Best Medicine for More Quantitative Easing: Gold

There’s plenty of media focus on the annual symposium at Jackson Hole where central bankers and other market personalities meet. The common hope for further quantitative easing by the Federal Reserve is also looming in the air.

What’s my take on what the Federal Reserve’s plan for quantitative easing for the small investor will be? Gold bullion, the shiny yellow metal loved by many, and a true hedge against inflation.

So far, quantitative easing has been about the Federal Reserve buying U.S. Treasuries or similar securities to put more money into the financial system. But more of something is not necessarily a good thing.

It may take time, but history has shown us that inflation and currency devaluation are the end result of too much money pumped into a country’s financial system.

Gold bullion is a hedge against inflation and a devaluing currency.

The more quantitative easing the Federal Reserve announces, the more reason there is to be bullish on gold bullion. In these pages, I have been harping on the fact that numerous world central banks are raising their stakes in gold bullion as they diversify their reserves.

Central banks adding more gold bullion to their reserves could be a sign they are losing trust in the U.S. dollar or in fiat currency in general.

On August 22, the price of gold bullion broke above its 200-day moving average; a very bullish sign.

Gold - Spot Price Chart

Chart courtesy of www.StockCharts.com

The chart above shows the price of gold bullion increased quickly and broke its price resistance that was in place at the $1,630 per ounce area. This resistance level was in place since mid-June and was tested four times before going to the upside.

This recent move in gold bullion prices is significant. Gold bullion prices are starting to reflect their true value and, as I forecast many times before, they are going higher from here.

There is no economic growth in the U.S. Europe is still deep in its economic mess and the global economic slowdown is at full throttle. What does gold bullion provide? It provides safety. It holds value. And in a situation where the financial system is being pumped with more liquidity, gold bullion becomes a draw for investors.

Where the Market Stands; Where it’s Headed:

Some very important facts on the stock market I want to point out to my readers:

Trading volume on the NYSE has been extremely light (real market advances happen with strong volume). More and more stock advisors are turning bullish on the stock market (a bearish indicator). The Dow Jones Transports did not confirm the advance of the Dow Jones Industrial Average back in May (a bearish signal for the Dow Theory). Revenue growth for the S&P 500 companies could be negative in the third quarter of this year.

There is nothing in the stock market to celebrate…just lots of evidence of a bear market trap. (See: Why the Stock Market Is Running on Nothing But Thin Air.)

What He Said:

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will cut deeper and harder than most realize today.” Michael Lombardi in Profit Confidential, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worst times ahead.