund.
Check out the full details on Ian Wyatt’s $100k
Portfolio by clicking
here.
Good investing,
Kevin McElroy
Editor
Resource Prospector
Disclosure: long gold and silver