Best of the Week
Most Popular
1.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
2.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
3.Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - Nadeem_Walayat
4.Scotland Independence Result NO Win 55% to Yes on 45% - Nadeem_Walayat
5.US Dollar Forecast to Go Much Higher - David_Petch
6.Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - Raul_I_Meijer
7.The Emergence of the US Petro-Dollar - Gary_Dorsch
8.Don't Miss This Gold Buying Opportunity - Brien Lundinr
9.Silver Price: A Collapse and a Rally - DeviantInvesto
10.Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14 - GoldCore
Last 5 days
Indian Stock Market BSE SENSEX The Encore Rally - 21st Sept 14
ISIS Fear-Mongering Ahead of Another US False Flag? - 21st Sept 14
Ecology Politics And Haeckel's Tree Of Meaning - 21st Sept 14
ASX200 Stock Market Index Set For New Highs - 21st Sept 14
Scottish Referendum Not Avoiding The Future - 21st Sept 14
Five Lessons Learned from the Scottish Referendum - 21st Sept 14
The Problem With UKIP And Other I I P's - 21st Sept 14
Stocks Bull Market Resumes - 20th Sept 14
Gold And Silver - Current Price Is The Story - 20th Sept 14
Can the U.S. Economy Withstand Another Housing Market Breakdown? - 20th Sept 14
Nervous Investors Will Hate the Money You Make With This Strategy - 20th Sept 14
Cheap Gold Stocks Upleg Intact - 20th Sept 14
Monetary Policy Killing The System - 20th Sept 14
Scotland and the Spirit of Our Time - 20th Sept 14
Bitcoin Price Charts In-Depth Analysis - 19th Sept 14
Alibaba is Focused, Will Use Money in Emerging Areas - 19th Sept 14
Bird's Eye View of the Gold Stocks - 19th Sept 14
Scotland Independence Result NO Win 55% to Yes on 45% - 18th Sept 14
Silver Price: A Collapse and a Rally - 18th Sept 14
Here's Why Trendlines are Your New Trading Best Friend - 18th Sept 14
Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14
The "Hidden" Billions in the Alibaba IPO - 18th Sept 14
Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - 18th Sept 14
Monetary Policy Weighs on Gold and Silver - 18th Sept 14
Global Currencies Analysis...The World According to Chartology - 18th Sept 14
Gold Price Hammered by Strong U.S. Dollar - 18th Sept 14
Is Citigroup the Dumbest Bank Ever? - 18th Sept 14
Scotland Must Vote Yes! For All Of Us - 18th Sept 14
Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - 18th Sept 14
A Public Bank Option for and Independent Scotland - 17th Sept 14
The Charade of Independence for Scotland and UKIP - 17th Sept 14
Gold Report - U.S. National Debt Surges $1 Trillion In Just 12 Months - 17th Sept 14
How to Find Trading Opportunities in ANY Market Using Fibonacci Analysis - 17th Sept 14
Why Money Is Worse Than Debt - 17th Sept 14
Can Gold Price Finally Recover? - 17th Sept 14
Scotland Independence - Europe Holds Its Breath - 17th Sept 14
The Energy Prices at Risk with Scottish Independence - 17th Sept 14
Scottish Independence SNP Lies on NHS, Economy, Debt, Oil and Currency - 17th Sept 14
The Truth Behind the Dangerous "Helicopter Money" Delusion - 16th Sept 14
Central Bank Balance Bullying: Investor Implications - 16th Sept 14
U.S. Dollar and Gold Elliott Wave Projection - 16th Sept 14
The Origins and Implications of the Scottish Referendum - 16th Sept 14
The Collapse Of U.S. Silver Stocks As Public Debt Skyrockets - 16th Sept 14
Emerging Markets Are Set Up for a Crisis, What’s on Your Radar Screen? - 16th Sept 14
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

You've never seen this before and may never again

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

© 2005-2014 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

Free Report - Financial Markets 2014