If QE1 to QE3 Don’t Work, Best Medicine Must Be QE4

gold investmentsEverything is falling into place. So far, so good for my predictions in 2012.

In January 2012 I started warning of recessions hitting various eurozone countries, and they happened. I’ve been warning about the soft economic landing in China, and that’s also well underway. Domestically, I’ve been saying that a third round of quantitative easing (QE3) would happen and that it would give a blow-off to the top for stocks, and that’s what we saw last week. And since the spring, I have been stating that the stocks of quality and senior gold producers were screaming buys.

The Federal Reserve announced this past Thursday afternoon that, to boost the economy, the central bank would do another round of quantitative easing by purchasing mortgage-backed securities (MBS) at the open-ended rate of $40.0 billion a month.

An important realization come out of the Fed’s actions: by undertaking more money printing, the Fed is acknowledging the economy is very weak and the post-recession growth has been very weak.

I’m in the camp that believes QE3 will be great for big banks, but will do very little for the economy. Eventually, all this money printing will lead to inflation and sharply higher interest rates.

What does QE3 mean for gold bullion? Simple: the more money printed, the higher gold prices will rally.

I’ve been bullish on gold bullion since late 2001. I believe the metal’s price will only move higher over the next few years. I also believe QE4 is a strong possibility, because if QE1 to QE3 don’t work, we’ll surely need QE4. The more money printed out of thin air, the higher the price of gold bullion.

Central banks around the world are already buying gold bullion. I have been writing about this phenomenon for a while now.

The most recent quantitative easing announcement by the Fed will simply drag the U.S. dollar lower in value against other world currencies (except the euro).

While they’re obviously biased…

The CEOs of Barrick Gold Corporation (NYSE/ABX) and Goldcorp Inc. (NYSE/GG) believe that the price of gold bullion will exceed $2,000 an ounce within a year. On the same note, the CEO of Newmont Mining Corporation (NYSE/NEM) believes the $2,000 price tag on gold is far from unreasonable. (Source: Bloomberg, September 13, 2012)

The price of gold bullion has risen for 11 years straight now. The demand for gold bullion is backed by central banks buying, currency devaluation, uncertainty around the world, and buying as a hedge against inflation. There is very little speculation in the gold market as far as I can see.

Gold bullion is playing its role, as fiat currencies are becoming more volatile and questionable. Central banks are trying to protect their reserves from a possible decline in their U.S. dollar holdings and other assets—gold bullion is the only option they can go with.

Since August, gold bullion is up $176.50 an ounce. Nothing goes up in a straight line. We could see a pull-back here for gold bullion prices after such a great six-week run-up. But look at any weakness in the metal as a buying opportunity, not a selling opportunity.

It might be too expensive to own gold bullion, but there are still major opportunities in the junior miners that can help you take advantage of the spectacular, and far from over, rise in gold bullion prices.

Michael’s Personal Notes:

If you were thinking that inflation is not an issue facing the U.S. economy, please think again.

Another round of quantitative easing (QE3) announced by the Federal Reserve this past Thursday will not only further destroy the dollar; it will also create inflation in the U.S. economy. As the U.S. dollar declines in value against other world currencies, goods imported into the U.S. become more expensive.

According to the Producer Price Index (PPI), wholesale prices saw inflation of 1.7% in August. It is the biggest rise in inflation in more than three years. (Source: Bureau of Labor Statistics, September 12, 2012). The inflation in wholesale prices in the U.S. economy in August was mainly due to a hike in energy prices—6.4%, the biggest monthly increase in three years.

The Federal Reserve tells us it is not worried about inflation and its Consumer Price Index (CPI) expectations are much lower for the next few years for the U.S. economy. Federal Reserves believe that inflation will stay at two percent or below until 2012. (Source: Federal Reserve, September 13, 2012).

Let’s get real. We want inflation. That’s the whole purpose of QE3—to create inflation so asset prices go back up. But it is backfiring. Yes, the stock market is rising. Yes, the prices of goods are rising. But the most important inflation goal—creating jobs and increasing wages—eludes the average American.

For years, economists like me have complained that the official CPI isn’t an effective measure of inflation. And the way inflation is introduced to consumers is often tricky. For example, the price of my favorite juice stays the same, but the size of the container decreases. I receive less for an equal price.

I believe all of this money printing will eventually result in higher inflation and will hit the U.S. economy like never before. Food and gas prices are already on the rise in the U.S. economy. The average American will pay more for basic needs. Unfortunately, personal incomes are not rising in conjunction with higher prices for goods and services. To deal with inflation and higher prices, people will need more money to buy essential goods, but with the U.S. economy in a dire state, more income is not going to happen.

From 2010 to 2011, the median household income in the U.S. economy fell 1.5% to $50,054 and the country’s poverty rate was 15%— that’s 46.2 million people under the poverty line—a number that has increased for three years. (Source: Census Bureau, September 12, 2012.) Almost one in seven Americans is living in poverty!

Now, imagine if inflation were to rise even more. What will happen to the middle class? The middle class will be hurt and they will consume less—not good news.

We already have an increasing number of people going on food stamps, because they can’t survive without them. Inflation will simply be another blow to their pockets. The past quantitative easing programs of the Federal Reserve have not had any meaningful impact on “Joe America.” QE3 will be no different.

Where the Market Stands; Where it’s Headed:

As has been widely forecast in these pages, the announcement of QE3 was to deal a blow to stock prices to the upside, and that’s exactly what happened. But I believe the rally will be short-lived.

Trillions of new dollars created and both the S&P 500 and the Dow Jones Industrial Average are below their October 2007 highs. We need to see if those highs are broken. If they are not, what I have been saying all along about us simply being in a sucker’s rally since March of 2009 will come to fruition.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in Profit Confidential, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.