Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18
Big Cap US Stocks Fundamentals - 13th Apr 18
Jaguar Land Rover Cuts 1000 Jobs on Diesel Sales Slump, Long-term Discovery Sport Review - 13th Apr 18
Stock Market SPX May Tangle with the 50-day MA - 13th Apr 18
Longtanding Chinese War: Intrigue & Betrayal - 13th Apr 18
How I Own My Gold - 13th Apr 18
ISupply Energy Consumer Warning - Never Put Your Account Into Credit! - 13th Apr 18
SPX Resistance May Prompt A Massive Short Squeeze - 12th Apr 18
Stock Market High Volatility is Not Consistently Bearish for Stocks - 12th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

QE-3 Hyperventilating Hyperbole on Hyperinflation

Stock-Markets / Quantitative Easing Sep 21, 2012 - 08:07 AM GMT

By: Ned_W_Schmidt

Stock-Markets

Best Financial Markets Analysis ArticleWow! The hyperventilating hyperbole on hyperinflation to be brought about by QE-3 was near overwhelming. From some of what we read, QE-3 is to cure all the economic woes of the U.S., cause hyperinflation, crash the U.S. dollar, prevent male patten baldness, push $Gold to $2,400, and cause the death of our favorite pet. Oh, and the perennial favorite fantasy trotted out on a regular basis is Silver going back to $50. Could QE-3 really be all those things, or is it really Damp Squib One?


Federal Reserve Bank Credit Chart

In order to appease the Street, FOMC announced the purchase of $40 billion of mortgage backed securities each month. To help understand the meaning this policy let us consider the chart above. The blue line, using the left axis, is Federal Reserve Credit, or the size of the Federal Reserve's assets. We have extended it out a year at a rate of $40 billion per month. Before going on let us note that the rationale for this policy is totally frivolous, and it was adopted purely to appease the paper asset pushers on the Street.

First observation is that adding $480 billion, while admittedly too much, does not compare to QE-2, early part of graph. QE-2 added nearly twice that much in less than six months. Relative to QE-1 and QE-2, QE-3 is not much to talk about. Second, the red line, using right axis, is the year-to-year change in Federal Reserve credit projected out for the next year.

The absolute size of Federal Reserve Credit, blue line, influences the size of the money supply. Red line is a major determinant of money supply growth and the inflation rate. A year from now that growth rate might be as high as 15-20%. While that rate of growth is too high, it falls far short of that necessary to create hyperinflation. Given the structural problems in the U.S. economy being created by the Obama regime, the level of economic slack in the U.S. economy, and the unwillingness of bankers to make loans that create money, QE-3 is unlikely to live up to most expectations.

Two other portions of the FOMC announcement have also received more comments than they are worth. This policy is to be open ended and more could be added to these purchases. What is new in that? That has been the Federal Reserve's policy for decades.

In anticipation of QE-3, or as we prefer DS-1, the teenage traders on the Street pushed $Gold up by more than $200 and sent the U.S. stock market to an unjustified level. What should investors do given that set of market action and the likely ineffectiveness of QE-3?

Gold has firmly established itself as a portfolio asset. Investors are not likely to abandon it. $Gold's price does have short-term risk as most of the action has been in the derivative's market. Investors should by now be accustomed to volatility in the price of $Gold, and must simply learn to live with it. Further, Gold is the only insurance available to protect one from the Obama fiscal cliff set to cause the U.S. economy to fall into recession in January. Obama fiscal cliff is a greater worry than QE-3.

US$ / Chinese Yuan Chart

As Silver does not have the positive long-term outlook as is the case with Gold, investors should be looking at alternatives. An excellent one would be the Chinese Renminbi, shown in the above chart. Note it is approaching a new high. Investors owning Gold should be adding Renminbi to their portfolio. Those holding Silver, hoping to recover, would be betters served by switching their investment in Silver into the Renminbi.

An investment in Renminbi can be done with either bank deposit accounts, the preferred alternative, or ETFs. Latter uses non deliverable forwards, which might make them undesirable for many. Do not use exchange traded notes, ETNs.

Chinese Renminbi, along with Gold, is preferable to holding either U.S. dollars or Euros. Likely appreciation over time versus those two currencies is largely due to growing importance of the Renminbi as a currency in Asia, and the positive long-term prospects for the Chinese economy. Think of it as switching from the British pound to the U.S. dollar in 1913. While the negative outlook for the dollar does help the case for the Renminbi, the positive influence from China's growing economic importance is more important.

By Ned W Schmidt CFA, CEBS

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to www.valueviewgoldreport.com

Ned W Schmidt Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules