Best of the Week
Most Popular
1.The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - Doug_Wakefieldth
2.Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - Nadeem_Walayat
3.The Trend Every Nation on Earth Is Pouring Money Into - Keith Fitz-Gerald
4.Do Tumbling Buybacks Signal Another Stock Market Crash? - 26Mike_Whitney
5.Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - Nadeem_Walayat
6.Gold And Silver Price - Respect The Trend But Prepare For A Reversal - Michael_Noonan
7.U.S. Economy Faltering Momentum, Debt and Asset Bubbles - Lacy Hunt
8.Bullish Silver Stealth Buying - Zeal_LLC
9.Euro, USD, Gold and Stocks According to Chartology - Rambus_Chartology
10.Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - EWI
Last 5 days
More Downside Ahead for Gold and Silver - 31st Oct 14
QE Is Dead, Now You Tell Me What You Know - 31st Oct 14
Welcome to the World of Volatility - 31st Oct 14
Stocks Bear Market Crash Towards New All Time Highs as QE3 End Awaits QE4 Start - 31st Oct 14
US Mortgages, Risky Bisiness "Easy Money" - 30th Oct 14
Gold, Silver and Currency Wars - 30th Oct 14
How to Recognize a Stock Market “Bear Raid” on Wall Street - 30th Oct 14
U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? - 30th Oct 14
Stock Market S&P Index MAP Wave Analysis Forecast - 30th Oct 14
Gold Price Declines Once Again As Expected - 30th Oct 14
Depression and the Economy of a Country - 30th Oct 14
Fed Ends QE? Greenspan Says Gold “Measurably” “Higher” In 5 Years - 30th Oct 14
Apocalypse Now Or Nirvana Next Week? - 30th Oct 14
Understanding Gold's Massive Impact on Fed Maneuvering - 30th Oct 14
Europe: Building a Banking Union - 30th Oct 14
The Colder War: How the Global Energy Trade Slipped From America's Grasp - 30th Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VIII) - 29th Oct 14
Flock of Black Swans Points to Imminent Stock Market Crash - 29th Oct 14
Bank of America's Mortgage Headaches - 29th Oct 14
Risk Management - Why I Run “Ultimate Trailing Stops” on All My Investments - 29th Oct 14
As the Eurozone Economy Stalls, China Cuts the Red Tape - 29th Oct 14
Stock Market Bubble Goes Pop - 29th Oct 14
Gold's Obituary - 29th Oct 14
A Medical Breakthrough Creating Stock Profits - 29th Oct 14
Greenspan: Gold Price Will Rise - 29th Oct 14
The Most Important Stock Market Chart on the Planet - 29th Oct 14
Mysterious Death od CEO Who Went Against the Petrodollar - 29th Oct 14
Hillary Clinton Could Be One of the Best U.S. Presidents Ever - 29th Oct 14
The Worst Advice Wall Street Ever Gave - 29th Oct 14
Bitcoin Price Narrow Range, Might Not Be for Long - 29th Oct 14
UKIP South Yorkshire PCC Election Win is Just Not Going to Happen - 29th Oct 14
Evidence of New U.S. Housing Market Real Estate Bust Starting to Appear - 28th Oct 14
Principle, Rigor and Execution Matter in U.S. Foreign Policy - 28th Oct 14
This Little Piggy Bent The Market - 28th Oct 14
Global Housing Markets - Don’t Buy A Home, You’ll Get Burned! - 28th Oct 14
U.S. Economic Snapshot - Strong Dollar Eating into corporate Profits - 28th Oct 14
Oliver Gross Says Peak Gold Is Here to Stay - 28th Oct 14
The Hedge Fund Rich List Infographic - 28th Oct 14
Does Gold Price Always Respond to Real Interest Rates? - 28th Oct 14
When Will Central Bank Morons Ever Learn? asks Albert Edwards at Societe General - 28th Oct 14
Functional Economics - Getting Your House in Order - 28th Oct 14
Humanity Accelerating to What Exactly? - 27th Oct 14
A Scary Story for Emerging Markets - 27th Oct 14
Could Tesco Go Bust? How to Save Tesco from Debt Bankruptcy Risk - 27th Oct 14
Europe Redefines Bank Stress Tests - 27th Oct 14
Stock Market Intermediate Correction Underway - 27th Oct 14
Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans - 26th Oct 14
Obamacare Is Not a Revolution, It Is Mere Evolution - 26th Oct 14
Do Tumbling Buybacks Signal Another Stock Market Crash? - 26th Oct 14
Has the FTSE Stock Market Index Put in a Major Top? - 26th Oct 14
Christmas In October – Desperate Measures - 26th Oct 14
Stock Market Primary IV Continues - 26th Oct 14
Gold And Silver Price - Respect The Trend But Prepare For A Reversal - 25th Oct 14
Ebola Has Nothing To Do With The Stock Market - 25th Oct 14
The Gallery of Crowd Behavior: Goodbye Stock Market All Time Highs - 25th Oct 14
Japanese Style Deflation Coming? Where? Fed Falling Behind the Curve? Which Way? - 25th Oct 14
Gold Price Rebounds but Gold Miners Struggle - 25th Oct 14
Stock Market Buy the Dip or Sell the Rally - 25th Oct 14
Get Ready for “Stupid Cheap” Stock Prices - 25th Oct 14
The Trend Every Nation on Earth Is Pouring Money Into - 25th Oct 14 - Keith Fitz-Gerald
Bitcoin Price Decline Stopped, Possibly Temporarily - 25th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

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