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Catching a Falling Financial Knife

Bernanke and Gold

Commodities / Gold and Silver 2012 Dec 19, 2012 - 02:20 AM GMT

By: Ned_W_Schmidt

Commodities

To date seems only one group truly loves the monetary policy of the Federal Reserve. Largely, that group is comprised of bankers and bond dealers that profit from selling bonds to the Federal Reserve. Bernanke and the bond dealers have become BFF, Best Friends Forever.


Perhaps the time has arrived for Gold investors to be less critical of Bernanke's policies. Instead, we might want to consider that Bernanke could be our BFF too. With a continuation of the intellectually bankrupt policy called quantitative easing by the Federal Reserve we may now have a Bernanke "Put" on Gold.

Federal Reserve Bank Credit

Above chart is one we have discussed many times. The blue line in that chart, using the left axis, is Federal Reserve Credit. Essentially, it is the size of the Federal Reserve's balance sheet. That data is released weekly on Thursday afternoon.

We have expanded the actual data by projecting out the Fed's balance sheet for the next year. That forecast is done using the stated policy of buying $85 billion per month of bonds. By this time next year the Fed's assets will be about $4 trillion. Contrast that with level of those assets two years ago. At that time they were slightly more than $2 trillion. In two years the Federal Reserve will have almost doubled the size of its assets by buying bonds.

Never in history has the premier central bank of the world acted so irresponsibly!

Red line in that chart, using right axis, is the year-to-year percentage change in the size of Federal Reserve Credit. By this time next year, the rate of increase in those assets should approximate the level reached in August/September of 2011. That is the last big hump in that line.

What was important about that period of time? September of 2011 was when $Gold reached its high.

Will history repeat itself? Odds are very good that it will. Hard to imagine the currency of a nation appreciating with such horrible monetary policy. Only the Keynesian quacks can believe that such a policy will benefit the nation. Global purchasing power of the dollar could quite likely begin to crumble by this time next year. That might be especially true with the economy killing regulatory and tax policies being advocated by the Obama Regime.

How should investors be responding to the efforts of our new BFF, the Bernanke Federal Reserve?

  • Gold coins should be the primary investment with Gold ETF used as a secondary.

  • Investors with adequate exposure to Gold might want to consider some dividend paying Gold stocks with a history of more than two years of paying dividends.

  • Holders of Silver should consider switching into either Gold or Chinese Renminbi.

  • Excess cash reserves should be invested in Chinese Renminbi through either a bank deposit or ETF, not an ETN.

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

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Catching a Falling Financial Knife