The Fed recently decided not to taper their bond-buying program, even as interest rates rise, housing slows and the world economy remains sluggish.
All are signs that gold and silver are good buys.
TAPERING: NO END IN SIGHT
Eric Sprott, chairman, CEO and portfolio manager of Sprott Asset Management believes that the recent rise in interest rates explains the Fed’s decision not to taper their bond-buying program.
Rates on the 10-year note have climbed from about 1.4% to 3%. Rising interest rates have slowed the housing market by increasing the cost of carrying a house by 50% over a year ago. On top of that, the price of houses has risen about 10%. With rates rising, it dampens refinancing, so owners can’t take money out of their home and spend. Already refinance rates have fallen 70%. Tapering the bond program would only trigger a further rise in rates, further harming the housing market and, thereby, the economy.
GLOBAL CENTRAL BANKS
It is difficult for the U.S. Fed to taper alone, since other central banks around the world apparently have been working together to buy bonds and keep interest rates low. Unfortunately for the global economy, bond rates are rising even while central banks buying more bonds than ever before.
Additionally, the housing market and auto market, which are both heavily dependent on low interest rates, are slowing. Combined with weak job numbers, falling consumer confidence and slowing retail sales, as well as inflation higher than reported by the CPI, spending is falling and the global and U.S. economies are still sluggish, at best.
With talk of raising the debt ceiling, which the government will have to do, this was not the time for the Fed to taper, if there ever will be a time. After the Fed announcement, rates fell quickly, but they are already rising again. What does the Fed do if interest rates continue to rise?
Are we going to have QE to infinity?
GOLD AND SILVER: POISED FOR A RISE
The key to gold and silver prices is the unrelenting increase in physical demand caused by the recent sell-off, mammoth buying by the Chinese, and a shortage of gold— based on the difference between production and purchasing. If India were allowed to import how much they wanted, this physical shortage would manifest itself so quickly because China already imported 100 tons in July. The Indians would certainly have bought 100 tons. We only produce 185 tons per month. So those two countries would consume 100% of the mined supply and someone is selling it. Apparently Western central banks have been surreptitiously selling gold. Sprott argues that the demand could be twice the market supply.
The demand for gold shows no sign of slacking, as prices remain low, there is no tapering, and no sign of economic strength in the United States, Europe or Asia. Theoretically, Sprott argued, we should be around $1,600 an ounce for gold. “I firmly believe within a year, we’re going to hit new highs in both gold and silver.”
END OF U.S. DOLLAR DOMINANCE?
The end of dominance of the U.S. dollar may be in sight. With the U.S. dollar technically breaking down and China announcing on September 6 that they will trade oil in Chinese yuan rather than U.S. dollars, demand for the dollar should weaken.
A SILVER DOLLAR COIN
Ecuador, Brazil and other fast-growing economies are investigating moving away from reliance on the U.S. dollar as a reserve currency. Ecuador is growing at a rate of 5.5% annually according to the International Monetary Fund. And, Nathalie Cely, Ecuador’s Ambassador to the US, commented in a recent presentation in New York, “Ecuador is ready to compete on the global stage and go back to the financial markets. Ecuador has issued a silver dollar coin. The Brazilian finance ministry has been outspoken about the dollar’s impact on South American countries. Latin American countries have founded a central bank, while a Pan-Asian group is investigating the possibility. As the U.S. dollar declines, it looks like a great time to buy gold.
GLOBAL RISKS
Furthermore, the Bank for International Settlements said that the world is more leveraged today than it was in 2008, so the free world’s capitalist system is very much at risk. Governments buy more bonds and continue to spend. The plan is to continue to print money. Central banks buy bonds to attempt to keep interest rates low. But, the bottom line is that the central banks take more and more liabilities while their capital remains the same. If rates rise the potential losses on the Fed’s balance sheet are well beyond the capital the Fed has on hand.
SILVER OUTLOOK
With the current gold/silver ratio 59 to 1, it appears that silver should soon make a significant move to the upside. Sprott agreed. People buy 50 times more silver than gold in physical ounces and yet we produce only 11 times more ounces. One reason is that because they can’t buy as much gold, Indians are buying more silver. The price of silver should rise.
NEW HIGHS AHEAD
Within a year, Sprott and I believe that we will see new highs in the price of gold and silver. People are realizing that there is risk in currencies. There’s risk in government. There’s risk in the system. If governments just keep printing money, the number of people who are going to move into gold and silver, which already exceeds mine production by at least a factor of two, will skyrocket and prices will rise.
LOOK AT THE BIG PICTURE
The long view is key— all great investors take a long-term view. Gold investors have suffered the past two years as prices have fallen due to the paper price. That should create more opportunity. After the 2008 decline, gold rallied right back to new highs and gold stocks went up 200% in 12 months. Sprott said, and I agree, “That’s the kind of thing I’m looking for.”
Buy gold and silver.
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