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Don't Take My Word For It.



Most of Wall Street (for it is in their own interest to do so) will go along with the current monetary plan of the Federal Reserve as I have described it: a negative real interest rate policy accommodated by our friends in Japan. This monetary policy is fraught with risk, as I have also described. But there is one man at a prestigious investment bank who isn't gong along with the Wall Street crowd, Stephen Roach of Morgan Stanley.

So don't take this lowly hedge fund manager's word for it. I urge you to read Stephen Roach's latest piece, "The World's Biggest Hedge Fund". In it he describes our own Fed's policy as hedge fund-esque in the sense that they are introducing huge and unprecedented leverage (debt) into the system in order to allow financial companies to "earn" an artificial spread, a spread that under normal conditions would not be there.

In order to perpetuate this policy, normal market reaction to risk must be arrested. This is being done partially through "Fedspeak", the ongoing commentary by Fed governors and other officials in an attempt to confuse, obfuscate, and otherwise deter market participants from "putting two and two together".

An example of this (and there are so many I can make this statement just about every day) just occurred today when the president of the Federal Reserve bank of Minnesota (they all take turns) Gary Stern had a few comments on gold.

He said that gold is only driven by uncertainty, and that as long as fiscal and monetary policy is sound, gold is irrelevant.

I would agree with Mr. Stern's statement, although not his implication. He is implying that fiscal and monetary policy is fine where I (and it is clear Mr. Roach agrees with me) think that is far from the case. I think it is very dangerous.

Perhaps the Fed believes that we are in extraordinary times and that extraordinary measures are called for. Regardless, make no mistake: we are now a country with a fiat currency, a currency with absolutely no value except for what other countries say it is.

Right now Japan is luckily for us saying that it is worth something. Let's hope they don't change their minds, for if they do then all the "Fedspeak" in the world won't help.

But gold is anything but irrelevant as Mr. Stern would have us believe. As the Fed prints more and more dollars to facilitate the trade imbalance and to pay off dollar denominated debt around the world, the dollar should necessarily drop (there will be violent counter surges in this downward trend as debtors grab for dollars). Gold, as Laurie has offered several times, as a "real currency" will rise as a result.

Patience is required for gold, for the forces of government and central banks around the world are aligned against it.

Don't listen to what they say, watch what they do.
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